If there was ever a case to be made for holding promising businesses for the long term, Freedom Foods Group Ltd (ASX: FNP) would be an example of what not to do.
Readers might remember back to mid-2015 when Freedom Foods expressed an interest in acquiring a2 Milk Company Ltd (Australia) (ASX: A2M). Freedom Foods held 117 million shares (~17% of the company) of a2 Milk in August 2015, and sold its entire stake by October 2015 after it became apparent that a takeover would not eventuate.
Freedom Foods made a huge profit at the time, selling its a2 shares at prices of up to $0.85 apiece. Yet shares in a2 Milk Company are worth $3.69 today, and 117 million shares would be worth $431 million, or 40% of Freedom Foods' market capitalisation.
A lesson for all investors
Freedom Foods would have made another 4x its money if it had held its shares for another two years. Which begs the question, if the business is good enough to take over and you think it's got a promising future, why would you sell?
Of course, Freedom Foods is a business and not an investor, and it needed the funds, along with subsequent capital raisings, to invest in its own business. The value created by these investments along with the dilution avoided (by using the funds from the a2 sale instead of issuing more shares) may prove equally significant in time as overseas ventures come to fruition.
In that sense, a bird in the hand may have been worth two (or a possible 4 in a2's case) in the bush and it was probably a sensible business decision. Yet there's a pretty stark lesson here for ordinary shareholders – if you have a promising business that's growing rapidly, don't sell it.
