What’s a little greenmail these days but a flashback to the future of the 1980’s when the idea first came to prominence and became second nature for a host of big names who are now either supporters of Donald Trump, poor, or have had a holiday in Club Fed, or are dead.
According to Google, greenmail is defined as “the practice of buying enough shares in a company to threaten a takeover, forcing the owners to buy them back at a higher price in order to retain control.”
And that’s what is shaping up in Downer EDI’s $1.2 billion bid for control of the underperforming Spotless. This week, after Downer revealed it held 67.7% of Spotless, the Spotless board sort of threw in the towel and told holdout shareholders to accept Downer’s $1.15 a share cash offer, but said they would determine their own course of action (ie, we are not telling you now) for the shares they hold. It was in fact a highly qualified example of towel throwing.
Spotless in a filing with the ASX did point out that "A number of institutional investors, including Coltrane Asset Management (Coltrane), have so far not accepted the Downer Offer.
Coltrane has accumulated relevant interests in up to 10.64% of Spotless shares on issue (via cash settled equity swaps); If Coltrane does not accept Downer’s Offer for its full 10.64% interest, Downer will be unable to compulsorily acquire all of the shares in Spotless; and Downer may need to negotiate with Coltrane and other large institutional shareholders and may need to make a new offer to all shareholders at an improved price, although there can be no certainty as to this occurring or the timing of any such offer.”
And someone is keeping the Downer share price above the $1.15 offer price at $1.155 – not much but enough to send a message that Downer will not be wrapping this one up without some more money on the table.
Downer needs to get to 90% so that it can consolidate Spotless into its accounts and complete the merger. Coltrane has enough shares (not the 10.64% but the 0.64%) to prevent that happening. Not being able to consolidate the shares means higher costs – separate accounts, board, management, listing on the ASX – Downer will not be able to fully access Spotless’ cash flows, separate bank accounts and other systems will have to be maintained.
The extra costs will be millions of dollars a year. Eventually lifting offer price for Coltrane and other shares will look a better bet than holding out, as Downer might be tempted to do – cancelling Spotless’ dividend for example.
What is even more galling (for Downer) and those who believe in transparency is that Coltrane does not own shares in Spotless, but owns ‘cash settled equity swaps’ which are a type of financial derivative, which in need not be declared if the relevant interest rises above the 5% disclosure level and they are just cash settled and no physical delivery (or exchange of cash for shares) happens.
Coltrane declared it held 8.06% of Spotless’s shares on March 23, two days after Downer announced it bid. In its statement to the ASX Coltrane said it expected to take delivery of the relevant number of shares – 8.06% of Spotless issued capital.
Taking physical delivery of the shares means the holding has to be disclosed. Perhaps it was the Downer announcement on March 21 that forced Coltrane’s hand. That stake was added to so the hedge fund owns 10.64% with the last two digits the vital party of the number. Now for the greenmail dance and denouement – a higher price in early 2018.
