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Alignment in perceptions of value - pre-empting and responding to unsolicited bids

08 May 2012

Previously I had discussed the importance of an entity’s boards of directors (Board) having a clear understanding of, and clearly communicating to shareholders, the inherent value in its business, so as to pre-empt and place it in the best position to deal with any takeover offer received.

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

Spotless

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 17 November 2011. PEP's offer was subsequently increased to $2.68 cash per share on 1 December 2011.

Spotless subsequently announced on 9 January that the Spotless Board would not support an offer of less than $2.80 per Spotless share.

Given the public statements made by the Spotless Board in early January, this week’s announcement (that the Spotless Board supported the revised offer from PEP of $2.62 per Spotless share plus a $0.04 dividend franked at 95%) appeared to reflect an acceptance by the Spotless Board that the ‘value’ perceived by the Board may have been somewhat out of line with that held by the majority of Spotless shareholders who, perhaps, included in their assessment of Spotless value a greater emphasis on certainty.

While the delay in the Spotless Board supporting PEP's approach would have provided Spotless with an opportunity to canvas other potential suitors, some commentators have questioned whether the Spotless Board obtained any additional value for Spotless shareholders through the drawn-out bidding process, on the basis that the offer that has now been supported by the Spotless Board has an implied value of only 1.7% greater than PEP’s 1 December offer (including the $0.05 FY12 dividend already paid to Spotless shareholders).

Pre-emptive Communication

Mr Smedley has stated that, among other things, the Spotless Board has been mindful of the consequences that the on-going uncertainty and significant time spent by Spotless's key executives on the matter has had on Spotless.

While any unsolicited takeover offer will inevitably result in significant uncertainty and time being spent in responding to such offers, this process is greatly assisted by ensuring that you and your shareholders have an intimate understanding of your business and the environment that you operate in, on an on-going basis, including, among other things:

  1. your key assets and the strategic plan of your business;
  2. the key risks and any dependencies to your business and your strategic plan; and
  3. any external factors that may be impacting upon your achievement of that strategic plan or your business not currently meeting any established aims or expectations.

Ensuring that your shareholders have an understanding of each of these items will not only help to avoid any unsolicited takeover offers being received, but will also assist you once have received an unsolicited offer, by ensuring that shareholders are able to assess any offer in light of the overall value proposition of your business and that any messages from you regarding the offer are understood, ultimately increasing the likelihood of obtaining the best possible outcome for your shareholders.

In the case of Spotless, the Spotless Board tried to communicate the ‘fundamental value’ perceived by the Spotless Board as being inherent in Spotless's business, including as a result of the so called ‘Transformation program’ through, among other things, the 50+ page management presentation to PEP that was released to the market in mid-December.

It could have been beneficial if this information was already understood by shareholders and communicated to the market, which could have resulted in the perceived values of Spotless by both PEP and the Spotless Board coming together sooner (and therefore the transaction being achieved more quickly).