Mason Group Holdings: an exciting merger arbitrage play

I own shares of Mason Group Holdings (ticker 273 in Hong Kong, filings), since November 2021. Back then it was one of the best net-nets in my list based on a number of criteria such as trading liquidity, Piotroski score and NCAV/P. This was at a share price of 0.024 HKD. Even at a share price of 0.028 HKD it is still one of the best net-nets, according to my world-wide comparisons.

Photo by Ruffa Jane Reyes on Unsplash

Business description

Last year I did some research on the company. I found the company provides financial services such as “private banking, wealth and asset management, securities and futures brokerage, securities margin financing, corporate finance advisory services, investment in securities trading and money lending”. Furthermore the company invests in (unlisted) stocks, as a growth investor.

This stock trades below liquidation value, so do not expect this company to be good. It generates huge losses, already for 3 years. Instead it is extremely cheap, based on a comparison between net tangible assets and the market cap.

The company is incorporated in Hong Kong, which is very rare for companies listed in Hong Kong. Most Hong Kong companies are incorporated in the British Virgin Islands or in the Cayman Islands. I think companies incorporated in Hong Kong are easier to acquire for outsiders from Hong Kong.

There might have been several serious governance issues with this company. But these issues are from before 2020, when the executive directors were replaced. So, I do not think these issues are a good basis for predicting future unfriendly policies for outside shareholders. But although directors are new, I still consider the board as weak.

Currently there is no controlling shareholder. The 2 substantial shareholders (owning 17% and 9%) are not board members. At 0.028 HKD per share NCAV/P is about 2, so the discount to NCAV is high. However there are also some valuable non-current assets. Because of these non-current assets the discount to liquidation value is probably much higher.

So, this is a great target for an acquirer, with such an high discount to liquidation value, no controlling shareholder and incorporated in Hong. Despite such situations being rare in Hong Kong I already mentioned this possibility in my notes from November 2021.

The acquirer

The acquirer is Mr. Yam Tak Cheung (任德章). I had a look at this page from David Webb mentioning him in relation to some shady deals. According to this story about China Motion Telecom International he benefited enormously from a connected transaction. In 2009 he controlled China Motion Telecom International. Allegedly, he made a huge profit selling another company to China Motion Telecom International. Though the price must have implied a high multiple Price/Tangible Book this transaction was approved by the other shareholders.

Currently, he offers to buy all shares of Mason Group for 0.0311 HKD, up from 0.0265 HKD. If his stake increases from almost zero to at least 50% the deal will complete. Otherwise, he can still extend the offer and/or increase the offer price.

From this transaction from 2009 I do not think he will up his offer to 0.05 or 0.06 HKD. Such a price might make the deal acceptable for the 2 substantial shareholders. However, because of this previous transaction I think he wants the company really on the cheap. For 0.05-0.06 HKD the margin of safety would be too small for him. I do not think 0.04 HKD would be enough for the 2 substantial shareholders. But I do not exclude he will up it to 0.04 HKD for the other shareholders.

The current offer expires on 18 November 2022 but might be extended. The offer will be conditional on Mr. Yam acquiring at least 50% of the shares. Currently, the stock is at 0.025 HKD, so the spread is huge.

Several outcomes possible

There are several outcomes possible with this offer. First, such a low percentage of the shares will be subscribed to Mr. Yam’s offer that he will not buy the shares. In that case I expect the stock price to fall back to previous levels of 0.02 HKD per share. Of course, another acquirer might give it a shot as well.

Second, between 40% and 50% of the shares could be subscribed to the offer. In that case he can get out of the deal since his stake will stay below 50%. But why would he? In practice 40% is a controlling stake. So, in that case, I think he will buy the shares.

Third, more than 50% of the shares will be subscribed. In that case he has to buy these shares and he will become the controlling shareholder.

In the latter 2 cases, what happens to the other shareholders? They face the risk of an extremely value destroying related party transaction. Such a transaction would probably be motivated by pointing out the company is a growth investor and certain new business is the Next Big Thing. But, it is also possible Mr. Yam has the company restructured for the benefit of all shareholders.

As I wrote above, I do not think the 2 substantial shareholders are going to sell their shares to him. Therefore, I do not think he will repeat what he did at China Motion Telecom International. The 2 substantial shareholders have enough voting power to block large shareholder unfriendly transactions.

Final words

All in all, this is an exciting merger arbitrage situation with a huge spread. I suppose the deal will complete before the end of the year, unless it fails. I also think chances this deal fails are low. If it does, remember this stock is extremely cheap, even at the offered price of 0.0311 HKD. If necessary, small shareholders should have enough patience to own one of the cheapest net-nets on the planet for another year.