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Here’s the recent RNS from Argo Group (ARGO:LN), notifying shareholders of a March-3rd EGM seeking authorisation for a £2 Million Share Buyback & Rule 9 Waiver. [Here’s the actual EGM Circular]:

– Argo Group’s AUM has now declined by a cumulative 85% (to $166 million), the $3.5 million Argo Local Markets Fund remains its only new fund-raising (since the credit crisis), it continues to write-off virtually all the management fees accrued & owed (now totaling $6.2 million) by the Argo Real Estate Opportunities Fund, and it’s also tied up a majority of shareholder funds in illiquid loan & fund investments. Management’s obvious inability to stabilise & increase AUM, plus its wilful neglect of shareholder value, are clearly to blame here for the 50% collapse in Argo’s share price just in the last 3 years.

– Judging by local press reports (for example, here & here), Andreas Rialas originally received a substantially higher offer for Argo’s Indonesian refinery investment (TPPI), but ended up spending another couple of years negotiating (or refusing to negotiate) with Pertamina…to ultimately realise a far lower exit price for fund/shareholders. [Which is consistent with a near-25% write-down (in the last interims) of Argo’s stake in The Argo Fund].

– Pursuant to this letter, in 2014/2015 I introduced and/or referred to Andreas Rialas a number of trade & financial buyers who were interested in potentially acquiring Argo Group, its asset management business, or its fund investments. Since then, I’ve had no meaningful feedback or reason to believe he/Argo have seriously engaged with any of these potential buyers.

– The EGM Notice process was both unprofessional & inappropriate: While most investors learned of the Share Buyback from Argo’s RNS (released after close-of-business on Mon, Feb-8th), the Notice was actually posted the prior week & received by some shareholders on Sat, Feb-6th.

– The Indonesian sale & proposed return of capital is Argo’s first major value-creation event in a number of years. Some level of (prior) consultation with a representative group of external shareholders, plus some additional time to adequately consider & discuss the proposal, would have been appropriate.

– Kenneth Watterson is a director since Argo’s original 2008 Admission. As is David Fisher, who’s also been an AREOF director since 2010. While Michael Kloter has a much longer history with Andreas & Kyriakos Rialas, Absolute Capital Management (which acquired Argo back in early 2007), not to mention Florian Homm (also, see here & here)…and received a post-Admission bonus, while billing Argo for legal services over the years. In aggregate, these directors have earned an estimated $1.4 million in total remuneration from Argo. I must say, I struggle to understand how they still qualify as Independent Directors..?!

– [NB: I have included Michael Kloter on all major correspondence…like any shareholder, I’d expect shareholder value to be his top priority as Chairman. Therefore, it seems like an extraordinary dereliction of his responsibilities not to acknowledge (let alone respond to) an activist who represents a significant percentage of Argo’s shareholder base, even after I publicly announced my search for potential buyers. Considering the collapse in Argo’s business & share price, I’m sure shareholders would expect him (at least) to initiate a strategic review to properly evaluate the company’s future in terms of its operating & capital allocation strategy.]

– Noting again local press reports on the Indonesian sale, plus the fact TPPI appears to represent a majority of TAF’s net assets, it seems reasonable to expect the ultimate net cash proceeds to Argo Group (from the payment of $5.8 million in outstanding management fees, and what could be a potentially substantial TAF redemption) would permit a much larger return of capital.

– Except management has provided NO updated financial info, which leaves shareholders (i.e. the company’s owners!) in the dark regarding Argo’s (post-Indonesian sale) cash/financial position…and clearly ill-equipped to properly evaluate this EGM proposal, let alone determine whether they might hold or sell their shares (if/when a buyback is launched).

– Noting Argo’s current £6 million market cap, and its limited trading volume & float, the successful completion of a £2 million Share Buyback in the market seems both impractical & unlikely. And the resulting reduction in float is equally unlikely to help in ‘creating liquidity in the stock market’. More importantly, the approval of the Rule 9 Waiver (which is inextricably linked to the buyback) would permit Andreas & Kyriakos Rialas to gain absolute majority control (of up to 89%) of Argo Group, with no obligation to pay a premium, launch a bid, or even put up a single penny of their own personal funds.

– A compulsory share tender offer/redemption (ideally at a premium, and for a potentially larger amount) would obviously be a much fairer & far more sensible alternative for returning capital to shareholders. And paying a dividend, as management has promised repeatedly in the last few years, is an additional means of returning cash. [NB: Both offer certainty for shareholders, whereas a share buyback comes with no assurance of execution, let alone completion].

Not surprisingly, I polled a selection of Argo’s shareholders in the past week:

In summary, I can report the Proposals (despite a £2 million lure) are generally viewed as a cynical & coercive attempt by management to minimise its return of capital, to offer a likely zero-premium exit to frustrated shareholders, and to substantially increase their control of Argo (for no money down). If so, this is yet another disappointment from a board that’s enjoyed an estimated $13.4 million in directors’ fees since Admission…while Argo’s external shareholders are forced to be content with a mere $5.4 million stake in the company.

And if this share buyback actually goes ahead, at best departing shareholders can perhaps hope for some additional liquidity to facilitate their exit, while remaining shareholders can probably look forward to life in a highly illiquid company that’s now completely dominated by management, and that still exhibits no sign of an operational turn-around.

By my last count, I speak for well over 19% of the company’s outstanding shares – which amounts to nearly a third of Argo’s external shareholder base, and approx. 50 separate shareholdings, including (for example) David Barry of Value Investments Ltd. who recently declared a 3.0% stake. On behalf of each of them (& myself):

– I urge & recommend all ARGO shareholders to vote AGAINST this EGM resolution. I also urge you to share this post & recommendation with other Argo shareholders you may know (online, or offline) & other interested parties.

[NB: The EGM’s at 3pm Thursday, March-3rd (in the Isle of Man), while the Proxy Form deadline is 3pm Tuesday, March-1st. For most shareholders, holding share certs or attending the EGM isn’t necessarily practical, so I urge you to contact your broker AS SOON AS POSSIBLE (noting they may impose an earlier deadline) to request/confirm they can vote on your behalf.]

– And if you haven’t done so already, I also urge you to please email me at wexboymail@yahoo.com to confirm support for my activist campaign (& please include your exact Argo shareholding). Again, I ask you to forward this request to other Argo shareholders you may know. 

And remember, it requires a simple majority of Independent Shareholders to defeat this Resolution…Andreas & Kyriakos Rialas will NOT be voting their shares. Therefore, the votes of all external shareholders (large & small) will be crucially important here. [And by email today, just to really get the ball rolling, I’ll be reminding all shareholders I speak for (that’s 31%+ of the external shareholder base!) to vote AGAINST this resolution]. At the very least, this vote should deliver a loud & clear rebuke which management would do well to heed…but I think we have every right to believe we’ll see this EGM resolution decisively rejected with your vote.

And presuming that, please rest assured we’ll be continuing to actively seek a fairer (& hopefully larger) return of capital, and/or dividend, from Argo…

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