How is it that in a year of dwindling returns for investors, a generous offer to buy a company at a thumping 62% premium to its share price didn't even make it to shareholders' postboxes?
This is the fate that befell Tiger Brands' abortive R8bn bid to purchase AVI, which owns some of SA's top food brands, including Five Roses tea, Bakers and Pyotts biscuits and I&J fisheries. With Tiger Brands' assets like Ace, Colman's and All Gold, it would have created a formidable food company.
In March, Tiger called the bid off after months of banging its head against a wall. According to a trading update last week, this sorry episode cost it R32,6m — significant enough to shave 3% off its total earnings per share for the six months to March.
But why was this acquisition aborted?
It clearly wasn't because of price: AVI's shares are now treading water at R17/share — a 40% discount to Tiger Brands' offer of R24/share.
Ask those involved why the deal failed, and you get three answers. Tiger chairman Lex van Vught says AVI wasn't “sufficiently” welcoming to overtures; AVI CEO Simon Crutchley says the “many execution risks” led to his board recommending shareholders veto the deal, while some investors say “AVI management was against it, it's that simple”.
The background is this: after months of planning, Tiger put in two formal expressions of interest to AVI in October. This wasn't communicated to shareholders but AVI's board wrote back that the offer “was not in the best interests of AVI or its shareholders”.
Frustrated by AVI's reticence and convinced it had a good offer for shareholders, Tiger went public on November 17, saying it was “considering” making an offer for AVI at R24/share — a 62% premium to its R14,80 price. It said this would create a focused company with “a more efficient and effective platform”.
On the same day, AVI published reasons for its opposition, saying it was “unconvinced as to the commercial merits”, especially given the “execution risk” that the deal might fail at the competition authorities. It said it was also “unwilling to allow any form of due diligence [as Tiger had asked] as that would allow a competitor access to confidential information.”
The reasons were thin, and implied the same thing: AVI simply didn't want to be taken over. With no progress, Tiger had little choice but to walk away.
Coronation, which holds 30% of AVI, was keen for the deal to go ahead.
“There's no doubt shareholders had a great deal on the table,” says chief investment officer Karl Leinberger “It's a disappointment, because though we think both companies will prosper on their own, together it would have been particularly strong.”
In recent weeks, activist Theo Botha tried to revive the bid by using section 180 of the Companies Act.
This allows shareholders that hold at least 10% of the shares to call a general meeting at which investors could ask AVI's management to reconsider.
Botha had the support of the Public Investment Corp (PIC), which held 12.3% of AVI, but Coronation and Stanlib were reluctant to climb on board. “We wanted to ask management to reconsider this transaction because we feel that, at the least, directors should have presented it to shareholders,” says Botha.
Without more support, Botha says this avenue now appears closed.
Though Van Vught says Tiger is “still interested in AVI from a strategic point of view”, he appears to have thrown in the towel. Tiger built up a stake of 4.6% of AVI before launching the offer, but trading statistics suggest this stake has been sold.
In one month after announcing its withdrawal, nearly 47m AVI shares were traded — 13% of its entire issued share capital, and a higher monthly trading volume than normal.
Van Vught says that though the risk premiums of such a deal changed from when it was conceptualised, the issue was that “our engagement with AVI didn't progress sufficiently”.
While it seems iniquitous that a deal that looks so obviously good wasn't put before shareholders, Leinberger says this is a quirk of the Companies Act.
“If a board approves a deal, you need only 75% shareholder approval under section 311 of the Companies Act. But if the board doesn't approve it, then you need 90%,” he says.
When it became obvious that Tiger Brands wouldn't get 90% — AVI's empowerment staff trust held 7,7%, subsidiary AVI Investment Services held 4,6%, and asset manager Oasis held 4% — it scrapped the bid.
Oasis was against the deal as CEO Adam Ebrahim said Tiger “is not paying a full or fair price”, and it would “reduce competition in the SA food industry”.
But an analyst from a Johannesburg brokerage, who asked not to be named, says AVI's refusal was “very surprising”: “AVI is too small to survive on its own. Its administration costs as a percentage of revenue are high compared with its rivals, so it seemed logical that sooner or later someone would make a move”.
Crutchley says there was a simple reason it wasn't put to shareholders: it was only a proposal and never an actual offer.
But the reason it wasn't “an actual transaction” is because the board recommended shareholders veto the deal. Had AVI been open to a deal, Tiger would surely have proceeded.
Had Tiger increased its offer to R30/share, AVI would probably still have said no. Says Crutchley: “There's more to a transaction than simply price and the premium of 62% was opportunistic to a dark period [for stock markets].”
Was AVI also concerned about tying itself to a company notorious for competition infringements? “Reputational issues are a concern, and the board gave consideration to this issue,” he says.
Leinberger says AVI management could only have believed its stock was worth more than Tiger offered. “There were competition concerns, too, but the reality is they were more bullish on their company's prospects,” he says.
But right now, AVI's stock seems static at R17. Will it hit R24 anytime soon?
Analysts don't expect big things from AVI: on average, seven brokerages expect its share price to climb only up to R18.80 in a year. Yet, they expect Tiger's share price to climb to R163.50 in that time — 25% up on its current price of R130.
Last week, Tiger said it expects earnings per share to fall between 6% and 10% for the six months to March. For continuing operations, it expects headline earnings per share to actually grow by between 5% and 9%.
Leinberger believes Tiger Brands is 40%-50% undervalued, so should be trading north of R200/share. But he also believes AVI is worth north of R28/share.
“That's why the outcome was so disappointing. Together, it would have been a strong company, and it's frustrating that shareholders didn't get a chance to make it happen.”
Source: Financial Mail
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