Red 5 (ASX: RED) shares are up 20% this morning. RED’s share price rise accompanies the 8% fall in Silver Lake (ASX: SLR) shares. SLR shares have fallen because that company is behind a stock market raid upon RED’s shares.
This is how it often does work. One company looks to buy - or maybe buy just a stake in - another. The shares of the company being bought into rise, those of the company doing the buying fall. When it’s the whole company being swallowed this is for two reasons. One is simply that most such purchases are for shares and this will mean more of the purchaser’s shares around. The other is that most corporate takeovers actually lose money for the people doing the buying. Managements can do very well, shareholders not so much.
Here the reasoning is a little different. At least, so far it is, for Silver Lake says this is an investment in Red 5. A strategic investment: “Silver Lake Resources Limited (“Silver Lake” or the “Company”) wishes to advise that it has acquired approximately 383 million shares in ASX listed gold producer, Red 5 Limited (“Red 5”). The purchase represents approximately 11% of Red 5’s issued capital. The acquisition of the holding in Red 5 is considered a strategic investment.” That’s not a denial that there will be a bid - depends upon what the strategy is of course.
Red 5 share price from Google Finance
As we can see Red 5 shares jumped at the open, when the buying started. It was Petra who organised the raid.
Silver Lake share price from Google Finance
As we can see, it was late in the day when Silver Lake shares started falling - that’s when it was revealed that they were the company Petra was buying for.
Given that we don’t know about a bid as yet we need an explanation for that fall. And the answer is that Silver Lake is, as their announcement states, cash flow positive and generative. Well, one strategy is simply to return that to shareholders - dividends and share buybacks. The other is to spend it upon expanding the company by either takeovers or passive investments in other gold miners. That second might make more money in the long term - but it obviously limits capital returns to shareholders now. So, less cash to return to shareholders - for those strategic reasons - the value of the shares is lower.
Effectively, the impact upon Silver Lake is that management has now told us of their strategy for that free cash flow - shareholders ain’t getting it.
