In a lead up to the shareholder proxy vote later this month, the conflict between Meson Capital Partners, as lead by Ryan Morris, and Aberdeen International Inc. (AAB.TO) continued this week as the two parties issued releases reiterating their respective arguments.
As a recap, Ryan Morris’ Meson Capital Partners LLC, a San Francisco-based activist investment firm working in concert with Nightscape Capital (UK) LLP, recently forced Aberdeen International, a prominent Canadian resource investment firm, into a shareholder proxy vote on Aberdeen’s current board leadership. Meson Capital Partners and Nightscape Capital own a combined total of approximately 9% of Aberdeen shares.
Ryan Morris’ criticism of Aberdeen centres on the company’s “abysmal” performance and what Morris considers excessive leadership compensation. In November last year, Morris’ takeover attempt of Aberdeen’s board began when he publicly protested a private placement transaction executed by the company.
In the shareholder proxy vote ending on January 30th, 2015, Aberdeen’s shareholders will have the opportunity to vote whether they would like new board leadership, as represented by Ryan Morris himself and his list of nominees, or whether they would like Aberdeen’s leadership to remain as is.
As Ryan Morris explains in his January 12th press release, he not only opposes Aberdeen’s November private placement transaction, but plans on completing court proceedings in relation to the transaction.
Spelling out his leadership plan in further detail, Morris goes on to promise “… to maximize the value of Aberdeen for all shareholders which includes a commitment to an immediate capital return of at least $0.15 per Aberdeen share.”
How Ryan Morris intends to return this kind of capital to Aberdeen shareholders in a financially sound way is a big question.
This is an important to question to ask, especially considering that Morris is only thirty years old and has limited investment experience. Moreover, the performance of his Morris Capital Fund since 2010 has been consistently lacking, particularly when compared to the S&P 500. In fact, one year in the past, the Morris Capital Fund underperformed the S&P by as much as -41.4%.
As Morris explains, he and his nominees intend to immediately monetize Aberdeen’s stake in Rio Alto Mining, which, according to Morris, is a “non-core asset”. Following this, Morris and his nominees intend to return the net proceeds of this sale to company shareholders, which will form a major part of Morris’ promised $0.15 capital return. One issue with this is that selling 4.7 million shares of Rio Alto will not be possible without seriously driving down the share price and therefore the yield of this sale will be much lower than he anticipates.
Laying out a plan like this and highlighting the returned value to Aberdeen shareholders might gain favor with some retail investors. However, whether Morris and his nominees can in fact monetize Aberdeen’s Rio Alto Mining assets without negatively affecting value is an entirely different story. Unfortunately, Morris’ press release does little to offer details as to how he will accomplish this.
Following Ryan Morris’ press release, on January 14th Aberdeen leadership published a letter highlighting the potential destructive consequences of Ryan Morris’ bid for Aberdeen leadership.
Detailing a plan for long-term value creation, Aberdeen’s letter spells out a number of points damaging to Morris’ takeover attempts and calls Ryan Morris a short-term investor who simply wants to make short-term profit on Aberdeen by liquidating as much of the company as he can.
Aberdeen’s letter comments that shareholders will be responsible for the costs of the proxy battle, a fact that will greatly diminish Morris’ ability to return $0.15 per Aberdeen share to company shareholders.
Also hurting Morris’ ability to return $0.15 a share will be the fact that change of control fees will be imposed on Aberdeen if Morris and his nominees do win control of the company.
These fees are not something to be ignored. They will cost Aberdeen and its shareholders approximately $8 million and cancelling them will not be an option, despite whatever Morris may claim. Of course if Aberdeen’s current management remains on the board, change of control fees will not be applied and this charge will not diminish the share price.
All of this puts Ryan Morris’ campaign in an immediate and definite disadvantage.
Another significant detail standing in the way of Morris’ proposal is the fact that Aberdeen’s company’s by-laws require that the majority of Aberdeen directors be Canadian residents. Unfortunately for Ryan Morris, most of his nominees, including himself, are U.S. residents, making it very questionable whether Morris and his new leadership could even convene in a board meeting if voted in.
There is little doubt that company leadership plays a significant role in the performance of company stock and, in turn, how much profit is returned to company shareholders.
Unfortunately, a change in leadership through the kind of takeover attempt Ryan Morris is pursuing is no guarantee that Aberdeen’s performance will strengthen. Nor does it mean that Morris and his new leadership will be able to execute the strategies he’s been so vocal about it.
In fact, if you look at notable activist investors and notable company takeovers in the past, including Morris’, many have ended in failure, with company value eroding instead of being created or strengthened.
This is an uncertainty that investors in Aberdeen International need to soberly consider.
The fact that Aberdeen International’s current board has a plan of action that’s more realistically attainable should also be considered.
Shareholders should note that Aberdeen’s current leadership have begun implementing company changes, most recently by inviting the experienced mining minds of John Begeman and Bernie Wilson to Aberdeen’s board. Shareholders should also note that the changes Aberdeen’s current leadership is proposing are far more realistic than anything Ryan Morris has offered so far.
In the next several weeks, Morris may pull more promises out of his hat, but whether he and his nominees can actually strengthen Aberdeen’s stock performance if they are voted in remains very questionable.