The truth behind Yowie and the barbarian at the gate

The way Nicholas Bolton kept his brown hair messy and long around his ears was more junkie rocker than corporate raider, more Carl Barat than Carl Icahn. Although, Bolton was clad formally in a light grey suit with a black tie over a white shirt, he maintained a casual air because his tie was loose and the small, asymmetrical knot did not cover his top button (which is not done up).

Bolton’s smile is both smug and menacing.

While Bolton may not fit the money manager archetype, at just 26 years old, he demonstrated through his investment in BrisConnections that he was both clever and wily enough to generate a return. BrisConnections was a public-private partnership created to deliver a tunnel linking the Brisbane CBD to the airport. The project was an ASX-listed unit trust with an IPO price of $1 and an obligation to contribute two further instalments of $1 each. After challenges with the project, the value of the units fell to 0.1 cents — the lowest possible price on the ASX. Retail investors dumped units to avoid having to contribute further instalments.

On the other side of the trade was Bolton. He amassed 77 million of the partly-paid listed units for a total sum of $77,000 and launched a raid on BrisConnections, backing himself against the consortium behind the project including giants Macquarie Bank and Thiess John Holland. Bolton then attempted to wind up the company through a shareholder vote.

He was first dubbed a white knight but when Bolton was paid $4.5 million by Thiess John Holland in return from for abstaining from the vote, he was accused of greenmail — the practice of buying enough shares in a company to threaten a takeover, forcing the owners to buy them back at a higher price to retain control. It was a David and Goliath battle where David accepts a payment from Philistines in return for not fighting.

Bolton was unrepentant: “I believe my actions facilitated a large number of retail shareholders exiting before they lost further capital, and also brought attention to the fact that this privately funded entity did not need to pursue the building of an uneconomic road at the time.” The passing of time proved him right. While the BrisConnections board voted not to pursue unit holders through the courts for their remaining instalments, no one else made money from the investment and suspicion was cast on the convenient modelling underlying the economic case of building the tunnel in the first place.

The not-so-sweet beginnings

BrisConnections was ancient history now. Ten years had passed since Bolton caught the market’s attention and much had happened in the meantime.

On March 13, 2019, he would do it again.

Bolton and his associates, including Keybridge Capital and Aurora Funds Management, had been trying to upset the board of Yowie Group Ltd, the listed manufacturer of the toy-in-a-chocolate. Yowie had been phenomenally successful while marketed by Cadbury Schweppes. Within the first six months of launch, one and a half Yowies were sold for every person in Australia eventually leading to sales of over $50 million worldwide per annum, outselling Ferrero’s Kinder Surprise.

The toys began as the brainchild of illustrator and author Geoff Pike and novelist, Bryce Courtenay, purportedly developed as an educational tool to teach children to nurture the environment and look after the animals within it. Production of the Yowie product was discontinued in 2005 following a dispute between Cadbury and the Yowie creators. A lost decade followed where children could no longer find the toy on Australian shelves. Then in 2012 an old Perth mining shell, GSF Corporation Limited, advised that it had executed a binding terms sheet with Yowie Enterprises Pty Ltd to acquire 100% of the shares and options in Yowie on a 100% scrip basis — a reverse takeover or variant of a SPAC.

The newly listed Yowie’s focus shifted to the United States where chocolates with encapsulated toys were and are illegal. Yowie got around this by licensing a patented manufacturing process that could produce chocolate-toy products not technically “imbedded” under FDA rules. Design of the capsule ensured that the chocolate, which is made in two pieces, does not join around the capsule containing the toy.

Since the backdoor listing of the company in 2012, the company’s appetite for capital had far exceeded children’s appetites for the company’s product. Sales peaked at US$19 million in 2017 but with a corresponding net loss of US$7.3 million. By 2019 sales had fallen to US$14 million with a net loss of US$5.1 million. The share price had suffered going from a high of more than $1 to closing 2019 at 5 cents.

Bolton felt that management had been given enough time to turn the company around. He had already tried to remove Yowie’s chair, Louis Carroll, through a shareholder vote but to no avail. He would now try a different strategy.

Louis Carroll. Source: Real Estate.com

Louis Carroll was much older than Nicholas Bolton. His successful career included executive roles at Mars in Australia and the UK. Now, in the twilight of his career, he was chairing the board of Yowie.

In early 2019, Carroll had just sold his home in Seaforth, an area of NSW where the median income is more than double the national average. It was one of the many impressive north shore homes owned by Carroll through the years. The Hamptons-style house with views overlooking Middle Harbour was listed for $7 million. Carroll had purchased it in 2016 for $5.2 million downsizing from his $6.5 million Bayview home. Yowie was no Mars Bar though and to narrow Yowie’s loss everyone had to make sacrifices. The remuneration of US$115,474, including plummeting share-based payments, that Carroll had received from Yowie in 2019 perhaps meant that he would be downsizing again.

Carroll had become frustrated with Bolton and his associates’ efforts to remove him from the board. He had sent a letter to shareholders titled “AURORA, BENTLEY AND KEYBRIDGE CANNOT BE TRUSTED WITH YOWIE’S FUTURE”. Carroll was then no doubt furious when he heard the news at 8:19am, “Keybridge Capital Limited advises that it intends to make an off-market bid for all of the fully paid ordinary shares in Yowie Group Ltd for a consideration of 9.2 cents per share”. Carroll thoughts would again be in capital letters.

The bid came in at a 31.4% premium to Yowie’s closing share price of 7 cents the previous day. In the announcement, Bolton drew attention to Yowie’s abysmal performance noting, “Yowie has consistently failed to structure or conduct its business operations in a profitable manner and that Yowie has incurred significant losses in the ordinary course of its business”.

This time though, Yowie’s terrible performance would be its saviour. Less than two months later, Keybridge announced it would not proceed with the takeover after Yowie’s much larger than anticipated quarterly operating loss caused the company to fall below one of Keybridge’s minimum requirements for the bid, namely that Yowie’s cash be greater than US$17 million at any time during the bid period.

Another, slightly lower bid, to reflect the reduction in cash, was lobbed by the end of the month. This time from Aurora. “Aurora Dividend Income Trust intends to make an all-scrip takeover bid for 100% of the fully paid ordinary shares in Yowie Group Ltd. The bid represents a 16.8% premium to YOW’s most recent closing price of 7.7 cents.”

Again, Yowie’s losses won the battle. Aurora advised it was pulling the offer due to a ‘material adverse change’ citing Yowie’s rapidly increasing cash burn in its most recent quarterly report.

Bolton and his associates continued to accumulate shares, biding their time and submitting various s249D notices aimed at dislodging Carroll and the other members of the Board.

Bolton now sought representation on the board for himself and Keybridge ally, John Patton. But just as Bolton went from white knight to greenmailer in the BrisConnections saga, shareholders wondered whether Bolton really sought to improve the company or had something else in mind.

Bolton explained that, “If successful in our attempt to obtain board representation as Yowie’s largest shareholder, Keybridge intends to use that representation to:

“Conduct an immediate review of Yowie’s operations;
“Seek to improve cost controls and operational efficiencies within the business;
“Seek to rapidly reduce the company’s cash burn to nil;
“Look for opportunities for sales growth; and
“Consider value accretive corporate transactions that may enhance the value of the Yowie business.”

Yowie was at this stage what Warren Buffett would call a ‘cigar butt’ — “a really kind of pathetic company, but it sells so cheap that you think there’s one good free puff left in it.” For Yowie, the puff was the net cash of US$16 million compared to its market cap of $11 million (US$7.9 million). In theory, the company could be liquidated, and shareholders would receive more than the value of their shares in cash without even considering the value of assets such as the wrapping machine or the Yowie brand. Could it be that like the children that beg for a Yowie at the supermarket checkout, Bolton was only after what’s inside? For any shareholder that believed in the long-term value of Yowie under competent management, this was unlikely to be an acceptable way of increasing shareholder value. The cash of course would mean nothing if the company incinerated it before shareholders could get to it.

Yowie returned US$3 million of capital to shareholders in November 2019. It returned a further US$6 million at the end of 2020. For a small company with growth plans, this was an unusual move and newspapers questioned whether the capital have been better spent on executing the company’s strategy. It may have been a tactic aimed at making the company less attractive to any hostile acquirers.

Bolton and the board found a point agreement and the votes to return the capital passed with 84% and 99% of shareholder approval respectively. A rarity for a shareholder group that had been so bitterly divided. It did little to stop Bolton’s march for the throne. Motions for the elections of Bolton and Patton to the board were carried on 27 November 2020 but only after Carroll sought ‘judicial advice’ in a final attempt to halt the barbarians at the gate.

But then something entirely unexpected happened. Yowie turned a profit of US$894,956 for the year ended 30 June 2021 and generated free cash flow from operations of US$2.4 million. The capital returns started to make a little more sense.

Then another unexpected move. “Yowie Group Ltd advises that the Company’s non- executive chairman, Mr Louis Carroll, has advised of his intention to retire from his position as chairman and a director on the appointment of a replacement independent non-executive chairperson.” Carroll commented “Now that the business is cash flow positive and with the Company’s improved trading performance, I have decided that it is time for me to make way for a new independent Chairperson.” Carroll had proven the naysayers wrong. He trusted in management to turn the company around and it had worked. He would retire undefeated.

Yowie’s market cap continues to be greater than its net cash. The only difference is that now the company is turning a profit. It remains to be seen whether the newfound profitability will be enough to fend off further hostile bids but there is no doubt that Bolton’s efforts as an activist shareholder contributed to holding the company to account.

Bolton’s hair is more respectable now. His smile remains the same.