Here’s a perfect example of why accepting a takeover offer early (as many did in Qantas) can be self-defeating.
Hong Kong-based private equity group, Affinity Equity Partners (AEP) says it is offering $6.20 a share for the 16.4 per cent it doesn’t own in Brisbane-based retailer, Colorado Group.
The announcement came late Tuesday night as the country was preoccupied by the Federal Budget. When a trading halt ended yesterday the shares rose $1.09 to $6.02.
AEP’s Australian arm Australian Retail Holdings (ARH) said it believes “its offer provides the existing minority shareholders in Colorado with a compelling opportunity to crystallise substantial value from their shareholding without exposure to the significant execution risks faced by Colorado in implementing its current business strategy”.
This means they REALLY want CDO minorities to sell their shares.
The offer saw the CDO board call off a shareholder meeting yesterday that was going to consider a 52c a share capital return ($49.9 million), which would have benefited AEP with its 83.6 per cent stake in the retailer, and Solomon Lew, who holds a blocking 10.9 per cent stake.
The offer price is a 26 per cent premium to the closing price on Tuesday and a substantial amount above the cash price of $4.18 and 52c special dividend paid last October in the first offer last year.
That totaled $4.70 a share which was a substantial premium in itself above the CDO share price before the bid from AEP, which was notable for being the first hostile bid in this country from a private equity buyer who normally like to ‘hug’ and ‘hold ‘ their targets.
By holding out the prospect of a big gain, AEP is hoping to lure Lew into selling, but going by his stance at Country Road where he has remained a ‘locked’ in shareholder with around 12 per cent and an irritant for the South African owners, I wouldn’t be betting on him accepting too quickly.
After all he doesn’t need the money having sold his stake in Coles to Wesfarmers for more than $1.1 billion for his main company, Premier Investments.
In calling the now postponed meeting, Colorado said its capital structure was inefficient and the AEP local subsidiary ARH proposed the 52c a share capital return to create a more efficient capital structure for CDO.
CDO was in the process of completing a term debt facility to repay the $49.9 million borrowed from ARH to fund the share special dividend paid to shareholders on 6 October 2006.
This was a way of partly gearing up the balance sheet, like private equity firms do. This time it was still in the public eye.
The reason for the new, higher offer is not hard to find. AEP/ARH needs to eliminate the minorities, led by Mr Lew so it can fully consolidate and access the assets and cash flow of CDO unhindered.
Without total control (like now) ARH would have to use CDO dividends to try and repay borrowings and the associated interest cost and it could not fully gear up the balance sheet in the way that all good private equity companies do to make sure they get their money back quickly.
There’s also the savings from becoming a privately owned company with little disclosure needed and no expensive corporate governance required and the freedom for management to do what it has to make the investment pay off.
“The Board of Colorado Group Ltd has been advised by ARH Investments (Australia) Pty Limited (ARH) that it intends to make an off-market bid for all the outstanding shares in Colorado Group Ltd. ARH holds 83.6% of the shares in the Company.
“The consideration to be offered by ARH will be $6.20 cash per ordinary share held in Colorado Group Ltd.
“A committee of the Board comprising the independent non-executive Directors and the Chairman has been formed to consider the offer and recommends that shareholders take advice before dealing in Colorado shares.
“ARH has requested that the Board postpone the Special General Meeting scheduled for 9 May 2007 to consider a capital return of $0.52 per share in Colorado pending consideration by the company of the offer, and the Board sub-committee has agreed to do this. The Company has separately announced the postponement of this meeting.”
ARH’s justification for the bid “ARH believes its offer provides the existing minority shareholders in Colorado with a compelling opportunity to crystallise substantial value from their shareholding without exposure to the significant execution risks faced by Colorado in implementing its current business strategy.” is of course a try-on.
ARH/AEP is not going to adopt any sort of strategy that would risk the hundreds of millions of dollars they have invested in CDO.
Like Qantas it could be a chance to remain in and ride whatever benefits the private equity mob can wring from CDO. And if this bid fails they may came back with a third and higher offer. Total control is paramount.
But watch Solomon Lew, he’s the key.
But CDO (like Qantas would have been) is an example of why it sometimes pay to sit and wait and think about an offer and not accept too early.
