Humm Group: it's a SOTP Thesis Now??

One of my previous write-ups was Humm Group at A$0.70. It was a sizeable position for me at the time, in which I saw multiple ways to win with protected downside. It has, however, not panned out as I hoped.

Quick reminder of the pitch back then: cheap company, bad governance, activists will take control and fix that.

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Part of my quick bull pitch in December cited a new Capital Return program:

Capital Return Program:

• $15M fully-franked special dividend (3c per share)

• 10% share buyback over 12 months

• 75% payout ratio policy (implies 10%+ dividend yield at current prices)

And an A$1.00 - A$1.20 price target

The activists did “win” the vote at the EGM (actually they settled, but the outcome seemed like a win). However, instead of getting the big capital returns, we’re now hoping for a break-up of the company:

“the only remaining path to maximising value for all shareholders is to sell the Company’s Commercial division”

And that’s a problem.

When I originally wrote up Humm, it did not occur to me that we could win the vote and still be stuck, with the value locked in the box, controlled by the "bad" actor.

A lot of things happened. Abercrombie aka AA fought tooth and nail: doing potential insider trading, telling shareholders he would consider a takeover offer (while privately immediately dismissing it), and staying too involved when he needed to distance himself. Basically running the company as if it were his own.

The Australian regulators are involved by now, but the question is: how much can and will they do? If you want a thorough analysis of the events, check out the Takeovers Panel’s reasons for its declaration of unacceptable circumstances.

So it seems like basically all the claims from the activists regarding the terrible governance were true. But we knew this in advance! This should not be a reason for a bad investment outcome.

Credit Corp (CCP.AX) was doing due diligence for a takeout. This was just a cherry on top for me, but it would have provided a quick resolution and a nice IRR. But even if they walked, I still figured we were ready for the standalone path. The activists won, got their guys on the board, AA stepped down… time for some juicy capital returns!

And they did walk: after due diligence, CCP came back in June with a materially reduced bid, and the board ended the talks.

That changed with Jeremy Raper’s latest letter to the Chair of Humm Group, when he seemingly conceded that the original standalone earnings, capital-return and governance-repair thesis has collapsed into a breakup path:

The Company is beset by operational and governance dysfunction. The Takeovers Panel has declared unacceptable circumstances in its affairs; key human capital is at growing risk of departure

…
In these conditions, there is no path that maximises value for shareholders while these two distinct businesses remain combined in a single listed entity under this shareholding structure.
…

the only remaining path to maximising value for all shareholders is to sell the Company’s Commercial division.

Well, that sucks.

There are two segments: Commercial and Consumer. Commercial is the “good business”, but it seems like Consumer is AA’s baby: he keeps investing in it and wants to make it work, even when the ROE isn’t there. So in theory, in a fully economically rational world, both parties could agree here and try to do the right thing for all shareholders: sell Commercial.

But there’s a risk AA is not fully economically rational. He might be spiteful, wanting “his” company all for himself. He can let the share price linger and try another take-private in 2 years and sell off Commercial at that point. Or worse: “if I can’t have it, no one can.”

While the new plan sounds reasonable (”break up the company, SOTP value is X, downside is protected by NTA and a hidden good business”), this is not what I signed up for in the first place.

I have to re-underwrite the investment and ask myself: “if I didn’t own it already, would I buy it today?”

And the answer is no.

I don’t have to make it back the way I lost it. I can crystallize the capital loss for tax reasons and just move on to the next one.

This not me disagreeing with anything in that letter to the board or values assigned to the different pieces. This is just me saying this new pitch is not appealing to me, personally.

I truly hope Raper gets the outcome he’s campaigning for, as it does feel like justice in the fight against the big bad governance.

I’m not blaming JR for anything here. He saw a juicy situation where the problems seemed fixable.

The problem is that removing AA and getting a guy on the board has not given him control of capital allocation, nor has it fully removed AA’s influence.

And while all of this was going on (takeover due diligence, the EGM getting postponed again and again), the vibe amongst the employees has gotten worse and worse. He now fears that top talent will walk away from Commercial, the crown jewel, and claims a quick break-up is needed to maximize shareholder value.

I think part of this was risk he underrated from the start, and part genuinely adverse or unknowable developments.

My track record of tagging along with activists is pretty bad. But somehow I just can’t help myself. The upside sounds so appealing, and it feels good to fight the bad incumbents. But the recurring theme seems to be: once the activists win, you still get a decent price to buy, so you don’t need to buy in advance. And even then, they often disappoint.

Maybe one day I’ll learn my lesson.

(The lesson here though is not that tagging along with activists is always bad. It’s that when fighting the uphill battle vs a big shareholder, you better make sure the “win” is worth it)