Letko, Brosseau & Associates Inc., a Canada-based investment firm that exercises investment control or direction over approximately 1.7% of the outstanding shares of IMAX China Holding, Inc. has announced its intention to vote against a proposal by IMAX Corporation to take IMAX China private.
Currently listed on the Hong Kong Stock Exchange under the stock code “1970”, IMAX China is a leading cinematic technology provider, the exclusive licensee of the IMAX brand and technology and the sole platform for the release of IMAX format films in Greater China. IMAX Corporation currently owns approximately 71.6% of IMAX China shares outstanding.
On July 13, 2023, minority shareholders received a proposal from majority shareholder IMAX corporation to acquire the remaining equity of IMAX China for a consideration of HK$10.00 per share.
According to Letko Brosseau’s analysis, the proposed offer significantly undervalues the Company and unjustifiably benefits IMAX Corporation at the expense of minority investors.
The investment firm says the timing of the offer is opportunistic and comes as the Company is beginning to emerge from the global COVID-19 pandemic that has kept a significant portion of its theatres closed over extended periods of time from 2020 to 2022.
In a statement, Letko Brosseau said, “The 39.5% premium to the prior closing price is based on a very depressed share price (HK$7.17). At HK$10 per share, the offer is less than 60% of what the shares were trading before the global pandemic. The offer does not reflect IMAX China’s historical level of profitability and its potential for strong earnings growth and cash flow generation going forward.
“The announcement came just days prior to the release of IMAX China’s First Half 2023 results that highlighted the recent reopening of all theatres as well as a significant recovery of revenue (up 39%) and adjusted profit (up 6x) on a year over year basis.
“It values the Company at about 9x 2024 adjusted earnings1, which is less than half of the Company’s historical valuation and is unjustifiably low in our view given the strong recovery potential.
“To protect the value of our investment, Letko Brosseau intends to vote against the proposed going private transaction and urges all other minority shareholders to carefully consider the merits of this offer.”
In response, IMAX Corporation reiterated its belief that the transaction is in the best interests of IMAX China shareholders and represents “a compelling offer”.
According to the company, “While IMAX China’s first half results are encouraging reflecting both theatre re-openings and increased box office market share, IMAX China’s share price continued to exhibit weakness and its trading volume hit all-time lows throughout 2023 prior to the proposed privatisation transaction despite market awareness of IMAX China’s results through weekly box office reporting and the first quarter results released by IMAX Corporation on April 27, 2023.
“IMAX China’s volume weighted average price for the 30 and 90 full trading days prior to the transaction announcement was $6.46 and $7.50. We believe that major contributory factors to the historical share price weakness are a lack of trading liquidity, low institutional ownership and declining research coverage – all of which will remain unchanged should the transaction fail to receive shareholder approval. The proposal provides IMAX China shareholders with HK$10.00 per share in cash, which could be reinvested in IMAX Corporation’s shares for those shareholders interested in participating in the company’s continued growth in China.”
According to IMAX Corporation, the transaction was reviewed and approved by the Independent Board Committee (“IBC”) at the recommendation of the Independent Financial Advisor (“IFA”), who concluded the transaction terms are fair and reasonable. The full IFA letter is contained in the scheme document jointly issued by IMAX China and IMAX Corporation on September 15, 2023, with a few key highlights as follows:
- The HK$10.00 offer price represents a 49% premium over the 30 prior full trading day period average, a 35% premium over the 90 prior full trading day period average, and an 86.1% premium over the June 30, 2023 unaudited NAV per share
- The offer price implies a LTM P/E multiple of 18.4x and LTM EV/EBITDA multiple of 7.8x, both of which are higher or in line with the median multiples of 10.9x and 7.8x respectively of the comparable companies identified by the IFA
- The premium offered is consistent with precedent privatization transactions in Hong Kong and offers immediate value realization at a compelling price, especially for shareholders with sizeable holdings, without disturbing the market price or being subject to any liquidity discount
- Trading liquidity in the shares has declined significantly from an average daily trading volume of 982,361 shares per day in 2018 to 301,831 shares per day in 2023 up until the last full trading day. The low liquidity is impacted by (i) a cumulative reduction in public float of 21 million shares (~18%) from 2018 to 2022 resulting from share repurchases, (ii) the loss of trading through the Shanghai Stock Connect (since September 10, 2018) and Shenzhen Stock Connect (since March 15, 2021) and (iii) the loss of analyst coverage from over 10 analysts pre-pandemic to only 3 analysts currently
- Geo-political and macro-economic uncertainties and slower-than-expected PRC economic growth and consumption spending in general are factors that may influence the outlook of IMAX China and potentially dampen investor demand for securities with said exposure.
- While it is uncertain if the IMAX China share price will return to pre-pandemic levels, the IFA is of the view that the current geo-political and macro-economic overhang means that pre-pandemic conditions do not reflect the present circumstances.
IMAX Corporation says the scheme document contains a no offer price increase statement and therefore it is prohibited from changing the offer price directly or through the declaration of a dividend. It adds that shareholders should be aware that the HK takeovers code prohibits another privatisation attempt for at least another 12 months if the current proposal is not approved by the minority shareholders (and IMAX Corporation does not intend to make another privatisation attempt even when it is allowed to do so again).
IMAX China says it has confirmed that it will not declare or pay any dividends before 31 December 2023, and there is no guarantee that it will declare or pay any dividends after such date.