MARKET REPORT: PERCEIVED VALUE HELPS DEFLECT BIDS

I HAVE previously discussed the importance of an entity’s boards of directors having a clear understanding of the inherent value of a business and communicating that to shareholders.

That puts the business in the best position to deal with any takeover offers that may arise.

This concept of ‘value’ is one which has no doubt been a cause of contention for Peter Smedley, chairman of ASX-listed Spotless Group Limited recently when considering Pacific Equity Partners’ (PEP) unsolicited takeover offer.

Spotless first announced that it had received an offer from PEP to acquire all of its shares at a price of $2.63 per Spotless share on November 17 last year.

PEP’s offer was subsequently increased to $2.68 per share on December 1.

On January 9, the Spotless board announced it would not support an offer of less than $2.80 per Spotless share.

Given the public statements made by the Spotless board in January, the announcement in the first week of May that the Spotless Board supported the revised offer from PEP [$2.62 per Spotless share plus a $0.04 dividend franked at 95 per cent] was interesting.

Different perception

It appeared to reflect an acceptance by the Spotless board that the ‘value’ of the company as perceived by the board may have been different to that held by the majority of Spotless shareholders who, perhaps, included a greater emphasis on certainty in their assessment of the value of the business.

While the delay in the Spotless board supporting PEP’s approach would have provided the business with an opportunity to canvas other potential suitors, some commentators have questioned whether the Spotless board obtained any additional value for shareholders through the drawnout bidding process.

The basis of those views is that the offer that has now been supported by the Spotless board has an implied value of only 1.7 per cent greater than PEP’s December 1 offer [including the $0.05 FY12 dividend already paid to Spotless shareholders].

Smedley has stated the Spotless board was mindful of the consequences the ongoing uncertainty has had on the business and the significant time spent by key executives on the matter.

Matters to consider

While any unsolicited takeover offer will inevitably result in significant uncertainty and time being spent in responding, the process can be greatly assisted if a board and shareholders have an intimate understanding of your business and the environment that you operate in.

Matters to consider on an on-going basis include:

• Key assets and the strategic plan of your business
• Risks and dependencies to your business and your strategic plan
• External factors that may impact that strategic plan or make your business not achieve aims or expectations

Ensuring your shareholders understand each of these areas will help deter any unsolicited takeovers and assist the business to handle any offers that arise.

This is because shareholders are able to assess any offer in light of the overall value proposition of your business.

It also helps to ensure any messages regarding the offer are understood, which ultimately increases the likelihood of obtaining the best possible outcome for your shareholders.

In the case of Spotless, the board tried to communicate the perceived ‘fundamental value’ as being inherent in the business.

This communication included a 50-plus page management presentation to PEP that was released to the market in mid-December as part of a so-called ‘transformation program’.

It could have been beneficial if this information was already understood by shareholders and communicated to the market.

That could have resulted in the perceived values of Spotless, by both PEP and the Spotless board, coming together sooner.

The drawn out transaction may have then been achieved far more quickly.