Once again we have had a reminder that it pays to think long and hard about takeover offers and be a little slow in accepting.
You never know what might be around the corner, especially if big shareholders start talking about the company being undervalued.
We have just seen that with the mop-up bid for the 16.4 per cent minority holdings in Colorado from Hong Kong equity Fund AEP and its local arm, ARH, at $6.20 a share.
And we received an even better reminder yesterday from Flight Centre when the second version of a deal with private equity group, Pacific Equity Partners, was revealed.
Flight Centre said it had reached preliminary agreement to transfer its assets into a venture with PEP, around two months after a $1.6 billion management buyout bid with PEP was rejected at a shareholders meeting.
This deal stems from that rejection of the $17.20 a share buyout offer from PEP.
It forced PEP to come again with a new offer that emerged yesterday and is similar in style to the joint ventures PBL and the Seven Network struck with CVC Asia and KKR respectively.
Speculation about the deal has seen the FLT share price driven to above the $17.20price and yesterday it rose to $17.70, up 20c on the day.
Under the proposed deal with PEP, Flight Centre will raise $1.1 billion in cash by transferring all its operating businesses into the venture.
Flight Centre will own 70 percent of the venture and Sydney-based PEP will own the rest. If certain targets are met, PEP’s stake will rise to one third and FLT’s stake will fall to 66.6 per cent.
Flight Centre said in a statement to the ASX yesterday that it would now proceed to negotiate and finalise an Implementation Agreement with PEP as quickly as possible.
“Under the terms of the agreement, it is proposed that PEP will purchase a 30% economic interest in a leveraged joint venture to be formed to acquire the FLT business’s operational assets. PEP’s minority holding will increase to one-third if the business achieves certain targets.
“FLT shareholders will effectively retain an initial 70% economic interest in the joint venture’s business via their existing FLT shares. This interest will reduce to two thirds if the targets are achieved.
“FLT expects to receive about $1.1 billion in cash proceeds from the transaction, to be sourced from debt facilities entered into by the joint venture and the amount paid by PEP ($195 million) in acquiring its economic interest.
“It is proposed that the substantial part of these proceeds will be returned to FLT shareholders as a combination of cash and franking credits via an off-market buyback of FLT shares.
“The proposed buy-back is expected to be structured along similar lines to that proposed during the previous privatisation proposal and will be implemented by way of a scheme of arrangement.”
The company said it would offer a way for smaller shareholders to exit in full for an as yet to be determined cash amount per share if they do not wish to indirectly hold a continuing interest in the leveraged, restructured FLT business.
In addition, FLT shareholders will receive a $0.40 per share fully franked final dividend for the current financial year. The final dividend is expected to be paid prior to the transaction’s completion.
The sale of the FLT business to the joint venture will be subject to approval by an ordinary resolution of shareholders at a FLT shareholders meeting and will not be conditional on the outcome of the scheme of arrangement to facilitate the subsequent off-market buy-back of FLT shares.
Prior to any such meeting, an independent expert will review and evaluate both the sale transaction and the proposed scheme of arrangement.
The scheme of arrangement to facilitate the subsequent off-market buyback of FLT shares will be subject to a resolution passed by 75per cent in value and 50 per cent in number of shareholders present and voting at that meeting.
FLT chairman Bruce Brown said: “This proposal has the potential to benefit FLT and its shareholders, including those who do not wish to maintain an investment in what will become a highly leveraged vehicle”.
The company said the deal will release a significant cash amount to shareholders, introduce a disciplined and experienced strategic partner in PEP with a strong track record of delivering high returns, deliver an attractive cash exit opportunity for smaller shareholders via a tax-effective off-market buy-back and provide those Flight Centre shareholders who choose not to sell with the opportunity to participate in the FLT business’s future upside potential.
It said this potential was “evidenced by the company’s recent upgraded profit outlook for the current year, and also create the potential for enhanced returns by introducing significantly greater leverage than can be practically obtained at the moment.”
The creation of the leveraged joint venture will not affect the travel agency business’s day-to-day operations and the joint venture’s cash flow will primarily be used to service the business’s new debt.
That will mean income and franking credits will not be important and any returns will probably be more capital in nature.
FLT told investors late last month that “Preliminary results for the nine months to March 31 2007 show that FLT’s pre tax profit is ahead of expectation and about 18% up on the previous corresponding period, excluding the abnormal $22.4 million gain from the sale of FLT’s Adelaide Street headquarters”.
That upgrade and the possible venture with PEP (which was announced a month earlier) helped rekindle interest in FLT shares and has pushed them past the $17.20 level of the first offer.
