It’s a question all shareholders (with the probable exception of those in the resource sector) will be asking of themselves and their companies when receiving a takeover.
Should we take the money and run, or should we stay and go alone?
And when the go it alone and reject the bid strategy is badly wounded by the slumping economy and retail sales, should management and the board of the target bow to reality and change?
And so it is with Just Group, whose loud defence against Solomon Lew’s Premier Group bid suffered a serious body blow with a mid-offer earnings downgrade.
Just cut its directors’ forecast for earnings-per-share guidance in the year to July 26 from 33.4c a share, issued early last month in its Target’s Statement, to 29.6c to 30.6c a share. That compares to 2007 earnings per share of 28.7c, so there’s still a small increase in the market.
That prompted the appearance of stories suggesting Premier might walk (As Spotless walked from its bid for Programmed last month).
The share price sank, dropping 14% to a new 52 week low of $2.70, compared to the cash and share offer that values the company at around $4.12. The shares ended at $2.78, down 12.6%.
On the face a no brainer, and unlike the rejections and defeats of bids for the likes of Qantas, Flight Centre and APN News and Media last year when the market was strong, this takeover is happening in a market softening as investors grow concerned at future earnings, dividends and the overall health of the Australian and global economies.
With those sorts of concerns that have helped the market lower by 19% so far this year and nearly 2% so far this week, it was brave of Just Group’s board to again reject the Premier offer, continuing the claim that it undervalues the company.
Despite yesterday’s news of a sharper than expected 0.7% rise in retail sales in May, driven in part by food, recreational retailers and ‘other retailers’ such as garden centres, retailing remains moribund.
In fact clothing was down 0.3% in May, and that showed up in the surprising update from Just (JST).
"In light of softer market conditions," it started, "slower recent trading and industry-wide uncertainty, Just Group has revised its FY2008 directors’ forecast. Pro-forma earnings per share for FY2008 is now expected to be between 29.2 and 30.6 cents per share, compared to 33.4 cents as included in the Target’s Statement."
But then it was on to the front foot for chairman, Dr Ian Pollard who went straight to work attacking the Premier offer.
"Dr Ian Pollard, Just Group’s Chairman, said: “Consumer spending has been weaker than was anticipated at the time of the Target’s Statement. However, despite this and the effect on earnings, Just Group is well placed to adapt to softer or improved market conditions due to the speed and responsiveness of its supply chain, the effectiveness of its inventory management and the scale and diversity of its portfolio.
“Just Group is also well placed to capture opportunities from challenges other retailers may face – including the potential to achieve market share gains, access new sites or undertake attractive complementary acquisitions.
“After reviewing the revised directors’ forecast, the Independent Expert has reconfirmed its original conclusion that Premier’s offer is neither fair nor reasonable. Premier’s offer remains unattractive and continues to materially undervalue the Company and its long term potential.”
The substantive part of the update and the reasons for the slowdown were down the page after the front foot work from the chairman.
"As part of its Target’s Statement, Just Group released a directors’ forecast for FY2008.
"Since the release of this forecast, there has been a further weakening in consumer sentiment in Australia, with the increases in fuel and food costs affecting consumer spending and impacting a broad range of retailers.
"As a result, Just Group has experienced a weaker than expected end-of-season sales period in Australia and further pressure on sales in New Zealand.
"Sales and gross margin performance have been affected, most notably for Just Jeans and Jay Jays. Trading however remained positive for Dotti, Smiggle and Jacqui E throughout this period in Australia. All brands except Peter Alexander have now introduced new season product and windows and the initial response from consumers has been encouraging.
"Stock levels remain well controlled and in line with expectations.
"Just Group will continue to take steps to mitigate the impact of the soft trading conditions, placing particular emphasis on cost control, inventory management, operating efficiencies and maintaining market share.
“The tax cuts that take effect in Australia from July 2008 will also provide some relief for consumers from the rising cost of living and may have a positive impact on sales.
"New Zealand tax cuts take effect in October 2008 and may provide further support for sales in that country."
Things must be pretty desperate (and ideas short in management) if the company places its hopes in a rebound from the tax cuts here and coming in New Zealand.
They seem to be ignoring the impact of rising petrol prices which the Reserve Bank now seems to be treating like an extra interest rate rise or two.
