Submitted by Dr. Justin Robinson
On Tuesday September 22 2015, approximately 20% of the shares in Banks Holdings Limited (BHL) were acquired by SLU Beverages Limited (‘SLU’), a St. Lucian company. When combined with BHL shares […]already held by SLU,
the above-mentioned transaction resulted in SLU owning approximately 40% of the shares in BHL. SLU is majority owned by Companhia de Bebidas Das Américas – AmBev (‘AmBev’), which is controlled by Anheuser-Busch InBev. AmBev is the largest brewery in Latin America and the fifth largest in the world. Ambev operates in 14 countries in the Americas and its portfolio includes beers like Antarctica, Brahma, Bohemia, Skol, Stella Artois and soft drinks like Guaraná. As the largest PepsiCo bottler outside United States, it sells and distributes PepsiCo products in Brazil and other Latin American countries.
On September 22 2015, Ambev purchased 13,170,728 BHL shares traded at $4 per share, paying approximately BDS$52,682,912.00. On that date, BHL’s share price on the stock exchange was BDS$2.49 per share. AmBev therefore paid a substantial premium of about 60% over and above the most recent stock market price on the Barbados Stock Market. However, BHL’s Balance Sheet for the nine months ended May 31 2015, valued the shares at BDS $4.81 each. The Balance Sheet reports shareholders’ equity of BDS $311,812,000, and with approximately 64,853,760 shares outstanding, the book value per share was approximately BDS $4.81. Therefore, on September 22 2015, BHL’s balance sheet valued the shares at BDS $4.81 each, the Barbados stock market valued the shares at BDS$2.49 each, while AmBev was willing to pay BDS $4.00 per share. Is AmBev really paying a premium or getting a steal of a deal? They are paying sixty percent more than the stock market valuation, but paying a 20% discount on the book value of the company.
The balance sheet value of the shares or what is termed the book value per share, is typically viewed as a backward looking measure based on the book value of the companies’ assets and liabilities. It does not account for the market value of assets and liabilities or future earnings potential. The stock market valuation is supposed to do that, and reflect the book value plus future growth potential. When you sell a company you not only sell the company as is but you also sell the future growth potential, and investors normally expect to be compensated for such, and buyers typically pay a premium.
On the surface the stock market price of BDS$2.49 compared to a book value of BDS $4.81 suggests that investors on the Barbados Stock Exchange view the future growth potential of BHL as being negative. Companies’ shares being sold at prices below their book values is extremely rare on most stock markets and is typically associated with companies in financial distress and facing bleak futures. I doubt investors see a bleak future for BHL and negative growth potential. I think the low market value is due to the infrequent level of trading on the Barbados Stock Exchange. Stock prices only change when trades of a certain volume are made. The infrequent trading means that stock prices are not being regularly updated to reflect the current book value and future growth potential of companies. Stock market prices only come close to reflecting the true value of companies if there is sufficient trading by informed investors. I am sure we have lots of informed investors in Barbados and the Caribbean, what we appear to lack is sufficient trading, or a group of what economists call “marginal investors”. Marginal investors are investors who are willing to buy and sell shares regularly at prices based on their estimates of the future direction of a stock price. Marginal investors are typically institutional investors such as mutual funds, insurance companies and other professional investors.
Why with so many informed and sophisticated institutional investors is there such infrequent trading on the Barbados Stock Exchange? Is this lack of marginal investors leaving companies on the Barbados Stock Exchange seriously undervalued? If this is so, investors are unable to reap the full benefits of their investment and companies are vulnerable to cheap takeovers. Why should I buy shares when market prices only approach realistic levels when there is a takeover bid? Why should local companies be sold at relatively low prices because of consistent undervaluation on the local stock exchange? Oh for some marginal investors! There are many more companies on the Barbados Stock Exchange trading at below book value.