M&G Investments wants Methanex to stop spending capital on assets and start buying back shares.
The largest shareholder of Vancouver’s Methanex Corp. (TSX:MX) has fired a warning shot across the bow in what could shape up to be a proxy battle for control of the company.
M&G Investment Management Ltd., a London-based asset management company, believes Methanex is undervalued and recently filed a 13D application with the U.S. Securities and Exchange Commission (SEC) in which it is asserting its power as the company’s largest shareholder.
M&G, which has been an investor since 2007, owns 19.5% of Methanex’s stock.
In its SEC filings, M&G states it is becoming increasingly impatient with the company’s valuation and is pushing the company to use all its available cash to buy back shares.
“The reporting persons (M&G) have been supportive shareholders since 2007 but have become repeatedly frustrated with the market valuation of the issuer, which the reporting persons believe does not reflect the Issuer’s intrinsic value,” M&G states.
M&G states that it believes Methanex’s value is “significantly below the replacement cost of its assets.”
In 2012, after Argentina began choking off its natural gas supply to Chile, where Methanex had methanol plants, the company decided to disassemble two plants and relocate them to Louisiana.
The relocation and reassembly, which cost US$1.4 billion, was completed in 2015.
While M&G states that it supports Methanex’s dividend policies, it wants the company to use all its available cash flow to buy back shares “until the share price appreciates beyond the replacement cost of their assets.”
“Post the completion of the relocation of the Chilean assets to the U.S., we believe the issuer is finally now in a strong position to take advantage of this situation by using its strong cash generation to repurchase shares.”
It warns that failure to do so could result in M&G losing confidence in the company’s board of directors.
“The reported persons will consider voting against the re-election of certain board members should the issuer choose an alternative route,” M&G warns.
Share buybacks is a strategy that Methanex has used in the past to boost its valuation, said Methanex CEO John Floren, who noted the company issued a Normal Course Issuer Bid on March 6 to buy back 5% of its shares.
"We understand M&G's frustration with Methanex's share valuation and we believe that M&G's views are quite aligned with our strategy with respect to capital allocation,” Floren said in a news release, in response to M&G’s 13D filing with the SEC.
He also noted that the major capital expenditures the company has made in recent years “is now behind us.”
But he added that the company is now in a position to secure a new gas supply and restart one of its remaining methanol plants in Chile. Refurbishing the plant would cost $50 million – an expenditure that might not sit well with M&G.
“We believe these investments would make excellent business sense as they represent a high return on investment and a very low capital cost opportunity to grow the business and return value quickly to shareholders,” Floren said.
Methanex’s share prices have gone as low as $8 per share in 2009 and as high as $80 per share in 2014. The company’s shares were trading at $59.18 per share March 27 in mid-day trading.
