Cellestis Shareholders Action Group

A Difficult Decision.

2011-07-11T11:05:00.001+10:00

The CSAG Team has had extensive and detailed deliberations about the revised offer of $3.80 that Qiagen have made for our shares. Ultimately, we have come to the decision to accept this improved offer.

With the advent of this offer, we have had to consider many factors.

CSAGs stated intention has always been to achieve a better outcome for shareholders. Whilst accepting $3.80 may not be the best outcome that we might have wished for, it is certainly a better outcome.

We are very aware of the fact that some shareholders may be disappointed with our decision. This may not be the outcome that every individual shareholder might have hoped for. However, we should all consider the fact that we are in this together. In the end, the outcome of the vote will be binding upon all of us. Accepting the offer of $3.80 is undeniably better than receiving a payment of $3.55.

It is reasonably certain that, subsequent to a rejection of the Scheme of Arrangement, the share price of Cellestis would fall somewhat and may take some substantial time before reaching a price equal to this revised offer. Whilst many of us would not be concerned with such share price movements, there are other shareholders who would be significantly disadvantaged by such an event. We could wish that this Scheme of Arrangement that creates this situation had never happened but it has.

Whatever the outcome of this Scheme of Arrangement, there is no denying that Cellestis has changed forever. It can never again be the same Company that we all originally invested in. We need to consider whether we now, under these changed circumstances, still wish to remain invested in this "new" Cellestis.

We should consider that we now all have the opportunity to exit our positions in Cellestis for immediate cash that we can invest in other ways.

For most of us, the payment of up to 7c of the payment in the form of a fully franked dividend will effectively increase the $3.80 offer by up to 3c.

We now believe that it is in our best interests to divest ourselves of our shares in Cellestis for this improved price that we have achieved, add this event to our storehouse of knowledge and move on.

We can not and should not advise individual shareholders how they should vote. However, we urge everybody to seriously, pragamatically and sensibly consider their decision.

We should also look to the positives in this story.

It is an absolute certainty that without working together to exert our strength and conviction as shareholders, we would not have achieved this improved outcome. It is a result that we should all take some pride in.

We have clearly demonstrated that our active voice should and can be heard. Together, we have taken our place at the table in this Corporate Action.

Make no mistake. If, in the end, there is credit to be assigned for this meaningful improved outcome then it belongs to all of you. Thank You.

Why do we care about the Independent Expert?

2011-07-07T12:57:00.000+10:00

To those reading these articles it may seem that we have a certain obsession with the report produced by the Independent Expert.

However, let's just briefly go back to the basics and understand why it is so important and why we might be very disappointed that we feel that we cannot rely upon the report produced by the Independent Expert.

The mechanics of a Scheme of Arrangement are that whilst the bidder (Qiagen) have offered to buy the Company, the actual Scheme of Arrangement is run and promoted by the target (Cellestis). Clearly, this means that both Companies are largely on the same side of the fence.

In an attempt to counteract the bias that might be seen to be operating under such an environment, the Scheme of Arrangement procedures call for a report by an Independent Expert to ostensibly ensure that we, the shareholders are not being unfairly treated by this Scheme of Arrangement.

That is, and should be, a huge responsibility on the shoulders of the Independent Expert. This is something that we would expect to be undertaken with the full recognition of this responsibility. As shareholders we are being asked to put a huge amount of faith in the Independent Expert. It is a central tenet of the entire procedure.

It is therefore absolutely essential that we all examine the procedures, assumptions and outcomes of the Independent Expert report with the greatest diligence. Without conducting such an intensive examination, how can we be assured, in our own minds, that a deal being offered is, in fact, fair?

Of course, we could just take it on face value. Perhaps many do.

I am disappointed that there are so many issues with the Independent Expert report that I cannot rely upon it to make a valid decision.

The Straw Man.

2011-07-06T11:21:00.003+10:00

The Independent Expert, in trying to justify his selection of EBIT multiple used in his valuation, makes many statements that are intended to persuade us that Cellestis should be valued at the low end of every range that he is able to manufacture.

There are many examples of this but let's just look at a single one:

"Whilst the overall number of people infected with latent tuberculosis is significant, the actual market for latent tuberculosis testing is relatively small as the tests are more common in developed countries for certain screening purposes."

This is "straw man" logic. Here he sets it up by admitting that latent tuberculosis is significant on a worldwide basis and then uses that to enable him to say that the QFT addressable market is relatively small.

Given that Cellestis has never built its business or our expectations on achieving sales of any note outside the developed world this "relativity" is factually irrelevant. It was really just done to allow him to include the word "small" and to add to the picture that he is trying to paint of Cellestis being a company with a poor future. It would be just as (ir)relevant to compare the market for latent TB testing with the market for iPhones.

The potential market for latent TB testing in the markets that Cellestis is addressing is estimated at 45m tests p.a. Beginning and end of story.

I and others have actually queried an acknowledged expert as to whether this is a small market in the scheme of things. We have been told that this number of diagnostics is considered huge in the world of diagnostics and that any diagnostic company would love to have a market like that.

But, don't take my word for it. Ask Dr. Radford*.

*An ideal opportunity to do that would be at the webcast that they are planning for Friday. I understand that due to a "typo" on the leaflet distributed by Cellestis there is some confusion about the actual time of the webcast. I have now had it officially confirmed that the webcast is at 10am AEST Friday July 8th.

What?

2011-07-05T10:40:00.000+10:00

Qiagen want us to sell them our shares in Cellestis at $3.55.

Our Directors want us to agree to selling our shares to Qiagen at $3.55.

Now, there have been all sorts of arguments about what the real value of Cellestis is. Clearly Qiagen want a bargain. We want the true value of Cellestis recognised.

It is now the 5th of July. That means that Financial Year 2011 has ended. The sales for the year have been made, the profits are booked. And yet, despite several requests, our Company has said that they do not intend to provide to us, the owners of Cellestis, the Financial Year figures before the date at which they are asking us to decide whether to sell or not.

Does that seem reasonable to you?

The excuse that the Company has given for not releasing any figures to us is that they cannot do it in time.

However, many companies are willing to provide profit guidance a month or two before the end of the financial year (Cellestis has even done this in the past). We should be asking just why it is that we are getting nothing about the 2011 financials from our Company. It is material information.

We, the shareholders, have owned this business for the entirety of FY 2011. We deserve to know just how well our Company has performed during our ownership. How do they expect us to make a valid assessment of the offer that Qiagen has made without this information? I am sure that the reluctance to provide this information makes many of us feel uncomfortable.

If the Company truly cannot provide us with the financial results for the completed Financial Year then they should delay the vote on the Scheme until they can.

The case of the missing control premium.

2011-07-04T11:59:00.000+10:00

Crossposted from here

---------------

It's helpful to spend some time looking at the control premium attributed to the market value of a Cellestis share. The IE says that

Notwithstanding the relatively wide dispersion of control premiums observed in our study we consider the control premium range of 20% to 40% to be representative of general market practice..

..we consider a control premium at the lower end of the range to be appropriate for Cellestis

This leaves the reader speculating on what exactly might be "appropriate."

However RSM Bird Cameron spent some time on the matter and

performed an analysis of successful takeover offers and schemes of arrangement (“offers”) made between 1 July 2005 and 30 June 2010, for companies listed on the Australian Securities Exchange.

They found that different industries demand different control premiums

Clearly the business of Cellestis is not comparable with those of real estate, diversified financials and banks. Apples with oranges. Had Cellestis been compared with similar industries we might have arrived at a different opinion

Final words from RSM Bird Cameron

Control premiums vary significantly by industry and it may not always be appropriate just to use the widely accepted average.

Synergy.

2011-06-30T17:05:00.000+10:00

The Independent Expert (IE) seems to pay scant attention to the Synergistic benefits that accrue to Qiagen on purchasing the Cellestis business. There are very significant synergistic benefits that Qiagen seem unwilling to pay for.

Contrast this stance with the following public statements that describe the Synergistic benefits that Qiagen would gain.

"Cellestis has developed a technology that is highly complementary to our portfolio and which we expect to migrate onto our QIAsymphony, QIAensemble and our point of need platforms, thereby adding a new, unique assay menu to these QIAGEN platforms. We believe the addition of Cellestis will further strengthen our capabilities to offer innovative sample and assay technologies that are making improvements in life possible." - Peer Shatz, CEO Qiagen N.V.

"We have many of the same customers for HPV and the QuantiFERON test, particularly in the United States with large reference labs or in hospitals. And profiling the QuantiFERON CMV test has a potential to accelerate our fast growing leadership position in viral load monitoring. This would include monitoring of immune compromised patients such as those with HIV, Hepatitis, or people or patients taking medicines as pressed immune system. We also see a strong link to our industry leading transplantation position. In personalized healthcare we see significant opportunities given that several new classes of medicines require patients to be free of latent TB. We will also consider developing tests for other infections given that a number of medicines require for example latent viral testing before treatment initiation and this could be done with this technology. So this is a solid deal inline with our strategic and proposed at a full and fair price. We are adding next generation, unique and proprietary technology to query a previously untapped information source. QuantiFERON is highly synergistic with our molecular diagnostics portfolio and we will develop assays matching our DNA based products. We will be migrating this technology to our platforms. It provides us with strong leadership position in TB one of the most critical diagnostic areas. And this is a financially attractive deal." - Peer Schatz, CEO Qiagen N.V.

"Cellestis will provide us with exclusive access to QuantiFERON technology, which allows a new dimension of testing, pre-molecular testing where disease detection can be undertaken far earlier than possible with any other diagnostic method. We will migrate this technology to our automated platforms in particular to QIAensemble, and develop a range of tests that are highly complementary with our DNA and RNA-based molecular diagnostics." - Peer Schatz, CEO Qiagen.

"We believe QuantiFERON is highly complementary to our DNA and RNA based molecular diagnostics. So we see the opportunities where appropriate and clinically relevant of marrying our molecular diagnostics portfolio with QuantiFERON based tests. This acquisition has a technology focus. But TB also has an attractive market dynamic." - Peer Schatz, CEO Qiagen

"We believe QIAGEN as an industry-leading company provides the best strategic fit in terms of capabilities and resources. As part of QIAGEN, we will be able to accelerate our growth much faster than as a standalone company and offer even greater benefits to patients and healthcare providers." - Anthony Radford, CEO Cellestis.

Independent Expert Valuation - Critique Summary to Date.

2011-06-24T14:34:00.000+10:00

There is so much to say about the Independent Expert (IE) Valuation that I am afraid it may well go on for several posts yet.

However, it has been pointed out to me that the detail in my critique posts is bordering on being as long winded and difficult to absorb as the IE valuation itself. In an attempt to assist all shareholders, in this post, I will provide a summary of where we are up to in point form.

The IE has chosen to value Cellestis using an Earnings Multiple methodology, rather than using a DCF. I have given the reasons why this is inappropriate. However, you don't need to rely on me to tell you that. As our good friend Rog on his BLOG points out, Deloitte themselves agree with us.

In a submission to ASIC (Deloitte response to ASIC Consultation Paper 143) Deloittes made it clear that with regards to DCF:

alternative valuation methodologies that may be used to value an Asset are likely to be less reliable that a DCF approach. In our view, other alternative approaches such as a market based method (resources multiples observed from comparable transactions) are approximations of a DCF approach and require or imply significant assumptions to be made which are often difficult to apply with a reasonable basis

I have shown why we believe that the earnings multiple (18 to 20) that the IE has used in his valuation is too low. (I have more to say on this in later posts). The result of this is an excessively low valuation.

The IE has subsequently used a DCF valuation to "confirm" the primary valuation. I have shown why we believe that the compound effect of his unnecessarily pessimistic view of the future and selection of an excessively high Discount Rate has resulted in a valuation that is not justifiable. Furthermore, the IE DCF valuation provides no premium for control.

Far from "confirming" the primary valuation, a corrected DCF valuation clearly demonstrates that the primary valuation that IE has used as his primary methodology is flawed in choice, content and result.

In the end, we believe that the IE valuation cannot be relied upon by shareholders to establish that the offer of $3.55 per share by Qiagen is "fair and reasonable" and "in the best interests of shareholders".

Vic Bula
Spokesperson
CSAG

Disclaimer. Nothing in this document should be construed as personal financial or legal advice. All information is provided on the understanding that you will take whatever steps are necessary to ensure that any actions that you take are the most approriate for your own personal circumstances. The author accepts no responsibility for the impact of any consequent outcomes.

Independent Expert Valuation - Critique Part Four.

2011-06-22T17:05:00.001+10:00

Discount Rate.

In producing a DCF Valuation, it is essential to knowledgeably and with full understanding choose a Discount Rate (DR) that makes sense in the future situation that we are attempting to describe.

In the interests of not putting you to sleep, I will not repeat here the actual meaning and relevance of the Discount Rate. I have covered that in previous posts, including the CSAG Valuation. Instead, I will discuss the Independent Expert's choice of Discount Rate.

Firstly, let's have another look at the DCF valuation table provided by the IE.

The important thing to notice is that a change of just 1% in the choice of DR makes a substantial difference to the final value. As an example, in Scenario 2, a change in DR from 14% to 13% results in the DCF value increasing from $3.76 to $4.21. (an increase in value of almost 12%).

So, how has the IE chosen his Discount Rate?

Here is what he says:

a cost of equity of 13.4% to 15.0% based on:

a risk free rate of 5.6% based on the five day average of the zero coupon ten year Australian government bond as at 4 May 2011.
an equity market risk premium of 6.0%
a levered beta of 0.8 to 0.9
a company specific risk premium of 3% to 4%, reflecting the high level of uncertainty associated with the growth potential of Cellestis’ product

The Discount Rate is calculated as RFR + (EMRP * Beta) + CP

This results in a Discount Rate of between 13.4% and 15%. Rather strangely, after calculating those figures, he has then actually used Discount Rates of 14% and 15% in his calculations.

Now, that is a quite conventional computation for calculating a Discount Rate. However, let's look at it item by item

Risk free bond rate (5.6%).
Nobody can really argue with that, the risk free bond rate is what it is. However, that is a pre-tax rate, whereas the IE states that he is calculating an after tax Discount Rate. Depending upon an individuals tax rates the actual return from investing in these bonds would be approximately 3% to 4%. If he is calculating an after tax DR then we would have expected him to use the after tax risk free bond rate. Alternatively, he could consider his DR as a pre tax DR and apply it to Cellestis' EBIT, rather than NPAT. Compare apples with apples.

Equity Market Risk Premium (6%).
This is where most people get a little confused. This premium has nothing at all to do with any perceived risks in the company that you have chosen to invest in. It is, in fact, a risk premium that is assigned simply because you are investing via the stock market (as opposed to some other market, such as the bond market, the real estate market, etc.). It is not a business risk, it is the risk of share prices going up and down on the stock market. It represents the extra return that you, the stock market participant, require because of the vagaries of share prices.

EMRP is generally calculated from the historical volatility of stock prices in the stock market as a whole.

Personally, as a long term investor, I am not particularly interested in EMRP. The reason for that is that I do not ever put myself in a position where I have to sell my investments at any particular time (I'm sure you can see the irony that the current event creates here). I have no reason to sell my investments in the times that the share market is weak. I invest in businesses and therefore do not consider that EMRP has any real relevance to me.

I understand and am happy to accept that others may feel differently.

Here is the crunch. If Qiagen are successful in purchasing Cellestis, then Cellestis will no longer be listed on the stock exchange. If Cellestis is not listed on the stock exchange then it is not subject to any share market volatility risk and Qiagen do not need to take that (now non-existent) risk into account when calculating what Cellestis is worth to them.

Levered Beta (0.8 to 0.9).
Firstly, for Cellestis, we can disregard the superfluous qualifier "levered". The difference between a levered and an unlevered Beta is purely based on the debt of the company. Cellestis has no debt and therefore there is no difference between the levered or unlevered Beta of Cellestis.

In simple terms, the Beta is a multiplier that is applied to the Equity Market Risk Premium to account for that fact that the market price of individual stocks have different volatilities than the market as a whole. The Beta of less than one that the IE is using tells us that the Cellestis share price is less volatile than the market as a whole.

The Independent Expert has therefore used an adjusted Equity Market Risk Premium of between 4.8% and 5.4%.

Company Risk Premium. (3% to 4%).
This is the premium return that an investor in Cellestis expects in exchange for the risk that things may not turn out as good as projected in the future earnings table.

The IE has not given any reason for seemingly arbitrarily selecting this Company risk premium so it is a little hard to sensibly analyse his choice.

My general comment here would be that the IE has produced an extremely conservative future earnings projection for Cellestis and then is still not happy with it so has discounted the value further by applying an arbitrary 3% to 4% risk premium. How you would actually do that with any level of justifiable confidence is beyond me.

In the end.

I am not going to tell you what DR the IE, or you, should use. However, I am absolutely confident that his 14% to 15% Discount Rate is significantly higher than that which any reasonable analyst would use. Remember that even a 1% change in the Discount Rate used will result in a very material change in the valuation calculated.

The compounding of the IE's incorrect assumptions, miscalculations and errors has resulted in a valuation of Cellestis that I cannot in any way rely upon in making my decision about this offer by Qiagen.

Vic Bula
Spokesperson
CSAG

Disclaimer. Nothing in this document should be construed as personal financial or legal advice. All information is provided on the understanding that you will take whatever steps are necessary to ensure that any actions that you take are the most approriate for your own personal circumstances. The author accepts no responsibility for the impact of any consequent outcomes.

Independent Expert Valuation - Critique Part Three.

2011-06-22T11:56:00.001+10:00

In the Critique Part Two I closed with a comment about the lack of a control premium in the Independent Expert (IE) DCF Valuation.

Good cyber friend "Griggy" has pointed out yet another contradiction in the IE Valuation that relates to this.

The IE, in discussing the control premium in his FME valuation, makes the following statement.

some of the observations of very high premiums are for relatively small listed companies where there is typically less trading liquidity in their shares and they are not closely followed by major broking analysts. In such situations, the traded price is more likely to trade at a deeper discount to fair market value on a control basis. Accordingly, the observed control premiums to share trading prices for such stocks will tend to be higher.

Well, paint me red and call me a fire engine, those specifications couldn't better define the ASX trading situation of Cellestis.

Cellestis is a small listed company.
Cellestis has a very low trading liquidity.
Cellestis is not covered by any major broking analysts.

But, don't take my word for it.

The IE himself states the following:

Cellestis shares are thinly traded on the ASX. Consequently, Shareholders face limited opportunities to achieve liquidity in respect of their shares in Cellestis. (Annexure 1 - p6)

...many of the companies identified above are considerably larger than Cellestis... (Annexure 1 - p35)

And yet, after examining a basket of other takeover targets that he seems uncertain as to whether they are similar to Cellestis or not, he reaches the following conclusion:

we consider a control premium at the lower end of the range to be appropriate for Cellestis

If that was not bad enough, there is more.

Special purchasers may be willing to pay higher prices to reduce or eliminate competition, to ensure a source of material supply or sales, or to achieve cost savings or other synergies arising on business combinations, which could only be enjoyed by the special purchaser. Our valuation of a share in Cellestis has not been premised on the existence of a special purchaser. (Annexure 1 - p12)

We probably don't need the IE to make this suggestion for us:

a potential acquirer with an established distribution network could leverage its existing distribution network to increase sales beyond the levels that could currently be achieved by Cellestis. (Annexure 1 - p37)

Qiagen themselves have said that they intend to integrate the Cellestis QuantiFERON technology into their existing diagnostic platforms to increase its value to them.

Clearly, Qiagen anticipate that they will be able to increase the Earnings of Cellestis through synergies. In fact, the ability of Qiagen to make a better fist of managing Cellestis has been a central argument that has been given to us for selling our shares. Obviously the expectation is that Qiagen will achieve a better earnings growth profile than the pessimistic ones that the IE has presented to us.

If the above does not define a "special purchaser" who will increase earnings through synergies then I will turn on the sirens and lights.

As the IE has himself said above, such a purchaser should be willing to pay a higher price for that.

And yet, the IE persists with his use of a control premium at the lower end.

In my next post I will get back to critically examining the mechanics of the IE Valuation.

Vic Bula
Spokesperson
CSAG

Disclaimer. Nothing in this document should be construed as personal financial or legal advice. All information is provided on the understanding that you will take whatever steps are necessary to ensure that any actions that you take are the most approriate for your own personal circumstances. The author accepts no responsibility for the impact of any consequent outcomes.

Independent Expert Valuation - Critique Part Two.

2011-06-21T15:55:00.001+10:00

The Independent Expert (IE) has been employed by Cellestis and paid for with our money for the worthwhile purpose of independently protecting us (the shareholders) from a takeover that is unfair to us or not in our best interests. For that reason it is absolutely essential that we examine the IE Valuation in great depth to ensure that he has, in fact, produced a Valuation that we can rely upon in making our decisions.

I suggest that he has not.

The Valuation Method.

I wrote about this yesterday and just wish to touch on it again in summary.

The IE believes that a FME valuation is more appropriate in valuing Cellestis than a DCF valuation. His rationale for that decision is essentially that "it may be difficult to estimate future cash flows". This is absolutely true. None of us have a crystal ball that will project the future with a 100% accuracy. However, given that valuing an operating business is always about projecting the future, this difficulty applies to any valid valuation method, including the FME valuation method chosen by the IE. Furthermore, the FME valuation method suffers further because it does not provide any meaningful representation of the future. What does a FME multiple of 19 really tell you about the projection of the future? On the other hand, a DCF valuation uses and displays a projection of the future that can be critically examined.

Anyway, having rejected the DCF valuation, the IE has produced a DCF valuation to "confirm" the FME valuation. Let's have a look at his DCF valuation.

The Independent Expert DCF Valuation.

The IE has not provided the year by year detail of his DCF valuation. This is somewhat surprising, given that he has presented the detailed CSAG DCF valuation.

He has, instead, provided a scant set of assumptions, percentages and numbers. Fortunately, we can use that information to "reverse engineer" his DCF valuation.

In doing so we rely upon his assumptions which include:

the overall market size of latent tuberculosis tests by number of tests conducted per annum in the developed world (45 million as at 31 December 2010)

future gross profit margins are assumed to remain relatively stable

Given that he has assumed that Gross Profit margins are projected to remain stable and we have previously been informed that we cannot expect any decrease in manufacturing costs as volume increases then he has assumed that the selling price of the product will remain stable. This means that the revenue growth profiles that he has provided will largely equate to sales volume growth profiles.

The IE provides three scenarios for his DCF valuation.

Scenario 1: revenue growth of 30% p.a. during the initial years, reducing progressively to 8% p.a. over the Projection Period. Under this scenario, Cellestis is projected to reach a market share of 10% in four years i.e. by FY 2015. Cellestis’ market share by the end of the Projection Period is assumed to be approximately 20%

Scenario 2: revenue growth of 30% p.a. during the initial years, reducing progressively to 5% p.a. over the Projection Period. Under this scenario, Cellestis is projected to reach a market share of 10% in five years i.e. by FY 2016. Cellestis’ market share by the end of the Projection Period is assumed to be approximately 14%

Scenario 3: revenue growth of 30% p.a. during the initial years, reducing to 3% over the Projection Period. Under this scenario, Cellestis is projected to reach a market share of 10% in six years i.e. by FY 2017. Cellestis’ market share by the end of the Projection Period is assumed to be approximately 11%

Using the above assumptions we can firstly "fill in the gaps" to provide year by year growth detail that matches these assumptions.

Here is the result. (click on the image for full size)

The first comment is that Scenario 3 is a mathematical impossibility. Given that the growth in 2023 is assumed by the IE to be 3% it is actually impossible to get the market share down to the 11% (4.95m tests) unless you were to assume that in the years 2018 to 2022 the growth dips significantly below 3% and then jumps back up to 3% in 2023.

It is up to us to look at these growth scenarios to decide if we believe that they are, in fact, realistic. Personally, I think not.

It certainly doesn't seem realistic to see two years of 30% revenue growth to suddenly fall off a cliff to a growth of 13%, 11% or 9%.

Our lead product, QuantiFERON-TB Gold In-Tube only received FDA approval in 2007 and CDC guidelines in 2010. Even so, we have already achieved a 5% market penetration. USA volume sales have been growing at 50% p.a.. Remember that if the A$ stops climbing (it doesn't even need to fall) then the growth in foreign markets will flow directly through to revenue denominated in $A. Does it really seem realistic to expect that over the next 12 years we will only increase our market penetration to 11%, 14% or 20%? It is important to understand that the 45m potential market is purely our target (developed world) market. It does not include the underdeveloped and developing world. Neither the Company or us have ever built those markets into our projections. There is no reason whatsoever that the superior diagnostic QFT-TB should not ultimately largely replace the much detested TST test in the developed world.

Bear in mind also that none of the IE valuation models have factored in any revenue from additional products developed on the QFT platform. As recently as the last AGM, the Directors provided details of several potential diagnostics being developed on the QFT Platform. It is not unreasonable to assume that at least a proportion of these potential diagnostics have real commercial potential - otherwise our Company would not have spent the time and effort in developing them. That potential has value.

Having now derived the IE revenue projections from his own assumptions, we could produce full DCF valuations for the 3 scenarios. However, to save myself a lot of work, I am going to assume that the IE has used his growth projections correctly to perform the mechanics of the DCF. His outcome is summarised in the following table.

Note that to get the DCF valuation down to something approaching the $3.55 that he is assuring us is fair and reasonable and in our best interests, he has to assume his scenario 2 (sales in 12 years time of 14% of the market) and a Discount Rate of between 14% and 15%.

I will deal with his selection of Discount Rate in a later post.

For the moment let's just try to understand what his DCF valuation is saying.

"If Qiagen buy Cellestis at $3.55 per share then, even if sales were to only ever achieve those outlined in Scenario 2 then they would achieve an effective annual return on their investment of more than 14%."

Of course we know and Qiagen know that Cellestis has the potential to achieve much much more than the revenue outcome described in Scenario 2.

If, on the other hand, were we to believe the still pessimistic Scenario 1 view of the future of Cellestis and a Discount rate of 13% then the value of a Cellestis share is $5.55 (56% above the offer price).

In his conclusion of the DCF valuation the IE states:

"The estimated value of a share in Cellestis on a control basis under each of the three cash flow scenarios discussed above and a range of higher and lower discount rate assumptions, as set out in the table below."

Note that he has suddenly decided that his DCF valuation that has not mentioned anything about a control premium is now a representation of the value of Cellestis on a control basis. Even if we were to assume that all of his projections and his discount rate are applicable then this is a sharemarket valuation. It is not a "takeover valuation". It includes no premium for control.

Vic Bula
Spokesperson
CSAG

Disclaimer. Nothing in this document should be construed as personal financial or legal advice. All information is provided on the understanding that you will take whatever steps are necessary to ensure that any actions that you take are the most approriate for your own personal circumstances. The author accepts no responsibility for the impact of any consequent outcomes.

Independent Expert Valuation - Critique Part One.

2011-06-20T16:59:00.002+10:00

By now many of you will have read the Independent Expert Valuation online at THIS LINK. No doubt we will all receive the printed copy in the mail over the next few days.

The CSAG have held a very pragmatic stance on this situation. The Independent Expert (IE) has had full and unfettered access to the Board, Management and Books of Cellestis. Given that, then had the IE been able to legitimately and convincingly demonstrate that $3.55 is a fair and reasonable price and is in the best interests of shareholders, we would have had no choice but to accept that.

Unfortunately, the IE has not been able to do that. In fact, he has not been able to present a valuation case that comes even close to justifying this offer.

The IE has used some 65 pages in an attempt to legitimize what, in the end, is a very thin and fragile valuation calculation.

Now, I live and breathe financial documents and have spent the weekend devouring this document. I do understand, however, that many of you have better things to do with your lives than wade through pages and pages of financial justifications. I will make it my task to answer this valuation as cogently, directly and concisely as is possible. Having said that, it is a big task. I anticipate the full analysis to run over several posts.

The IE has chosen to value Cellestis using the "capitalisation of future maintainable earnings" (FME) valuation methodology. Whilst this may sound impressive it is, in fact, nothing more or less than:

"Take the 2011 Earnings of between $15m and $16m and multiply by a multiple of between 18 and 20"

That's it! The rest of the valuation document is purely an attempt to justify that calculation.

So, let's work our way through this.

Choice of Valuation Methodology.

The IE has chosen to use a FME valuation method, rather than a DCF valuation (even though he subsequently does perform a DCF valuation - more on that later). His justification for this choice is:

"The discounted cash flow method is a commonly used valuation methodology in sectors such as the resources, infrastructure and life sciences sectors where the cash flows of a business are subject to variability over time."

and

"The capitalisation of maintainable earnings [FME] method is most appropriate where the company’s earnings are relatively stable."

Do I need to point it out? Using those justifications the choice of valuation method should be exactly the opposite to that which the IE has chosen. Cellestis' earnings are not "relatively stable". They are, in fact, "subject to variability over time". Clearly, a DCF valuation would have been much more appropriate to value Cellestis than a FME valuation. The reason for the choice will become obvious when we look at the IEs "confirmatory" DCF valuation later.

Regardless, let's have a look at the IEs chosen valuation in some detail.

The Capitalisation of Future Maintainable Earnings (FME) Valuation.

I don't think that any of us would have any objection to his assumption of 2011 Earnings of between $15m and $16m. I should point out that for some reason the IE has chosen to operate on a Jan-Dec Financial year, rather than the Australian standard July-June Financial year. It is also worthwhile to bear in mind that that projected earnings figure for 2011 will have been after taking into account the one-off $1.9m cost of running this Scheme of Arrangement.

However, the principle of a Capitalisation of Maintainable Earnings is supposed to be based around just that - Maintainable Earnings. The IE has simply taken the earnings for Calendar Year 2011 (actually the average of FY 2011 and 2012) and called that "Maintainable Earnings". That is hardly a rigorous methodology for calculating exactly what the maintainable earnings will be of the Company going forward.

The IE has then chosen a multiplier of 18 as an appropriate multiplier to arrive at a valuation. He justifies this by taking the average multiplier of a basket of selected Companies. It should be noted that not one of these Companies is an Australian listed Company. Furthermore, it is simply a failure of logic to take an average of a bunch of Companies that sound as if they might be somewhat similar to Cellestis to arrive at a suitable multiplier.

To give the IE credit, he does admit that none of these Companies are highly comparable to Cellestis. Given that they are not highly comparable then why we should accept a comparison between Cellestis and these Companies is beyond me.

He then goes on to express the opinion that the only two Companies that have a "similar earnings growth profile" are Seegene and Illumina. This is important because the selection of an appropriate multiple is all about GROWTH. A Company with a higher projected growth is normally valued at a higher multiple. Seegene and Illumina have current multiples of 36.1 and 27.2 respectively. Substituting those multiples into the IE valuation formula would give Cellestis a valuation of between $4.44 and $6.20.

Given that the IE looks favourably upon the method of averaging comparable multiples it is quite noticeable that when he examined the multiples paid for the takeover of similar Companies and came up with an average of 28.1, he did not apply this multiple to his calculation of value. After all, we are looking at a takeover of Cellestis by Qiagen. Surely a comparison with similar takeovers would be more appropriate than a comparison of the multiples of Companies trading on the sharemarket which includes no premium for control. Had he used the average "takeout" multiple in his methodology then the values that he would have arrived at would have been between $4.57 and $4.86

By the IEs own figures, Cellestis revenue is projected to grow by 30% in 2012. He states that he has been given the projection for 2013 but has not directly revealed it to us. It would be hard to believe that growth in 2013 is projected to "fall off a cliff". There is certainly no evidence presented to sustain such a belief.

Cellestis is absolutely unique. It is an Australian biotech that has succeeded in taking a product from laboratory bench to profitable commercialization while still having a formidable growth potential.

If one was to use a FME valuation methodology, the question becomes "what is an appropriate multiple to apply to current year earnings to calculate a value?".

As I have already expressed, I do not favour a FME valuation if for no other reason than a FME multiple is an extra step removed from any projection of the future. That is, it is not really possible to sensibly translate any time related future into a simple multiple. A DCF Valuation does a much better job of this.

If I was pushed to apply a realistic multiple to Cellestis then I would have to say that a multiple of 30 is much closer to reality than the IE multiple of 18 to 20.

A multiple of 30, using this methodology would imply a value of a Cellestis share of between $4.69 and $4.99. However, because of the inherent inaccuracy of the FME methodology I would not make my decision based on the result of a FME valuation.

I hope that the above is a good start on our critique of the IE valuation. In subsequent posts we will be looking at the many other matters raised in the IE Valuation, including his DCF valuation.

In the Press

2011-06-18T07:58:00.000+10:00

Accompanying the release of the Scheme booklet came a mild flurry of news items with Fairfax reporting that the independent report found the takeover offer was fair and reasonable and that Cellestis had

dismissed a group of shareholders opposed to a $341 million takeover bid as beating up ''dreams, suppositions and wild fantasies''.

Tony Radford was also quoted by Business Daily as saying

"The group has a certain disconnect with normal processes of valuation."

Qiagen have also taken the opportunity to weigh into the debate

“The views put forward by some retail shareholders are flawed and misleading."

Murdoch and Boardroom Radio have a video of CEO Tony Radford explaining the Scheme booklet. It is unfortunate that Tony Radford is unable to properly address the camera, which is unsettling to many of those who have viewed it.

Latest News

2011-06-10T11:28:00.003+10:00

Dear fellow Cellestis shareholders,

This story continues to develop.

Communications.

The CSAG Team thank you for the literally hundreds of emails of support and queries that you have sent. We really appreciate your contact. It has been our aim to reply to each and every email. If we have inadvertently missed replying to any of you, we apologize. By all means please re-send any emails that we might have overlooked. It is very important that our communications with you are bi-directional.

If you have any friends that are Cellestis shareholders that have not yet registered their email addresses with us, please reach out to them and encourage them to register their email address HERE. We want every single shareholder to be both well informed about this matter and confident that they are not alone in being opposed to this opportunistic bid.

Don't forget that you can also catch up with our previous communications at our BLOG.

Numbers.

We offered the Cellestis Board the opportunity to inspect our numbers enabling them to be assured that we are not bluffing, that we do have the numbers to defeat this bid. They have taken us up on this offer and their representative has inspected our numbers.

This means that Cellestis, Qiagen and the advisers to both are now fully aware that we do have the numbers to soundly defeat this lowball offer of $3.55 per share for our Company.

Australian Shareholders' Association.

The Australian Shareholders' Association (ASA) have noted our case, as detailed in the article written for "The Australian" newspaper by the Chief Executive of ASA, Vas Kolesnikoff. If you have not yet read this article you can do so HERE.

2011 Full Year Financials.

Because of the latest delay announced by Cellestis the vote on this Scheme will not take place until well after the end of the Financial Year. This means that the Company will have no choice but to release the Financial Year figures to us before the vote takes place. It is a requirement of the Scheme of Arrangement process that any material matters that occur after the Scheme Documents have been released must be provided to the shareholders. It is simply not possible that the financial figures cannot be considered a material matter.

As always, we urge you all to remain steadfast in your opposition to this takeover. The CSAG Team continues to work on this unwaveringly.

Vic Bula

Spokesperson

CSAG

P.S. It seems that a small number of you have mistyped your email addresses when registering with CSAG. If you have registered and believe that you should be receiving our emails but are not, please drop us a line at cst.shareholders@gmail.com so that we can correct your records.

Biotech a small symptom of a larger malaise

2011-06-09T06:31:00.000+10:00

SHAREHOLDER: Vas Kolesnikoff

From: The Australian June 09, 2011

I LOVE it when a shareholders action group contacts me. Not because it means there is trouble but because the shareholders are doing what they are supposed to be doing, and what fund managers already do.

Shareholders action groups comprise small individual fund managers who pool their shares behind a larger united voice in decision making. So I wonder why all these small individual fund manager shareholders don't join the Australian Shareholders' Association, while acknowledging some already have, because that's what the ASA is about and there is already a big action group in place, ready and waiting.

Cellestis is a great story and a great little biotech company. Its two founders, Tony Radford and James Rothel, deserve the glory for turning a small Australian tuberculosis diagnostic kit maker into a $350 million company, with regulatory approval for its product to be sold in some major markets like the US and Japan. This company can dream about following in the footsteps of CSL, Cochlear and Resmed.

The problem is Cellestis is now subject to a takeover offer from German company, QIAGEN. The founders want to accept the offer and cash in their chips. The company will be absorbed into something bigger where they can concentrate on science rather than management, ASX listing rules and all that other good stuff.

The shareholders want to stay with the founders, however, as they believe the offer price of $3.55 grossly undervalues the company's huge potential.

Shareholders are being asked to sell the company to offshore interests perhaps prematurely, before the company has had the chance to realise its potential and before shareholders have realised the value they believe is there.

The chairman, Ron Pitcher, notes that Cellestis's revenue growth will be accelerated as part of QIAGEN. However, this is cold comfort for shareholders who will lose this opportunity. Perhaps it also reinforces what a great deal this is for QIAGEN.

At present, a significant shareholding block -- mooted to be close to 40 per cent and growing -- will vote against the proposal.

The Cellestis takeover highlights a few pitfalls for all shareholders. Are the management and controlling shareholders of such companies conflicted in their desire to realise their wealth, rather than hold it on paper and continue to grow the company for all shareholders? Shouldn't they try to keep it in Australian hands, as seen with Cochlear, CSL and Resmed, at least a bit longer?

Management deserves the right to enjoy the fruits of their labour from the accumulated wealth of their shareholdings.

So how else can such founders sell down their significant holdings while allowing other shareholders to stay with the company? I would hope this avenue has been considered.

In this case, shareholders are not complaining about management. Just the opposite. But we can see the fine line in the argument for alignment of interests with all shareholders.

Vas Kolesnikoff is chief executive of the Australian Shareholders' Association

Another Delay.

2011-06-01T10:48:00.000+10:00

Today, Cellestis have announced a further delay to their schedule for this proposed Scheme Of Arrangement.

The full announcement can be read HERE

The CSAG Team take this opportunity to assure all shareholders that we remain committed to achieving a better outcome for all shareholders than this $3.55 takeover offer by Qiagen NV. We will remain committed and active - no matter how long it takes.

Shareholder response.

2011-05-31T13:18:00.000+10:00

The page what shareholders are saying has been updated to include more recent entries. Shareholders are to be commended and congratulated for stepping up to the challenge.

Eight Weeks In.

2011-05-31T11:42:00.001+10:00

It is now eight weeks since Cellestis dropped this bombshell on us.

Assuming that their timeline does not slip again, we can expect the Scheme Documents to be released next week. That makes this an appropriate time to restate our objectives, reasses what we have achieved and examine where we now find ourselves.

This issue is not only about facts and beliefs (about which we have said much and will have much more to say) but also about the principles of shareholding. It is about us, private investors, being informed and able to make our own decisions about our investing and receiving the rewards from our decisions.

The world has moved on from the days when we were often the roadkill of the sharemarket and were indiscrimately run over again and again. The access to information and communications, largely provided by the Internet, means that we need no longer be victims. In the past, we may have felt that we had no choice but to accept "our lot" in situations such as this opportunistic low ball takeover offer. It is no longer the case.

The Cellestis Shareholders Action Group (CSAG) opposes this offer of $3.55 for our shares in Cellestis and is determined that every shareholder has the information, opportunity and power to make their own well informed decision.

To that end we have provided the Cellestis Research Report which is a distillation of research about Cellestis and its market accumulated by a dedicated team of investors over ten years. Every shareholder should take the time to read it to ensure that they really understand both the current successes and the potentials of their Company.

We have also supplied both a methodology and tools to enable shareholders to make their own assesment of the true value of their shares in Cellestis. To date, CSAG are the only ones to have done so. We will have much more to say about valuations in the coming weeks.

CSAG have also established a mechanism through which shareholders can be connected to the group so that they can receive timely information about this proposed matter as it proceeds. To date, shareholders representing 38% of the shares in Cellestis have indicated their opposition to this offer.

Right back at the beginning of this saga we (CSAG) stated our aim as being "to retrieve the true value of Cellestis for its shareholders". That aim still stands true. By working together we can achieve that aim.

The next major event on the horizon is the release of the Scheme Documentation, including the Independant Expert's conclusion. The Independant Expert is tasked with establishing whether, in his opinion, the offer is both "fair and reasonable" and "in the best interests of shareholders".

Unfortunately, the allowable interpretation of those terms is very wide and provides for a significant amount of discretion by the Independant Expert.

For us, this means that even once the Scheme Documents have been released we must remain independantly informed to be in a position to make our own decisions. We made the decision to make our investment in Cellestis. We made the decision to hold the investment as the business grew. We are quite capable of deciding for ourselves what is in our best interests.

The whole principle of the sharemarket originates from the concept of those with ideas but insufficient funds offering a share of the business to those with the funds to allow the business to be developed. We, the investors, enter into this type of arrangement of our own free will, in full knowledge of both the risks and the potential returns. Within known legal constraints we are entitled to continue to hold our share of the business as long as we like.

Some investments work out, others don't. We rely on the "winners" outweighing the "losers". Cellestis is a winner. After having our money invested for anything up to ten years with minimal cash returns, we can now clearly see the rewards approaching. Why would we sell our winner now? We want our just share of those future rewards.

Stay the course, stick together and we can win this battle.

Media Coverage.

2011-05-25T15:57:00.001+10:00

The media are taking a lot of interest in our situation. In particular, they have noted that there is strong shareholder dissent when it comes to this Scheme of Arrangement.

We have provided a linked list of media articles on the CSAG blog HERE. We will update the list as more articles are published.

If, by some chance, we miss an article that you think we should include, please drop us a line at cst.shareholders@gmail.com

An expert opinion on Cellestis

2011-05-25T10:28:00.003+10:00

Mr Penton Sutcliffe, former chief executive of the now Wesfarmers-owned Howard Smith and also a former director of both Toll Holdings and NIB, contacted CBD columnist Scott Rochfort with regards to the proposed acquisition of Cellestis by German based Qiagen.

His opinion can be read here

Cellestis Potential

2011-05-18T10:47:00.003+10:00

We have previously looked at a Discounted Cash Flow Net Present Value of Cellestis. The DCF/NPV valuation is a definitive method of calculating the value of an investment based upon a realistic examination or knowledge of the future projected returns from the investment. Through this process we have been able to show that the value of Cellestis is multiples of the $3.55 offer that has been made by Qiagen.

However, as investors, we often look at much more in making our investment decisions. Importantly, we develop a view of the potential of the business to achieve even more than what we can confidently express in dry accounting style numbers.

Many of us began our investment in CST anything up to 10 years ago. CST was a speculative investment but the research that many of us did allowed us to believe that this investment had a very good chance of bearing fruit. As investors in a business we accepted the challenges encountered along the way and we were content to exchange immediate rewards for the potential future rewards.

We were right. The business has suceeded. In fact, it has succeeded to the extent that we have been able to perform the abovementioned DCF/NPV valuation with confidence.

However, success does not mean that the potential has disapeared. While some of the potential that we saw in this business has now turned into reality, much of the potential remains. In fact, the successes to date probably make the potential of this business even greater and more real.

It is important that we do not lose sight of this. We mustn't be fooled by this lowball offer (or even our DCF/NPV valuation) into believing that the potential has dissipated.

Cellestis' current sucessful business is almost wholly based around its lead product - the QuantiFERON TB diagnostic. This product has currently achieved about a 5% market penetration and our valuation has been based on reaching a 36% penetration by 2020. Given that QFT-TB In-Tube has no practical competition, is being received exceptionally well by the TB community and has a long patent life, we might believe that there is potential for its market penetration to happen more quickly and to be larger. Either of these events increase the ultimate value of Cellestis.

The QuantiFERON method and the In-Tube technique that has been developed and patented by Cellestis also has huge potential in diagnostics other than Tuberculosis.

Cellestis have already developed QFT-CMV for the diagnosis of Cytomegalovirus, a virus that causes particular problems for transplant patients. This is not as big a market as TB but certainly has potential to add to the bottom line beyond what we have projected.

At the 2010 AGM Cellestis indicated that in addition to further development, refinement and automation of the TB diagnosis, they have a pipeline of other products in development.

These include

Lyme disease

Leishmaniasis

2 Cancer targets

2 Allergy

1 Autoimmune

Immune Function

Nobody can guarantee that all of these products will reach commercialisation. However, we would expect that at least some will reach that status.

Furthermore, it has been suggested by the executive that at least one of these potential diagnostics has a market potential that is greater than that of QFT-TB.

Qiagen themselves seem to agree that there is much potential in the QuantiFERON technology with the statement in their own announcement

"...strong pipeline, several new products under evaluation, cancer..."

Now, we cannot sensibly attach a specific value to the potential that all of the above provides. But, to the investigative investor they are something that we would certainly consider in making (or holding) our investment in Cellestis. There is every possibility that, in time, like QFT-TB, these potential diagnostics will turn into actual value.

Another potential that Cellestis has is the huge cashflow that the business will generate over coming years. This is a direct result of the Cellestis business model that includes low overheads and a minimal appetite for capital. Certainly some of this cashflow will be returned to shareholders as dividends but there is still much potential for Cellestis to utilize a strengthening balance sheet to leverage the business into becoming a significant player on the world stage.

In the end, we have to look at all aspects of the business and decide whether we are happy to sell our Cellestis shares at $3.55. Given that the identifiable and justified value is significantly higher than $3.55 and the business has the potential to achieve even more in the future, it would seem that Cellestis is a fabulous investment. Qiagen know that. However, we know it too!

If we sold our Cellestis shares for $3.55 we would immediately face the perenial problem that faces all investors - finding another place to invest the money. I suspect that we would find it very difficult to find an investment that has such a great value and potential as Cellestis.

Vic Bula

CSAG

DISCLAIMER
This post has been prepared without knowledge of your individual investment objectives, financial and personal circumstances. Accordingly, it is not a recommendation that a particular course of action is suitable for you. You should obtain your own independent professional advice before making any decision about Cellestis.

Update

2011-05-16T13:48:00.001+10:00

Dear fellow Shareholders,

By now, you should have all received our first correspondence by post. This letter has been sent to every one of the more than 5000 CST shareholders on the official shareholder register.

The response to the letter has been astounding. Many shareholders, both large and small, have subsequently contacted us. A regular comment is that shareholders had decided independently that they are opposed to the takeover but thought they were alone and that, in the end, they would have no choice. They have expressed their pleasure in finding that there is a solid group of like minded shareholders that will prevent this offer of a takeover at $3.55 from proceeding.

We offer a huge welcome to all those shareholders who have recently registered with us. You can catch up with the story so far at www.csag-blog.com. We particularly draw your attention to the Cellestis Research Report and our DCF Valuation available on the website. Those two documents alone clearly support the case for voting NO to this opportunistic offer.

Major new information is coming to light daily confirming the pace of the uptake of QuantiFERON. A great place to keep an eye on this is www.quantiferon.blogspot.com

To date we have received expressions of an intention to vote NO from shareholders representing 38% of the shareholding of Cellestis.

The CSAG Team continues to work incessantly on defeating this takeover offer. It is the ongoing support of the shareholders that makes this a worthwhile task.

Whilst we will continue to keep shareholders informed on any salient events, our next major task will be a reply to the Scheme Documents when they are released by Cellestis.

We repeat our previous suggestion that all shareholders should refrain from voting for the Scheme until they have received our reply. It will be sent by post to every shareholder as soon as possible after the Scheme documents have been released. We will ensure that you will have ample time to successfully lodge your vote.

The CSAG Team.

Cellestis Valuation

2011-05-03T09:34:00.001+10:00

We've all been talking a lot about Value. Specifically, we have been contending that the Qiagen offer of $3.55 per Cellestis share does not represent the true value of the Company. In fact, we are saying that Cellestis is worth significantly more than $3.55 and that the offer is neither "fair and reasonable", nor, "in the best interests" of the current shareholders.

Obviously, to support the valuation component of that contention we must, at some point, try to value Cellestis sensibly and, most importantly, justify that valuation to ourselves.

I am going to attempt to help you to do that here. I apologize right now that the approach I am going to take is going to make this a long post. However, I see my task as not to simply give you a dollar value for your share but, instead, to give you the understanding and the tools to justify a value for yourself.

There are a number of ways that we might value a Company such as Cellestis. However, the most sensible (and most commonly used) is to use a DCF (Discounted Cash Flows) method to arrive at a NPV (Net Present Value).

The basis of a DCF is founded in a very simple and straightforward concept. Cash received in the future is worth less to you than cash that you receive today. This is a concept that none of us should have any difficulty in understanding.

The real use of a DCF calculation is to compare a potential or held investment with another, alternate, investment. The most common comparison is between an equity investment and a zero risk investment (usually Government Bonds or an Interest Bearing Deposit (IBD) ).

If we examine the future cash flows from the two investments and discount those cash flows back to a NPV, using the same Discount Rate then we can see how the values of the two investments compare.

So that is the basics. There are those who might try to "complexify" the concept of a DCF/NPV but as you can see for yourself, there is no magic or great mathematical prowess required. On the other hand, however, it does require some effort and careful thought.

A DCF valuation is trying to calculate a value today, based upon what will happen in the future. Nobody and nothing can predict the future. All any of us can ever do is to absorb every piece of information that we can and make some well founded assumptions about the future. This is what you are going to have to do to develop your own valuation of Cellestis. I am going to take you through my assumptions, reasoning and justifications. Hopefully they will make sense to you but you are quite welcome to make your own.

Let's start by downloading this VALUATION SPREADSHEET . This spreadsheet contains all the formulas for doing a DCF valuation of Cellestis and has been built to allow you to put in your own assumptions about the future. This spreadsheet will work happily in Excel or OpenOffice.

You can see that this spreadsheet is quite straightforward. It essentially describes the Profit and Loss Statement of Cellestis. The grey shaded columns are the actual figures for FY2009 and FY2010. For subsequent years, we can describe the future as we see it. Whatever we do to it, it will calculate a NPV value of Cellestis.

Let's start at the top - Revenue. That is, Sales.

We can start with the well known estimations that the Directors made at the November 2010 AGM.

"Revenue growth of between 30% and 40% is expected for full fiscal year 2011.. ..our goal in financial year 2012 is to achieve similar revenue growth as this fiscal year."

and

"Sales of ~1.9 Million tests in FY2010. Estimated sales of between 2.6 Million and 2.9 Million in FY2011"

If we start with those assumptions we can use the lowest growth figure that they have projected - 30%. You can see that I have put this 30% growth figure into the spreadsheet for the years 2011 and 2012.

Before going any further, have little glance down at row 29 where we calculate the number of tests that our revenue estimates. We show 1.9m tests for 2010 (the actual figure for 2010) and 2.47m in 2011 (slightly lower than the bottom range of numbers that the Directors estimated). This just tells us that we are certainly not overestimating our growth projections for these years. In fact we are probably being conservative.

Now, we have dealt with 2011 and 2012. What about 2013 onward? Given that Cellestis is really only now hitting its stride, we might anticipate similar or even greater growth in future years. There is also the concept of a tipping point that may well occur at some point (the publication of the latest trial results from the CDC that are due within months may well assist with this). However, I am going to be super conservative and calculate my value on the presumption that sales growth actually slows going forward.

I have therefore decided to continue the growth for 2013 and 2014 at 30% and for subsequent years through to 2020 at 20%.

As an aside. These figures are purely based on sales of QFT-Gold TB. I have made no allowance for the additional sales that may be generated by QFT-CMV and the other potential tests that the Directors have alluded to.

Clearly, projected sales are the most important factor contributing to the value of Cellestis. Whilst I have been quite conservative with my projection, you may want to see the impact of describing other scenarios. You can change these figures at any time and as often as you want to achieve your own understanding of the value of Cellestis.

Cost of Sales. These are just the direct costs that are associated with making sales. Primarily, these would be the costs of manufacturing/purchasing the test kits that the Company sells. This is a scalable cost in that if you sell twice as many kits then your costs will be twice as much i.e. the cost of each test remains constant. Of course there is an argument that as volumes increase, costs may decrease due to economies or power of scale. However, again, I have been conservative and assumed that the current Cost of Sales of 30% will remain constant.

Other Income. For Cellestis, this is the interest earned on Cash held. I have set this at 5%, which seems reasonable. It is automatically calculated by the spreadsheet.

Now we need to look at expenses.

The biggest expense that Cellestis has, by far, is Marketing. It is composed of many individual costs that can be attributed to actually achieving Sales. Advertising, Conferences, Sponsorships and Marketing team salaries will all be included in this figure.

Unlike Cost of Sales, this is not a scalable expense. The impact of Marketing tends to have some cumulative effect, meaning that as Sales increase, the Marketing costs as a percentage of Sales will decrease. This is especially so for a Company like Cellestis because their customers are repetitive. Unlike selling Television sets, once a potential customer has become a customer they will reorder continually, as long as the Company continues to service them well and QFT remains an appropriate solution for them. In the early years of a Company of this type, Marketing expenses will be high, as a percentage of sales. Over time, this percentage will reduce.

It is actually quite hard to estimate what this percentage will be into the future. However, once again, I have decided to be ultra conservative again and to reduce the Marketing expenses, when expressed as a percentage of sales, by only 2% per year. Even with this reduction, the spreadsheet tells us that Marketing expenses in 2020 would still be almost four times ($41m) the amount being spent at the moment. I truly believe that this expense will lower than this but let's go with it.

Management expenses. These are the expenses that directly relate to running the business. Things like management salaries, office overhead etc. In 2009 these costs were 6.4% of Sales and in 2010 they were 4.8% of Sales. In the interests of being conservative (again!) I am setting the Management expenses at 6% of sales for 2011 through to 2014, then dropping to 5% for 2017 and 4% after that. This still results in Management expenses of almost $14m in 2020, compared with an average of a little more than $2m for the last two years (2009 and 2010).

Research and Development (R&D). Again, I have continued the historical R&D expense at 3% of Sales. Because Cellestis may well benefit from an increased R&D budget in the future I have decided not to lower this percentage going forward. This means that by 2020 the R&D budget increases from the 2010 figure of $1.3m to over $10m.

Share options. This is a non-cash expense that is required by Australian accounting standards. Historically, this has been less than 1% of Sales. I have simply estimated a future expense of 1% of Sales per year.

Legal. Again, 1% of Sales going forward seems reasonable. This increases the allowance for legal expenses to increase from less than half a million dollars to around $3.4m per year over the projection.

Depreciation. The low depreciation expense of Cellestis is one of the significant benefits of this Company's business model. Cellestis do not run a manufacturing plant that would incur significant depreciation. Essentially, the only depreciation would be office equipment, vehicles and R&D equipment. I have projected a 1% of Sales as the depreciation cost. Bear in mind that, as for many expenses, this expense is unlikely to be scalable with sales and would in reality most likely actually decrease in time as a percentage of Sales.

We now have in place our projection of future Sales, Cost of Sales and Expenses. This allows the spreadsheet to calculate the Net Profit Before Tax (NPBT).

I think you would have to agree that I have been extremely conservative with my projections. Feel free to go back and adjust any of the abovementioned figures to suit your own estimates.

It is interesting to note that, having done all that work, our figures for 2011 and 2012 are very similar to the figures that Qiagen themselves have notified to their own shareholders. This is very relevant because they will have, I am sure, much better access to internal Cellestis data than we have.

My projections used in this spreadsheet are also more conservative than those put forward by Shaw Stockbroking.

In my "heart of hearts" I truly believe that the reality will be better than my projections. However, in the interests of producing a valuation that everybody can see as being a realistic minimum, I am quite happy to run with these conservative figures.

Taxation. Over the last few years the Company has paid less than the corporate tax rate of 30% because it had accumulated tax credits earned in the development years. Whilst there are some tax credits remaining to be used in the coming years I have set the tax rate at a flat 30% for all years. Any tax credits that are used will increase the valuation marginally.

Okay, so now we have described the financial future of Cellestis, as we might see it. We are close to getting a valuation but we do need to chat about a couple of other things first.

Cash. If you recall, way back at the beginning of this post, I stated that we calculate the NPV by discounting the future Cash flows back to a current value. There are a couple of different ways of looking at the cash flows - the end result is not really different but we do need to understand what we are doing.

You may notice in my calculations that I have used Earnings (for Cellestis, Cash earnings and Earnings are not materially different), rather than Dividend flow as the basis for the NPV. In effect, I am simply calculating on the basis that all of the cash earned by the Company belongs to us, the shareholders. Now, you might prefer to do it slightly differently and calculate the NPV based upon a (say) 60% dividend payout. However, that raises some interesting situations. For a start it would mean that the Company would have a quarter of a billion dollars of cash in the bank by 2020. Clearly that is not acceptable. Obviously, during the period of calculation, either the Company would increase the dividend payout perentage or it would find a great way to invest some of that cash to earn more profits for us.

In the end, the approach that I have taken is to look at the valuation as it would be looked at by Qiagen. It is important to realize that if this Scheme goes ahead then Qiagen will own 100% of Cellestis and all of the Cash that Cellestis generates will flow immediately to Qiagen.

We can't really predict how Cellestis will utilize the cash in the future. All we can really say is that the cash belongs to us, whether it is used within the Company or paid out as dividends. Of course we have to presume that the Company will use the cash in a manner that is in our best interests.

Anyway, as I say, this Scheme gives Qiagen access to all of the cash flows so it makes sense to value our Company based upon Earnings. It is worthwhile pointing out that the legislation states that the Independent Expert Valuation must take into account the benefit that the bidder receives by owning 100% of the target when determining if the bid is "fair and reasonable". It is also well recognized that this is the appropriate approach to valuing an enterprise in the situation of a takeover.

One final point regarding the cash flows. Clearly our investment could continue effectively forever and we should discount all of the cash received off into infinity. Obviously that is simply not practical. Hence the use of what is known as a terminal value. That is a discounted value that we apply to all future cashflows off past the end of our projection timespan. There are a number of methods for calculating that terminal value. However, a commonly used method, and one that I prefer, is to set the terminal value to be the amount of cash that we would recieve if we terminate our investment at the end of the projection period. In the case of an equity (ie a share) we can take the simple path of working out what we would be able to sell the share for. I usually calculate this price at a PE of 12. That is, I anticipate that I should be able to sell the share for 12 times the current earnings. That approximates to an 8% annual return, forever. That is programmed into the spreadsheet but you can fiddle with it if you wish. The truth is, in 2020, the forecast still only projects QFT having achieved a 37% market penetration. In effect we are assuming zero growth after the ten year projection. We would, in truth, anticipate further growth and a consequent higher PE.

Now, we need to talk about the Discount Rate that we are going to use to calculate our NPV.

In effect, the Discount Rate defines the rate of return we would like to make on our investment. More correctly, it is the rate of the alternate investment that we are comparing this investment with. If we know (or estimate) the future cash flows and know the rate of return that we require then we can calculate the price we would be willing to pay for the investment to achieve our desired annual return. In other words, we can calculate the Value. The spreadsheet is going to do this for us once we have decided what the Discount Rate should be.

Now, you may recall that the most common use of a DCF/NPV valuation is to compare one investment with another. The comparison is normally made to a Bond Rate or perhaps an IBD rate. Therefore, it is quite common to use a comparative interest rate (say 6%) as the Discount Rate. You can pop that in and see what value it generates. On my figures it comes out at $11.53. In other words, if I was content to earn a 6% return on my investment in CST then I would be willing to pay $11.53 for a CST share.

It is interesting to note that Qiagen are currently reporting a Return on Equity (ROE) of about 6%. That means that all the equity currently invested in their business is earning a return of 6% p.a. They are now proposing to use about $350m of that equity to purchase CST. Therefore, to keep their ROE stable they should be willing to earn a return of 6% and therefore pay $11.53 per CST Share. Now, of course, they are not going to make this takeover just to earn 6% (and they most definitely aren't - they are proposing to pay only $3.55, not $11.53). We'll come back to this a little later.

Personally, I usually run my DCF valuations at 8%. My justification for this is that it is around the figure that I believe my overall sharemarket investing portfolio should return over the long term. At a Discount Rate of 8% my current value of Cellestis comes in at $9.79. I'm going to call that my value of my Cellestis shares. Again, in plain English, that is saying that if I paid $9.79 for a Cellestis share then I would receive an annual 8% return on that investment.

Now, allow me to digress a little.

We need to talk about risk. There will be many people who will tell you that you should run a much higher Discount Rate to allow for risk.

There are a number of problems with this approach.

Firstly this approach assumes that there is some way to assign a number to risk. There isn't. Have a look at your portfolio. You will find all sorts of information about the shares that you own but nowhere is there a number representing "Risk". It's just crazy to somehow adjust the Discount Rate for Risk. Do you set it at 8.9%, 11.34% or what?

Secondly, when Risk is mentioned, people always think about the negative. However, there is both downside and upside risk. I believe that the figures that I have used in my DCF valuation are, in fact, so conservative that there is a significant "upside risk". That is, there is a substantial possibility that the Company may achieve higher returns than I have estimated. There are indeed, many events (some less likely than others) that could impact the future in either direction. Again, this just makes it impossible to assign some sort of number to "risk".

A much more sensible approach to risk is as follows.

Step one is done before any of this valuation. If the observable risks of the Company appear to be at such a level that would make you uncomfortable then just move on. Find an investment where you feel comfortable. If you are interested in a high risk investment that has a limited chance of rewarding then buy a lottery ticket.

Step two is what we have done above. That is, when valuing the Company be overly conservative with your projections. All of the estimates that I have described above are honestly screwed down to the worst possible outlook that I can envisage for Cellestis. I actually expect Cellestis to perform substantially better than described but I am being careful and conservative.

Step three is "Buy with a margin of safety". Once you have valued the company, try to buy it for less than you have calculated it is worth.

No investment in the share market comes with an ironclad guarantee. However, having applied those three steps you have minimised your risk - which is the best you can do.

Having said all of that, Shaw Stockbroking have done a DCF valuation in which they have applied a risk metric to their Discount Rate to come up with a Discount Rate of 12.2% (You would need to ask them how they came up with this figure). If you use my conservative figures and apply a Discount Rate of 12.2% the valuation comes out at $7.07.

I hope the above has given you the tools and information to work out what your Cellestis shares are worth to you.

Now, let's look at the offer Qiagen are making for our shares. What was it again? $3.55. What Discount Rate would we need to apply to get the value of Cellestis down to $3.55? It is 22%! (do it and check).

This is really saying that Qiagen expect to buy Cellestis for around $350m and receive an annual return on that investment of at least 22%.

You do have to wonder how stupid they think we are.

Don't forget to look at it the other way round too. This says that if we buy (or hold) our CST shares at a price of $3.55 then my projections indicate that we can expect an annual return of 22% ourselves.

Alternatively, try this. Set the Discount Rate to 8%. Now, try to adjust the sales figures down to a point where the valuation comes out at $3.55. Very hard to do isn't it? You would just about have to presume that, tomorrow, aliens are going to land, wave their gamma beam around and cure the world of TB.

I could go on forever. However, I'll just leave you with a few things to think about.

As you would now clearly understand, there is no definitive number that anybody can attach to a valuation. At the best, all any of us can do is to understand very clearly what we are doing (I hope I have helped in that) and thereby understand whether an investment presents good value for ourselves.

In the end, one very clear thing stands out. The Qiagen offer of $3.55 comes nowhere near representing the true value of Cellestis. In fact, if one was to make the assumptions about Cellestis that would be required to bring the value down to $3.55 then the business would probably not be attractive to Qiagen at all.

If this Scheme is approved then Qiagen will have bought themselves a phenomenal bargain and you, I and Australia will have, once again, allowed ourselves to achieve less than we can.

We are nobodies fools. We just have to make sure that we let everybody know that.

Vic Bula
Spokesperson
Cellestis Shareholders Action Group (CSAG)

DISCLAIMER
This post has been prepared without knowledge of your individual investment objectives, financial and personal circumstances. Accordingly, it is not a recommendation that a particular course of action is suitable for you. You should obtain your own independent professional advice before making any decision about Cellestis.

Cellestis and Forex

2011-04-26T10:55:00.006+10:00

Many people have contacted us to comment upon the Forex (Currency Foreign Exchange) impact on Cellestis and this proposed Scheme.

It is worthwile, therefore, making some comments.

We all know without too much thought that the spectacular rise of the $A over the last two years has dramatically impacted the bottom line of Cellestis, where profits are reported in $A. We also know that, even with this phenomenal headwind, Cellestis has been able to report both substantial profits and impressive profit growth.

Had Cellestis been a European or USA Company then this forex impact would have been minimised and Cellestis would have been reporting profits and profit growth that would make anybody sit up and pay attention.

But we aren't (European or American)(yet!).

The Forex is what it is - there is really nothing that we can do about it. We do, though, need to consider the Forex impact in two different ways.

Firstly, as touched on above, the actual level of Forex at any point in time will impact the bottom line in A$. At the moment the $A is at US$1.07. I don't know where it will go next. From my reading it seems that even the experts are divided (read nfi). If, ultimately, the A$ was to go back down then the profits that CST reports would be much higher.

None of the above is an excuse for anything. We must be aware, however, that Qiagen are making an opportunistic bid in "the worst of times". Many of us have been with this investment for many years. We have been through many peaks and troughs of every factor impacting Cellestis. Selling at "the worst of times" is just plain silly - but that is what they want us to do.

Now, to another aspect of Forex that is not quite so obvious and often overlooked.

Cellestis is a GROWTH Company. We buy and hold our shares because we believe in growth (we could get a better raw return by putting our money in the bank). By definition that means that we are always watching the growth figures of the company. That is the most important metric that we have in monitoring and managing our investment in Cellestis.

From 2009 to 2010, Cellestis was able to report a growth in NPBT of 26%. Based on best estimates, the growth from 2010 to 2011 will be at the very least the same again. (I have used NPBT here because during the periods mentioned, CST has consumed its tax credits. Subsequent years can use NPBT or NPAT to report the same growth percentages).

Again, these very impressive growth figures were achieved despite the impact of Forex. However, in this case, it is not the level of the Forex that has impacted the figures but the movement in the Forex. A movement upwards in the Forex dampens the reported growth in profits. Both of the years mentioned have sustained continual movement upwards in the $A.

This means that if the movement of the Forex were to stop (even staying at the current high level) then the impressive growth that Cellestis is experiencing in native (foreign) currencies would be translated directly into profit growth in $A.

So, we don't need the $A to come down at all for Cellestis to begin to report even more spectacular profit growth figures. Of course, if the $A does move downwards, then .....

Vic Bula

Spokesperson

CSAG

Some Easter Reading

2011-04-20T14:45:00.001+10:00

When you get tired of eating and drinking this weekend. When you can't bear to watch the kiddies smear more chocolate into your furniture. May I suggest that you retire to a quiet corner for a good read.

THIS may be just the ticket.

32,853,318 say NO!

2011-04-18T12:05:00.002+10:00

Today, the Cellestis Shareholders Action Group (CSAG) is enormously pleased to announce that support for a NO vote in regard to the proposed takeover of Cellestis by Qiagen NV has been overwhelming.

To date, the number of shares that have indicated their intention to vote NO has reached 32,853,318. This represents 34.2% of the issued share capital of Cellestis.

Given that a NO vote of 25% assures that the takeover will not proceed, we can now reject this Scheme.

We caution, however, that to ensure our victory we need every single vote that we can muster. In addition to defeating this Scheme, it is important that we send the message that we are loyal, long term investors in OUR Company and we will NOT be pushed out of our chosen investment for a pittance.

Those of you with a calculator to hand will correctly realize that there are still many shareholders out there that we have not yet been able to reach out to. It is our aim to do so over the coming days and weeks. No doubt the NO vote will continue to climb.

We must all work together and stay the course to achieve a better outcome for all shareholders.

At this time, on behalf of everybody that is working on this matter, allow me to thank all shareholders for their amazing and overwhelming support.

The CSAG Team will remain dedicated to this task through to its' conclusion, no matter how long it takes.

Vic Bula

Spokesman

CSAG (Cellestis Shareholders Action Group)

VALUE Vs PRICE

2011-04-15T15:47:00.004+10:00

We all know the old saying "Price is what you pay, Value is what you receive".

Cellestis is the absolute demonstration of this.

We have been offered the justification for this lowball offer that the price is 24% above the one month Volume Weighted Average Price.

That is simply a failure of logic.

As investors, we want a recognition of the Value of our investment, not a comparison price to a market price. We all know that the market rarely prices value correctly. A mere few weeks ago Cellestis was trading at $2.40. Immediately before the takeover the shares were trading at $3. Had the value of Cellestis shares really changed by 25% in those few short weeks? Of course not.

So many things that have nothing whatsoever to do with Company value can impact the price of a share. We are all familiar with Companies that are adept at driving their share price to spectacular levels with aggresive announcements. (I certainly do not criticise our Directors for not having gone down this path).

It is, however, worth considering how the share price might have been affected had the Company paid a larger dividend in the half year from cash profits earned in that half year for which (it is now clear) they had no purpose.

Price does not equate to value.

I might value my ride-on mower at $5,000. If I was offered a price of $1000 for it last week then the fact that somebody offers me $1240 this week is not going to make me sell on the basis that the offer is 24% more than last weeks "price". This is all particularly true if I had no plans to sell the mower in the first place.

In our situation it is particularly galling when the Scheme calls for an Independant Expert to decide what is best for us. I have managed my investment in Cellestis for ten years now - I don't need somebody else to tell me that I am to be forced to sell my shares at a particular price.

But, guess what? The Independent Expert, The Cellestis Directors, other shareholders, Qiagen ... nobody ... can tell us to sell our shares at $3.55 if, together, we vote this Scheme down.

If we demand that the value that we see in Cellestis be retrieved for us then it will be so.

Knowledge.

2011-04-15T15:10:00.005+10:00

Dear Shareholders

It is only natural, in the light of our Directors seeming haste to sell out the Company, for investors to be asking the question "Do they know something [bad] that we don't"

Frankly, that is extremely unlikely for a number of reasons.

Even though Cellestis is currently subject to a proposed takeover via a Scheme of Arrangement, it is important to understand that Cellestis is still a listed Company on the ASX. The Shares in the Company are still trading on the ASX. This means that the Company must continue to abide by the ASX listing rules.

The Company must continue to meet the requirements of ASX Listing Rule 3.1 (Continuous Disclosure) to keep the market informed of material events as they occur.

At the 2010 AGM in November 2010 CST advised

"Revenue growth of between 30% and 40% is expected for full fiscal year 2011.. ..our goal in financial year 2012 is to achieve similar revenue growth as this fiscal year."

They also provided the following Growth Outlook

"Sales of ~1.9 Million tests in FY2010. Estimated sales of between 2.6 Million and 2.9 Million in FY2011"

As Shareholders, we are entitled to use these statements to make decisions about our investment in Cellestis and the Directors of Cellestis would be aware that we would have done so.

If any of these statements are now materially incorrect then the Company, under ASX listing rules, must inform us of that.

They have not done so and unless they were to do so we are entitled to believe that those statements still stand.

It is self evident that Qiagen propose to purchase Cellestis in the belief that Sales of QuantiFERON will continue to grow. In fact, in their own PRESENTATION to their shareholders, they point to "double digit growth" of QuantiFERON sales in 2011 and "substantial double digit growth" in 2012.

Qiagen, of course, are privvy to much information about our Company that we are not. It seems clear that, with access to that information, they agree with us that the sales of QuantiFERON are growing rapidly and will continue to do so.

Given all of this, we can be confident that there is no reason not to believe that the future of QuantiFERON (and Cellestis) has all of the potential that we have long believed in. There are no facts to contradict this.

Vic Bula

Spokesperson

Cellestis Shareholders Action Group

SHAREHOLDINGS

2011-04-12T15:26:00.007+10:00

We have noted "around the traps" that some people are a little confused about the ownership of shares in Cellestis. In the interests of every shareholder knowing the correct facts we provide the shareholder details here.

Total Shares.

There are a touch over 96 million shares on issue (let's call it an even 96 million).

Shares Held or Controlled by the Directors of Cellestis.

Ron Pitcher                                  160,000                     0.16%
Tony Radford                           11,449,690                   11.93%
Jim Rothel                              11,449,689                   11.93%
Prof. Antonio Catanzaro             175,000                     0.18%
John Bennets                            2,298,607                     2.39%

Total                                     25,532,986                  26.60%
____________________________________

Shares Held or controlled by Qiagen.

Qiagen hold exactly zero (that's nil) shares.

Note carefully that if they were to own any shares they are explicitly excluded from voting those shares.

What they do have is a highly conditional option to purchase 19.9% of the shares in the Company that belong to Tony Radford and Jim Rothel.

As part of that options agreement, TR and JR have agreed to vote that 19.9% in favor of the Scheme. Had Qiagen purchased the shares outright then they would have been prevented from voting those shares. It seems that this option arrangement avoids that exclusion.

It seems that this option agreement has been limited to be over only the 19.9% holding to avoid triggering the provisions of the takeover act. We would presume that the same consideration prevents Qiagen from buying any shares on or off market.

We will be covering the options agreement, the voting requirements and the Qiagen position post the Scheme in following emails. However, at this point it is important to understand that if this deal is voted down then Qiagen will hold NO shares in Cellestis.

Disclaimer. Nothing in this email should be construed as personal financial or legal advice. All information is provided on the understanding that you will take whatever steps are necessary to ensure that any actions that you take are the most approriate for your own personal circumstances. The author accepts no responsibility for the impact of any consequent outcomes.

In the Beginning..

2011-04-11T18:40:00.005+10:00

Dear Cellestis Shareholders,

Thank you for registering your interest in achieving a better outcome for shareholders than a takeover via Scheme of Arrangement by Qiagen at $3.55.

Before proceeding, I would like to draw to your attention the disclaimer at the end of this email.

Through this and subsequent emails it is our intention to keep you fully informed about this takeover and the actions that are available to ensure a better outcome for every Shareholder.

For obvious reasons, unfortunately, we may have to be somewhat circumspect in some of the matters that we discuss.

I am pleased to inform you that the combination of your indicated voting intentions and the votes of others who intend to vote NO ensure that we can reject this Scheme.

For this Scheme to be overturned , more than 25% of votes cast either in person or by proxy will need to vote NO. Whilst current indications are that this is very achievable we need as many votes as possible. The single most important thing that you can do at this time as an individual is to ensure that every person that you can contact registers their interest and intention.

Now, to answer some of the questions that you would no doubt already have.

Who are we?

Whilst at this point in time, I am the public face of this campaign, I can assure you that there is a very strong team of dedicated, professional long term Cellestis investors working behind the scenes on this. I do recognize that many of you would want to be more directly involved in this than you are at present. I am sure, however, that you would also recognize that our intention to approach this situation in a businesslike and professional manner dictates that we operate with a team of a manageable size.

That is not in any way to imply that your offers of help are not appreciated. In time we may contact individuals who have offered specific assistance.

In the meantime there are things that you can do. As mentioned above, we need every single Cellestis Shareholder to be aware of the Scheme that has been proposed and the impact on them. Use every tool that you have to reach out to them.

The knowledge of your moral support is also enormously appreciated.

What are our objectives?

At this early stage our objectives are best expressed as working to achieve a better outcome for Cellestis Shareholders. Whilst that statement is by necessity vague it does express our intention of retrieving for the Shareholders the true value of Cellestis.

It is clear that there are several potential outcomes and many permutations of each. It would be foolhardy to lock in any specific outcome at this point.

What we do know is that as a group we do have the power to impact the outcomes. Have no doubt that Shareholders have significant rights and the ability to exercise them. It has been done before and it can be done again.

What are we doing?

From a standing start a little more than one week ago we have made significant progress. We have assembled a team to manage this issue and we have marshalled the Shareholders into a potentially powerful force.

More specifically we have:

Sought and received legal opinion on many aspects of the Scheme and our rights.
Commenced the process of receiving media coverage.
Consulted with ASIC.
Initiated analysis of the potential outcomes.
Commenced the planning of strategies.

And more

What Next?

Over the coming days and weeks there is much more to be done. We will clarify our specific aims. We will commence implementation of the actions foreshadowed above. We will also need to respond to new events as they occur.

Importantly, we need to ensure that everybody has access to correct and understandable facts about this situation. It is our intention to initiate the provision of same via this email list. You can help by further disseminating that information to other shareholders.

If you wish to contact the team regarding any material matters, you can reach us at cst .shareholders@gmail.com . I can guarantee that every email will be read and considered. It may not be possible to individually answer each email but any important matters will be addressed in these emails.

Vic Bula
Representative
Cellestis Shareholders Action Group

Disclaimer. Nothing in this email should be construed as personal financial or legal advice. All information is provided on the understanding that you will take whatever steps are necessary to ensure that any actions that you take are the most approriate for your own personal circumstances. The author accepts no responsibility for the impact of any consequent outcomes.