General Market Thoughts and the Case for Change at Humm with Jeremy Raper
Jeremy Raper stopped publishing because writing for a paying audience had begun to distort where he invested. His edge remained undercovered, misunderstood small- and mid-cap deep value, often with an event, but publishing pulled him toward ideas in styles and sizes divergent from where he believed he made the most money; after quitting, he felt “the lifting of a weight.” He still writes private memos, while conceding that fewer inbound ideas and relationships make the decision “not an unadulterated win.”
Japan’s large-cap activism trade may be in the sixth or seventh inning, but Raper thinks regional companies below roughly $500-700 million—and certainly below $1 billion—remain in the second or third. Tokyo Stock Exchange governance, ROE, and price-to-book pressure has only slowly reached family-run companies outside Tokyo. At 0.4-0.5x book, with net cash or borderline negative enterprise value, receiving only half the cash over four years could still produce a 60-70% return. Walker’s response: “Sign me up, baby.”
Walker’s key objection is that Japan’s remaining bargains may also be the companies hardest for activists to influence. A family trust dispersed across dozens of descendants can still control 25%, while cross-shareholdings and insider ownership can make a nominal 10% activist position ineffective. Raper conceded there will be recalcitrant holdouts—“probably all the ones I own”—but believes the direction of travel now outweighs the risk of slower realization.
The UK is statistically cheap, but Raper’s own record—perhaps one winner in ten, or two in 12-15 over three years—suggests governance can consume the discount. His emblematic case was Cambria Automobiles (CAMB): an inadequate management buyout paired cash with an ostensibly voluntary but practically unusable rollover into a delisted security. Investors were effectively asked to remain “handcuffed” to the team attempting to underpay them, while an independent expert could deem the arrangement “not fair, but reasonable.”
Raper and an aligned shareholder, together owning just over 9% of humm group, have called a February 19 EGM seeking board renewal. The six resolutions would remove three of four directors, including the nearly 30% shareholder-chairman; appoint Raper and another nominee; and protect against incumbent board appointments before the vote. Raper personally owns 5.7% and has put about A$20 million of his own money into the position: “I have the whole shebang in the game.”
Raper’s HUMM thesis is “good company, bad governance,” anchored by a commercial asset-finance business growing at double digits with loss rates below 2% of ANR. The consumer portfolio is mixed, but the company had not lost money in the GFC or COVID. Against tangible assets of A$0.76-0.77 per share and sector valuations around 10x earnings or at least tangible book, the chairman’s A$0.58 proposal represented roughly 5x earnings and 0.7x tangible assets.
The board’s handling of the chairman’s bid, rather than the bid alone, became Raper’s case for removal. It allowed almost five months of diligence without a standstill, market test, or capital-return alternative, then disclosed a credible third-party A$0.77 proposal only after shareholders filed to remove directors; the chairman subsequently bought roughly another 3%. Raper argues a renewed board could establish a dividend policy, distribute excess cash, conduct a strategic review, investigate the prior board’s conduct, and prevent minorities eventually being acquired at “a massive undervalue.”
1. Public writing became an investment-process liability
Raper began publishing on Seeking Alpha around 2013 or 2014 because writing imposed “an external discipline on an idea.” If he could not develop a thesis “coherently and cogently” on paper, he questioned whether it was genuinely workable; Walker agreed that unresolved questions often become visible only after thoughts reach the page.
A second objective was building an “intellectual track record” before he had meaningful capital or a formal portfolio-manager record. He hoped public calls might eventually help him raise substantial outside money; his blunt retrospective was that this “didn’t turn out to be true at all,” although the exercise still improved his investing.
After 10-12 years, a broad paying audience began influencing idea selection. Raper’s best niche was undercovered small- and mid-cap deep value with an event, but limited liquidity made those ideas unsuitable for nine-figure readers; publishing therefore nudged him toward styles and sizes divergent from where he believed he made the most money, notwithstanding major exceptions such as Twitter.
Raper no longer needed subscription income, felt more pressure than pleasure, and returned to writing chiefly for himself. Inbound ideas and relationships declined—a drawback he openly misses—but dropping the obligation freed him to revisit his original strategy. He also noted that U.S. event situations had become more competitive, volatile, and crowded by writers.
2. Japan’s remaining opportunity has migrated down-market
Raper rejected private-equity claims that all of Japanese activism remains in the second or third inning. For larger and upper-mid-cap companies, he thinks extraction of the obvious event-driven and governance “low-hanging fruit” has reached perhaps the sixth or seventh inning, even though simply buying disclosed activist targets over the prior 12-24 months would have generated “an astounding amount of alpha.”
The institutional catalyst began with Abenomics, then accelerated when the Tokyo Stock Exchange reorganized its listings and tied Prime listings to governance, independent directors, ROE, and price-to-book expectations. Those requirements became forceful only about four years earlier, with specific P/B and ROE pressure intensifying over the subsequent three years; reform has barely reached the market’s smaller end.
Raper wants to anticipate “where the puck is going to be”: family-operated companies outside Tokyo, often in regional cities such as Nagoya or Osaka, that have not embraced the new regime. In Japan’s diffuse market, “small” can mean below $1 billion and especially below roughly $500-700 million, leaving a multiple-hundred-company subset of potential targets.
Walker’s pushback was structural: regional companies often combine family ownership with webs of cross-shareholdings, allowing many 50-basis-point descendants to aggregate into a blocking 25%. Raper did not dismiss that obstacle, but at 0.4-0.5x book, massive net cash, or borderline negative enterprise value, he views delay as tolerable: even half the cash after four years may still yield a 60-70% return.
3. UK cheapness comes with an expensive governance loophole
Raper readily agreed that UK equities are inexpensive on conventional statistical measures, yet his personal results have been “pretty bad”—roughly one for ten or two for 12-15 over three years. His diagnosis is not valuation but a governance framework that can permit conduct destructive enough to erase the apparent bargain, particularly in small-cap, takeout, and majority-minority situations.
Cambria Automobiles (CAMB) was his sharpest example. Management proposed an inadequate cash buyout but also offered dissenters a rollover, letting an independent expert argue that minorities were not technically forced to sell; in practice, most small equity owners cannot hold a delisted security, and rollover terms can lock them beside the management team that tried to underpay them.
Raper said the structure can defeat the coercion test: even a fundamentally unattractive rollover lets an expert say an offer is “not fair, but reasonable” because shareholders were offered an alternative to selling. He cited Hunter Douglas, where an opinion signed off at 65 was raised to the 80s after objections, while the equity value had started around 120, later rose toward 160, and was sold to a third party around 165-170 within six months.
Walker reinforced the point with a fairness-opinion example from biotech mergers: an opinion might bless a sale at 40, then bless a topping bid at 60. Both speakers’ examples illustrated how a nominal alternative or revised bid can make “fairness” highly malleable.
4. HUMM combines a cash-generative core with a conflicted board
Raper owns approximately 5.7% of humm group, and he and an aligned shareholder together own just over 9%. HUMM is an approximately A$325 million Australian non-bank lender whose chairman owns just under 30%; Raper has put about A$20 million of his own money into it and described himself not merely as having skin in the game but as being “pot committed.”
The commercial division is the “jewel”: one of the largest and most successful growing asset-backed finance businesses in Australia, growing at double digits for four or five years and producing cash with loss rates below 2% of ANR. Consumer is more uneven—cards businesses across Australia, New Zealand, the UK, and Ireland—but the UK had just become profitable, Ireland was doing well, and New Zealand remained profitable despite limited growth.
Raper stressed that his complaint is board-level stewardship, not current operations. The executives are relatively new after chronic turnover, the CEO has no board seat, and all directors are non-executive; he argues the ostensibly independent directors have nevertheless become captive to the chairman’s preferences.
HUMM had not lost money in the GFC or COVID. It reported roughly A$125 million of unrestricted cash against A$60 million of corporate debt, although the company disputes the accounting definition of unrestricted cash; Raper estimated that at least A$60-70 million was truly unrestricted. Tangible assets were A$0.76-0.77 per share when the chairman offered A$0.58.
5. The A$0.58 bid exposed a process built around the chairman
The chairman’s June proposal arrived after a 5% shareholder sold, depressing the price into the mid-to-high A$0.40s; its apparent 25-30% premium therefore referenced a last trade that Raper considered unrepresentative. At roughly 5x earnings and 0.7x tangible assets, it compared with peers around 10x earnings or above, the cheapest peer—Raper thought—around tangible book, and Shinsei Financial’s sale of its Australian consumer direct-lending business at roughly 1.2x tangible assets.
In the prior year, HUMM repaid roughly A$57-58 million of a mezzanine, debt-like instrument while the business generated about A$55 million of adjusted cash income. Raper argued it could instead have distributed comparable cash: against the then-A$250 million market capitalization, paying those earnings as a dividend would have implied a yield near 25%, versus sector yields of roughly 7-8%.
Raper immediately told the board the proposal was “insulting,” “derisory,” and clearly incapable of winning shareholder approval. Nevertheless, the board granted nearly five months of diligence without a standstill, market test, or independently developed BATNA; after the bid fell apart, the chairman was free to acquire additional shares. Walker called the absence of a standstill “creeping takeover territory.”
Walker separately raised concerns about the chairman’s participation in stock-price-sensitive matters during the bid, saying he was present at meetings discussing the annual accounts and noting press reports alleging that he massaged or edited a first-quarter trading update. Raper agreed that the chairman had been involved in the decision to repay debt rather than adopt a proper dividend policy, and said his fingerprints were over the company’s conduct. Their broader charge was that directors ignored minority shareholders and basic governance safeguards while the bidder-chairman examined the company from inside.
6. The February vote determines whether minorities gain an alternative
The governance dispute sharpened at the AGM. A formal meeting notice said the chairman would support a proportional-takeover defense, yet the resolution was withdrawn the day after his bid ended without an explanation; shareholders learned only at the meeting that he had switched to opposition. Because it required 75% approval, his nearly 30% holding could have defeated it.
After consensual renewal was rejected, Raper’s group filed a Section 203D notice seeking director removals. The company then revealed it had sat for about a month—without even signing an NDA—on a credible listed bidder’s A$0.77 proposal, 33% above the chairman’s A$0.58 offer. The bid was disclosed alongside the board challenge, which Raper argued cleansed the chairman to trade; he then acquired roughly another 3% over two days.
Six February 19 resolutions would remove three incumbent directors, including the chairman; install Raper and a second nominee; and protect against interim appointments. Raper’s promised agenda is governance reform, a sustainable dividend payout policy, excess-cash distribution, a full strategic review, and examination of the preceding 12 months’ conduct. His closing instruction was unusually direct: consider the shares only if prepared to vote.
Full transcript
Jeremy, how’s it going?
Hey, buddy. I’m good. Thanks for having me, and congratulations on your second arrival. It’s great news. I hope everything’s going well.
I know you have, too. Maybe I’ll have to get some pointers for how to survive and invest while doing two, because right now it’s tough.
Jeremy, it’s been a while since we caught up. Let’s just start. We’re recording this in early January 2026. What’s going on in the world of Jeremy Raper? How are things over there? What’s on your mind?
Things are good. I don’t actually know when we last did a pod, so I feel like there might be a lot to catch up on. I guess the major changes that have happened in the last 12 to 18 months are that I obviously stopped writing the blog full-time in mid-2026—March, April, or May 2026—so it’s been a good 8- or 9-month period since I stopped writing the blog.
I miss it. Every couple of months, I miss it.
That’s kind of you. I think I articulated at the time why I stopped, so some people might be interested in hearing about that.
I’ve been writing and being in the public domain on and off for the better part of 12 or 13 years. I think the first article I published was on Seeking Alpha back in, I want to say, 2013 or 2014, and I extended my output online since then.
The original reason I started writing, and the reason why I then evolved that into a formal blog where I would talk about specific stocks, and eventually into a paid blog, was that I obviously enjoyed writing and it was helpful to my investment process. But that was the main reason initially why I started. It wasn’t because I wanted to be known or become a personality—nothing like that. I simply found writing helpful in developing and fine-tuning the investment process because it imposes an external discipline on an idea.
There’s a quote—I completely agree, and I’m actually working on a post now. People are going to think you came up with it, but I can show them there’s a quote from Warren Buffett in one of his shareholder meetings. It might have been in 2000 or even in the ’90s. They asked him, “Why do you write?” He said, “Sometimes I don’t even know what I’m thinking until I start putting my thoughts on a page.”
To me, I say it all the time. I’ve told people my returns are better when I write something than when I don’t write something. When I write something, a lot of times there’ll be a question. I’ll write a paragraph, and there’ll be a question that’s obvious at the end. In my head, I thought it was answered, but when you put it on paper, you’re like, “Oh, no. This question has not been addressed.” You can keep pulling that thread.
I’m completely with you. Sorry to ramble. I’d love to continue to hear your story.
No, no. I found something similar. If you cannot coherently and cogently develop and explain an investment thesis—now, that doesn’t mean it has to be short—but if you cannot coherently and cogently develop an investment thesis on paper, is it really a good investment thesis? Is it really a workable investment idea?
Sometimes it is, and sometimes it isn’t. Obviously, there were times when I thought I had developed a cogent investment thesis on paper and the idea didn’t work. Similarly, there were times when I didn’t, and I had investments that did work. But for the most part, I found it overall highly additive to my investment process.
Back then, I was also trying to develop what I would call an intellectual track record. I didn’t have a lot of money back then, and I didn’t have a formal track record as a portfolio manager, but I aspired to one day run money professionally. I thought that if I didn’t have a formal PM track record but I had an intellectual track record, then I could somehow parlay that at some point into raising substantial outside funds.
That actually didn’t turn out to be true at all. But then, 10 or 12 years on from that, having developed a certain style, a certain amount of credibility, and having accumulated enough savings to be able to just invest as I saw fit, the calculus around specifically publishing for other people to read became quite different.
I still write memos for myself, and I still write things that are maybe not as extensive or long-form for myself. I still try to derive a lot of that original benefit, but the calculus around specifically seeking out investment ideas for the purposes of writing them up for an audience—and increasingly for a paying audience—I found recently started to distort my investment process.
This obviously wasn’t a quick discovery. It happened over a period of time, and you and I talked offline about this a good 6 to 9 months before I made the ultimate decision. You probably recall.
I found that over time, instead of focusing on where I had developed a clear edge and a clear winning strategy, which was in undercovered, misunderstood, deep-value, smaller- or medium-market-cap situations, often going through an event situation, I started moving away from that. A lot of those situations have limited liquidity, right? They would have been actionable by someone like me investing at the time with 7 figures or even 8 figures, but not 9 figures.
Because I was writing for a wider audience at that point, having developed a 10- or 12-year audience, I was gravitating toward ideas in styles and sizes that were largely divergent from where I was making the most money—or at least where I believed I was making the most money. There were some big exceptions.
This is why it took me quite a while to get to the end of that journey, because I had some of my biggest successes in some very large-capitalization stocks, like Twitter and a few other event situations in the U.S. over the years. Nevertheless, the trend was unavoidable. By early to mid-2025, the trend was moving in that direction.
I didn’t need the money. I’ll just be honest: I didn’t need the money from the subscriptions. I felt the pressure more than I enjoyed the output of writing for an audience, and it had begun to objectively distort my process.
I thought, “You know what? Move on from that.” That was a big change. Then I noticed almost the lifting of a weight—going back to my roots, in a way. I was free from that pressure, and things really picked up.
Yeah. Go on. Has the amount of inbounds changed since you stopped that? You still have your Twitter presence, and especially—we're going to talk about HomeCo—but has the amount of inbounds changed?
One of the reasons I've kept doing it—actually, a main reason I've kept doing it—is the relationship I've developed with a lot of these people, especially on the premium side. Those are your biggest fans; they're the people who choose to pay. I hate to have my friends pay, I guess, but it's honestly people I never would have connected with except for the site. Has that changed at all?
Definitely. It's gone down a fair bit, so that's a drawback. This is not an unadulterated win; there are drawbacks. There are pros and cons, so the decision is different for everyone. It depends on the situation.
I should also mention one other thing I forgot, which is highly relevant to the decision. I had gravitated away from doing more U.S. stuff. So, when I first started writing—
I know what you're going to say. Let's not even talk about that piece. We don't need to put that in the book. Yeah.
No, no, no, no. That's what I was going to say. I was just saying the U.S. event environment had become either more competitive, more volatile, or more difficult, or some combination of all 3. There's obviously also a proliferation of other Substacks and writers, so the writing environment had become more competitive.
The ideas you're getting in the U.S. in particular—someone, I think it was Yellow Brick Investing, which is a site I don't follow closely, but they've emerged in the last 12 months—collected a bunch of pitches from online writers and did this snapshot of all the ideas on his site. Something like 80% of them were U.S. stocks, and there was not 1 single idea on there from Australia or Japan.
I'm not here to evangelize for Australian markets or Japanese markets. I happen to be in Asia, whether I'm in Australia, Thailand, Japan, or whatever. If you're in the Asian time zone, you can do all the Asian markets.
Just by way of example, when you have a situation where all these online Substacks are attacking Western Europe and the United States, and there wasn't 1 single pitch from Japan, for example, that's kind of an argument in and of itself. I did find that focusing less on U.S. stocks also lent itself to not losing quite as much, let's say, from giving up that interactivity with the network, the client base, and the broader network. But I do miss it.
I'm glad you made that point. I thought you were going to say something else. I know you know what I thought you were going to say, but I'm glad it's okay.
Australia—I would agree with you, though I do think I'm seeing a lot of Substacks that are increasingly writing up Australian stocks, maybe following in your footsteps. Japan, I feel like I disagree, because I feel like there are 15 different Substacks now. Maybe they are more along the deep-value side: “Hey, here's yet another Japanese stock trading for negative EV,” versus the event side. So maybe that's where the difference is, but I do think Japan is really picked over.
Let me ask you about Japan. We talked about it on our last podcast, and you and I have talked about it a lot offline.
The market for events in Japan: if we were recording this 4 years ago, the Japanese market would have been cheaper, but I think there would have been fewer angles. The Japanese market is obviously not the U.S. market, where if you trade negative EV, somebody's going to come in with an axe and force you to return capital, but there's been some progression. How are you viewing the Japanese event market today? Just in general, nothing specific, obviously.
Yeah. The opportunity set, such as it is in Japan, is still very good. A lot of KKR long-term money or private-equity-backed capital—long-term money—says we're still in the second or third inning. I think that's not right. For the larger-cap securities, or even the larger mid-cap securities, they're probably in the 6th or 7th inning, realistically, on the pure event-driven, low-hanging-fruit-extraction and activism side.
Those who are raising multibillion-dollar funds will take umbrage with that comment, but I think that's a reasonably fair judgment. On the other hand, at the smaller end of the pond—anything, and by the way, Japan is obviously a hugely diffuse market—the smaller end of the pond is not sub-$100 million necessarily. It's probably sub-$1 billion, or definitely sub-$500–700 million. There is still a huge amount of opportunity in the multiple-hundred-company subset within that bucket.
Basically, what happened is that when Abenomics first began in the early 2010s, you had this steady progression. Really, things only kicked into high gear once the TSE, the Tokyo Stock Exchange, reorganized its subsegments to promote listings—Prime and Standard listings—where Prime listings were dependent upon things like massive corporate governance reform.
Part of that is having a certain number of women on the board and a certain number of independents on the board, but a lot of it is tied directly to return-on-equity minimums and achieving certain levels of price-to-book ratio, et cetera. It's trying to embed a management that is at least semi-conscious of the cost of its equity capital. That only became hardcore, I want to say, 4 years ago.
In the last 4 years, there have been a number of developments: obviously, the Governance Code, the Stewardship Code, and then these discrete P/B- and ROE-related targets that have been promulgated in the last 3 years. That was, let's call it, 4 years ago, with increasing vigor from then on, but that's really just trickled down from the top and has hardly made its way to the lower end of the pond.
I've been public about my views that you don't really want to go to Tokyo-based companies that are $5 billion companies where Oasis is already on the register. Actually, I'm going to contradict exactly what I just said. If you had invested in every single disclosed activist target above a certain market cap—$1 billion—24 months ago and 12 months ago, you would have generated an astounding amount of alpha. That would have been an excellent strategy.
But it's my fervent view that going forward, there's a lot more money to be made where the puck is going to be than where the puck currently is. That means looking at companies where they're still not playing ball with the new regime. They're probably based outside of Tokyo, meaning a long way from the center of political and economic power, where they are typically run by family operators, if not family owner-operators.
They're based in some backwater in regional Japan, if not third- or fourth-tier cities—Nagoya or Osaka or something like that. I think that's where the lowest-hanging fruit remains. On that basis, I think the opportunity set is probably in the second or third inning.
Using the U.S. framework, I'll just apply it here: a lot of the backwater companies, as you mentioned, are smaller, and the family has more control. While I hear you that the valuations there have not floated up with the rest of the boats, I do worry you're stepping in there.
The nice thing about billion-dollar-plus Japanese conglomerates is that there wasn't a lot of insider ownership. So yes, they were misaligned, but you could go in, buy 10%, and really affect change.
A lot of these companies might have a weird web of organizations and a little bit higher insider ownership. So you go in and say, “I bought 10%,” and they say, “Well, we've got a family trust that's been here 100 years, 50 different grandkids, and all of them own 50 basis points. That adds up to 25%. Go pound sand. We own enough that you can't do anything.” Have you run into that, or am I simplifying too much?
No, it's definitely still a problem, and it's hard to speak in absolute terms because, of course, you still have recalcitrant companies that have webs of cross-shareholdings and will not play ball. But in the main, I've seen enough in the last 12 to 24 months to suggest that the direction of travel is clear.
Of course, there will still be holdouts. There will still be tougher situations. Probably all the ones I own will be the tougher situations, but in the main, the direction of travel is your friend. In the main, that's where the opportunity set is largest, I believe.
Again, if you're buying stuff at 0.4 of book, 0.5 of book, and it's massively net cash and borderline negative EV, then even if it takes 4 years instead of 2 years, and even if you get half the cash instead of all the cash, you'll still do very nicely.
Sure, you might not double your money in 3 years. You might only get a 60%–70% return over 4 years. Or you might not do that well either. But again, we're talking risk versus reward.
So if the downside is simply that you have an okay return rather than an exceptional return, while risking essentially no capital by buying something below net cash or whatever it is, sign me up, baby. Sign me up.
I do hear you, though. You know, this was the pitch for Japan in 2012, 2014, and 2016. I do think the interesting thing is, as you said, the larger boats have started to be lifted, and maybe some of the smaller boats haven't been lifted. But once the larger boats start getting lifted, the tide has started to rise, and eventually, as you've seen in the past, it kind of trickles down. It's really hard, once the larger boats start to get lifted, for the smaller boats.
Let me ask you about one more market, and then I want to turn to Humm Group, and then we'll turn to the second thing we're going to talk about.
One more: you mentioned that a lot of the subsets focused on Western Europe, and I do hear you, though. I mean, I've sent you emails. The UK market in particular—I've joked about it a few times on the podcast—it's an emerging market. It's an inefficient market, in my opinion. Do you think, when you were talking about how the Western markets are picked over, you would apply that to the UK market? Or do you think I'm wrong when I say I find it pretty inefficient? I think there's a lot of cheap stuff there. Or do you think, hey, it's actually been pretty picked over, Andrew? Let's go spend some time in Vietnam or Thailand. I mean, I'll spend time there anywhere, but I'm talking about the stock market, not in person.
Okay. It's definitely undervalued. UK stocks are definitely cheap on typical valuation metrics or statistical valuation norms.
The problem I have in the UK is twofold. One is a little bit of my own personal experience there. I don't think I've made money on a UK stock. I think I might be 1 for 10 in the last 3 years, or 2 for 15, something like that. 2 for 12. It's pretty bad. So I have a personal sense that, at some point, either I don't quite understand what's going on, or my sense for that market is somehow off.
I think it relates to this idea that, while it is incredibly statistically cheap, the governance framework is not robust enough. Or I should rather say, in situations that I've been involved in, often at the small-cap end of the pond—event situations, takeout situations, majority-minority takeout situations—the governance framework has been so poor as to allow pretty bad behavior, frankly, that has ultimately been destructive of shareholder value, such that even in the ones where I've won, I haven't won.
Just to give you an example that should be familiar to a lot of value investors on your channel, Cambria Automobiles, CAMB, was taken out in a management buyout about 4 years ago. Maybe it was 3 years ago, and it was a very, very close vote. But they used a trick in convincing the shareholders to sell—a trick that you often see in some markets, but you don't often see in the US because the governance structure is just better there. It's a trick you see in some other markets, too, but I've particularly noticed it in the UK, and it's really put a dampener on my view of the UK.
They offer a cash consideration for a takeout, and it's wildly insufficient. If the cash consideration were the only option, either the FCA would step in or the fairness opinion would not be able to be granted. So, in the vast majority of majority-minority takeouts, the independent expert will give a fairness opinion. They have to say something like, “This is fair and reasonable to minorities,” or, “This is not fair, but it's reasonable to minorities.” You can really finesse that. Obviously, these independent expert opinions are bought and paid for, but up to a certain limit.
This was the case when we did Hunter Douglas back in the day, right? You have a fairness opinion that says it's worth 65, while fair value is 150. That's just not going to fly. But if the truth—
RA Capital published this great piece, and they've been on a lot of boards for biotech mergers. They were saying, “Sometimes you'll get a fairness opinion that says it's fair to sell at 40, and then you'll get a topping bid at 60. Then they'll come in with a fairness opinion that says it's fair to sell at 60.” You'll be like, “Wait, you just signed off on 40, and now it's 60?”
I mean, look, Hunter Douglas signed off on 65. We complained—I complained—and they raised it to 80-something. The value of the equity had started at 120, and it went from 120 to 160. Within 6 months, they sold to a third party at 165. The same board that signed off on a 60 bid, 6 months later, signed off on a third-party transaction at 170 or whatever it was.
It happens a lot, but specifically, the workaround they found in the UK—or that seems to be used by highly opportunistic management teams—is they offer a cash consideration, then they offer a rollover option to those who don't want to take the cash consideration. Then they pitch it to their shareholders, saying, “Listen, no one's forcing you to take the cash. If you want to stay, stay with us and roll forward.”
I got involved in a couple of fights in Australia around ASX delistings. The reality is that the vast majority of small equity owners cannot hold a delisted security.
And the rollover terms I've seen are so onerous. You just don't know what you're getting. It's designed so that no one can do it.
Of course. Of course it is. Even if they set up a velvet feather bed for you to jump into and just hang out there for 3 years in some cushy vehicle, it's so wholly unattractive to be locked up with a management team that just screwed you, and that oftentimes has related-party transactions going on in the background within your investment.
I mean, that's almost always the case. When they're willing to rip you off to an extent that you complain about something like this, there are further related-party transactions, right? Jeremy Raper
So you're essentially being handcuffed into an agreement with someone that's already tried to screw you, or is screwing you, essentially.
Then you're being told by the independent expert, “Okay, it might not be fair, but it's reasonable because they've offered you the option not to sell your shares.” The regulatory rule, the rule of law, often in these situations, is that these kinds of majority-minority coercion tactics are only not allowed if the regulator deems that you're being forced or coerced to sell your shares at an undervalue.
Technically, under the letter of the law, if they offer a rollover option—even a fundamentally shitty rollover offer—then that technically is not coercive, right?
Even if they offer a shitty, fundamentally shitty rollover offer—
It's a great point. I know of a few where the company went private, and then 2 months later they sold a division that nobody even knew they had—a startup division that no one even realized they had—and they sold it for 50% of the enterprise value or something. It was literally valued by all shareholders at zero. They go private, take it out, and then, 4 years later—
Yeah.
You've been very active and very public. The question we got the most was Humm in Australia. You've been very active, and there's an upcoming vote. I'd love for you to— you've been on this for 9 months, I'd say. I can't remember the exact time, but maybe you could quickly summarize, for people who haven't been following the whole thing, what's happened there, how you got involved, and what the game plan is.
Well, I don't know how I'm going to summarize this quickly. Maybe keep it to very broad strokes.
Okay, so look, it's all public information. I personally own about a 5.7% position in Humm Group. Humm Group is a non-bank financial lender listed on the Australian Securities Exchange. The market cap is about 325 million Australian dollars. It's a smallish company.
As many followers will know, it's a quasi-controlled company. The chairman owns just under 30% of the company. I, along with another shareholder acting in concert, own, call it, 9%—maybe just over 9%—of the company, and we've called an extraordinary general meeting to propose full board renewal at the company.
This meeting will be held on February 19, so about a month from now. We're recording this on January 15, so about a month and change. At that EGM, we'll be proposing 6 resolutions. 3 of them are for the removal of current directors, including the chairman. The current board has 4 people.
We're proposing to remove 3 and add 2, including myself and another gentleman, to the board. The sixth resolution is essentially a protection resolution to protect us from the incumbent board adding additional directors between now and the date of the meeting. Essentially, I'm asking all shareholders to support my call for board renewal, because this is a company that's been woefully mismanaged under the stewardship of the chair. I should say: mismanaged at the board level, not the operational level.
This is one of those good-company, bad-governance situations where the underlying business is actually doing fine. The operational executives, while new due to chronic turnover as a result of the chair's mismanagement, have been doing fine, and the business is doing okay to well. The CEO of the company is not on the board. None of the board members are executives; all of them are either nominally independent but not really, or non-independent but non-executive, meaning the chair.
Essentially, what I'm proposing is simply to fix the governance culture and the alignment of the board, which has demonstrated itself to be captive to the whims of the chairman. If we do that, then I'm hopeful it will lead to a rerating in the stock, which I think is obviously very cheap. I put A$20 million of my own money, which I earn in the market, into this stock, so you could say I have skin in the game. More realistically, I have the whole shebang in the game.
I have a significant personal investment. I bought it slightly below market prices, but not meaningfully different from market prices, so I'm pot-committed on this. So, what's been going on at Humm?
Big picture, this is a non-bank financial lender. They have 2 segments: 1 is called commercial, and 1 is called consumer. There's a bit of a good-co, bad-co split there. It's a very simplistic overview, but essentially, commercial is a jewel. It's 1 of the largest and most successful growing asset-backed finance businesses in Australia.
The consumer business is a bit more of a hodgepodge of different things. They have a cards business in New Zealand, a cards business in Australia, and a cards business in the UK and Ireland. Some of these are in various stages of maturity. The UK business just turned profitable. The Irish business is doing quite well. The New Zealand business hasn't really grown but is still highly profitable. The Aussie business is a bit more of a hodgepodge.
If you've been following the non-bank lending space, or the direct-to-consumer lending space, over the last 4 or 5 years, you'll understand that buy now, pay later has kind of upended that business. There's a lot of competition in the direct-to-consumer, unbanked, or unsecured direct-lending space. On the other hand, the commercial business is an excellent business. It's been growing double digits for the last 4 or 5 years. Loss rates, again, are a function of where we are in the cycle, but they're close enough to historical lows—under 2% of ANR—and the business just prints cash, essentially.
I don't want to go too far back into ancient history. The reason I got involved in the situation was that the chairman, as is typical, made a lowball bid for the company in June of last year. He offered 58 cents per share at a time when the stock was trading in the mid- to high-40-cent range. That was about a 25%, maybe even a 30%, premium over the last trade. But that last trade was only a function of the fact that a 5% shareholder dumped his stake the day before.
So, really, it was a low premium to the undisturbed price.
Have you followed PRTH? This is in the US domestic markets, but did you see what happened there?
Someone brought it up to me. I did look at it quickly, but I didn't—
I have a small tracking position, so I'll disclose that. But it's very similar to what you said. The stock was at, let's call it, 8, and they reported earnings and missed analyst estimates, so the stock went from 8 to 5. The chairman owned 60%. It went from 8 to 5, and the next day he lobbed an offer: “I'll take you out for 6. This is a 20% premium. Let's go.” People were like, “Whoa, man. You can't take an illiquid stock out on a 1-day dump premium.”
Look, he did that. I mean, just on the underlying valuation, he was offering 5 times P/E and a big discount to tangible assets. Tangible assets at the time he made the bid were about 76 or 77 cents a share, and he was offering 58. This is a highly profitable business. It had not lost money in the GFC and had not lost money in COVID. Tangible assets were, as I said, close to 80 cents a share.
Every other comparable company in the market trades at, call it, 10 times earnings. There's nothing purely apples-to-apples, but essentially, the comp set trades at 10 times earnings or above. A lot of them aren't even profitable, but they're growing very fast. They trade at 10 times earnings or above, and some of them trade north of 2, even 3, times price-to-net-tangible-assets.
The cheapest one in the group traded, I think, around net tangible assets. The cheapest transaction in this space, even during the height of COVID, was when Shinsei Financial sold its Aussie business—its Australian consumer direct-lending business—for, I think, 1.2 times price-to-net-tangible-assets. You cannot buy this stuff below price.
So, he comes in and offers 0.7 times net tangible assets and a paltry multiple of last-12-month earnings. By the way, the company has oodles of excess cash. At the time he made the offer, they reported an unrestricted cash balance of $125 million. The company will quibble with the accounting definition of unrestricted cash. They do have $60 million of corporate debt, but even just removing the corporate debt and looking at the pro forma leverage of the underlying entity, at least $60 million to $70 million of that cash is truly unrestricted.
You know that because, in the prior year, they made the decision to repay some mezzanine-financing, debt-like instrument that's accounted for as equity on the balance sheet, for I think $57 million or $58 million gross. The business generated adjusted cash income of about $55 million. They essentially took all the earnings of the business and chose to repay equity. Well, they repaid its book balance-sheet equity, but it's not buying back shares. It's a fixed obligation in terms of the requirement to pay on that liability—a nominally high interest rate, but nevertheless, it was a decision to repay a debt-like instrument instead of just returning $58 million in cash to shareholders, which they easily could have done, and just kept that debt piece outstanding.
At the time he made the bid, the market cap was $250 million. If it had just paid out those earnings as a dividend, it would have been trading on a 25% yield.
Yep. Which obviously it wouldn't, because the average yield in the sector is 7% or 8%, or whatever.
So, a highly opportunistic offer. I come off the top rope immediately. I write to the board. My position is much smaller at the time, and I say, “Listen, no one's saying you have to sell the company. No one's saying you have to do anything. You shouldn't engage with this offer. This is an insulting offer.”
The standard for a board to engage with an offer always has to be this: first, what is the best alternative to a negotiated transaction? What is our BATNA? And second, is this transaction capable of being consummated into a binding agreement? It was a non-binding indication.
As soon as they launch the bid, socials are covered. All the shareholders are furious. Yes, he owns 30%, but there are a few other shareholders in there. I'm off the top rope. There's no chance 58 would get up. It's insulting. It's derisory. It's desultory. That was made clear from the get-go.
Despite that, the board allowed 5 months of due diligence. During that period, they did not extract a standstill agreement. They did not conduct a market test. They made no attempt to develop a BATNA. They made no attempt to return excess capital on their own for the benefit of all shareholders.
They simply opened the kimono and allowed the chairman to do as much and as deep a dive as he wanted, with no consequences for the rest of the shareholders. Because guess what happened when the deal obviously fell apart, as it was always going to do? The chair jumped into the market and started buying shares to entrench himself even further.
These matters have come to a head over a period of time, but that demonstrated that the chairman was acting in bad faith, fundamentally. There's a whole other host of problems with his behavior over the last 9 months. There are rules on undisclosed takeover offers.
Well, yes, obviously we'll get to that, but there are strict rules in Australia, as there are in any jurisdiction, where, if a person has a material personal interest in the stock price at large, they need to be stood down and/or recused from all matters that affect that stock price, right? This is in the Corporations Act, which is the governing document that sets the tone for all corporate and capital-markets legislation in this country.
He was present at board meetings discussing the annual accounts. There have been press reports alleging that he massaged and edited the 1Q trading update. He did not recuse himself from discussion of the accounts.
He was part of that decision to pay back the debt instead of adopting a proper dividend policy. His fingerprints are all over the behavior of the company. All these matters clearly affect the stock price during the pendency of his bid, while he was supposedly conducting due diligence on the company.
So, the fact that that environment was allowed to continue; the fact that the supposedly independent members of the board willfully ignored the views of the other shareholders and would not even conduct themselves within the norms of standard good governance—or decent governance, I should say—was problem A1.
And it's the lack of a standstill that gets me. I do a lot of these. Obviously, these are U.S.-focused, and I don't want to opine on another country's laws because they can get very technical, but it's the lack of a standstill where you have him make the offer and then you don't even put a standstill in place and you let him buy.
It's a creeping takeover, right? You could get into creeping takeover territory, and I can't believe that.
These issues are what really prompted us to go to an EGM as opposed to a consensual workout. Obviously, these issues came to the fore at the EGM, which was in November—mid-November. All these issues were given a full airing before the shareholders. We asked directly, “Why was there no standstill?” They said, “Look, we asked for a standstill. He wouldn't give it to us.” We just said, “That's not good enough.”
A standstill is M&A defense 101. As you just said, it doesn't matter what the jurisdiction is. We could be doing this in Poland. We could be doing this on the moon. There'd be a bloody standstill agreement.
And if he wants due diligence, as you're saying, there has to be a quid pro quo. If he wants due diligence, he's going to say, “You've got to do it,” or else you say, “Hey, you're not working in the interest of all shareholders. You've got to get out.”
Look, I wish the violations just stopped with the no-standstill agreement. The reality is that the chair puts out a document called a notice of meeting before the AGM. This is signed off by the board, but it's a document put to the stock exchange. It's a quasi-legal document. It's a binding document.
That notice of meeting explains how the chair intends to vote on all the resolutions put to the meeting. In that notice of meeting, the chair stated he intended to vote for all the resolutions. One of those resolutions was a proportional takeover defense resolution. As part of explaining that resolution, the company put out a 6- or 7-page document explaining why a defense against proportional takeovers was good for all shareholders.
I don't want to get too technical, but essentially, it was a resolution that would stop someone coming in and bidding for, say, 10% or 20% of the company, thereby encroaching and creeping without offering a full control premium. He said in the notice of meeting that he would vote for that resolution at the AGM.
That resolution was withdrawn. It was withdrawn a couple of days before the meeting, the day after he dropped his bid for the company. But no explanation was given for why it was withdrawn. Only at the AGM did he disclose that he had changed his voting intention and decided to vote against that resolution as a shareholder. Therefore, he would have killed that resolution, because a 30% vote against would have killed it. It's a special resolution; you need 75% support.
He didn't make an announcement to the stock exchange. The board didn't find it problematic that the chairman of the company would not announce to the market that he had changed his voting intention before the AGM. I find it literally incredulous that the board can continue on after something like that, after making a false statement to the market.
Under continuous disclosure in the U.S., that would qualify under Regulation FD, the Fair Disclosure rules. It's a similar thing in Australia. It's called continuous disclosure. That is just insane to me.
So that happened. Then we find out that, after that, I approached the company and said, “Listen, the culture is not good enough. It needs to improve. Are you interested in pursuing consensual board renewal?” “No, we are not. Go away,” was essentially the message.
So we put in a Section 203D. Section 203D is a technical notice in Australia that says you intend to remove directors of the company at a forthcoming meeting. As soon as we popped that in, they announced to the market that they'd been sitting on a third-party bid at a 33% premium to the chairman's bid.
In other words, a third-party bidder came in and wanted to buy the company at 77 cents. The last chairman's bid, which never got anywhere—that was undercooked, I should say—was enabled by a compliant board. That was 58 cents. That got 4.5 to 5 months of due diligence. That was okay to get due diligence. At 77 cents, nothing happens for a month.
They don't even sign an NDA. They don't disclose it to the market. To be clear, they're not legally obliged to disclose it to the market; it's an immature proposal. But then they make the choice to disclose it to the market, paired with the announcement that we had challenged the board in this way.
So the only time the shareholders actually learn that there was a bona fide bid—this is another listed company, a billion-dollar company in Australia, a credible company—a bona fide bid to acquire the company at a huge premium to the chairman's own derisory offer is when that information has to come out to cleanse the chairman and allow him to trade the shares, because that's obviously inside information.
Guess what happens? He announces that, and he starts buying shares in the market. On the same date, with no standstill agreement, he buys 50 million shares in the market over the next 2 days—3% of the company—in order to try to entrench himself.
So this is where we are. The company has come out with its statement saying vote against all our resolutions for various reasons, most of which are ridiculous. But at its core, if you cannot trust management to look after your interests as shareholders, and if the chairman has demonstrated—not said he would, not hinted he would, but demonstrated—that he intends to buy you out at a massive undervalue, then that's the situation.
Indeed, he was asked directly at the AGM, “Will you guarantee you will not make another offer for the company?” He said no. He said no. So the only possible outcome to this situation, if you're a minority shareholder, is that one day he will wake up and try to steal your shares.
Well, I should not say he will try to steal your shares. He will try to extract your shares from you at a massive undervalue to fair value. That's the only possible outcome unless you change the board.
If you change the board, all manner of things become possible. We can reform the governance culture of the company. We can institute a proper dividend payout ratio and a proper dividend payout policy based on sustainable earnings. We can pay back some of the excess cash within the company.
We can conduct a full strategic review of the best alternatives for the company. Last and not least, we can do a full examination of all the conduct that occurred on the board over the last 12 months to understand exactly the extent of the misconduct and to clean the slate, moving forward with what ultimately is a good, profitable company that should be a growing company going forward for the benefit of all shareholders, not just for the narrow interests of the chairman.
Jeremy, you had to have taken debate in high school. That ending with the 5 points and the finger—that was fantastic.
Yeah, I love debate. I was a debater in high school, but unfortunately I didn't continue on at college. Girls and whiskey got in the way. [laughter]
I think about that all the time, man. Some of the stuff in college. I was very focused, but I wish I'd been a little more. All right. Well, look, Jeremy, I hate to cut it off here, but there's one other thing we want to do. The only thing before we cut off—sorry, last thing, just—yeah. Yeah. The last thing I want to say is if you are interested—
I would only encourage you to look at it if you intend to vote. There's no point either getting involved or buying shares unless you intend to vote. If you have any questions, you can reach out to me on DMs, or you can go to www.humboardcleout. Humm is humboardout.com. Easy to find. It has all the information you need for the meeting. All the coverage. All of your points collateral on that site.
That is exactly what I wanted to wrap it up with. Jeremy, we said we're going to do 20 to 25 minutes bouncing around the market. We went for 50. I'm going to end this video right here, and then we'll do the next thing. But thanks so much for coming on.
My pleasure, man.
Yet Another Value Podcast Hall of Famer, Jeremy Raper. We'll talk soon.
Thanks.
A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.