Alesco wins, Billabong loses: Handling a takeover offer

The board of listed garage door maker, Alesco, hasn’t done a perfect job of handling an uninvited takeover bid by paint company DuluxGroup, according to Beulah Capital chief investment officer, Tom Elliott.

But Alesco has done much better than surfwear company, Billabong International, handling of private equity buyer, TPG, he says.

Alesco and Billabong both recently rejected all-cash takeover offers. “Reject an all-cash offer at your peril,” Elliott says. “Boards that reject things generally do their investors a disservice.”

However, rejecting an initial cash offer can work to a company’s advantage, if it is done correctly, as Alesco’s experience demonstrates. With this in mind, it is worth looking at the different approaches used by Alesco and Billabong.

In May, DuluxGroup made a $188 million takeover bid for Alesco. At $2 per share, Dulux’s bid was a 43% premium on Alesco’s share price at the time the offer was announced.

Alesco rejected the offer,  saying it was underpriced, and got an independent expert, Lonergan Edwards & Associates, to value the shares. LE&A made a valuation of between $2.23 and $2.53 a share.

As Dulux set about selling the offer to shareholders in the months following the bid, Alesco used the independent report to try to convince investors it was a dud deal.

Billabong International, on the other hand, handled its takeover bid very differently. In February, TPG offered investors $3 per share. When this was rejected by the board, TPG raised its offer to $3.30 – a 66% premium on the price ($1.79) the company was trading at before the first attempted takeover.

Influenced by major shareholder and founder, Gordon Merchant, the Billabong board rejected the offer and announced they would not sell for under $4 per share.

The different approaches brought very different results.

TPG effectively walked away from the negotiations when the $4 asking price was announced, but the Billabong board was forced to re-engage as the share price tumbled lower in ensuing months. It is now $1.10. TPG today announced a much-reduced offer of $1.45 per share. Billabong is expected to accept it. Disaster.

Elliott says: “If do you want a bit more [than the price offered], typically ask for 5%-6% and have some reason to back it up.”

Alesco had an independent valuation to back up its claim of a low-ball bid, and this helped convince investors of the company’s worth.

DuluxGroup was able to secure 29% of Alesco from investors, which is significant, but not enough for a takeover. In order to secure more shares, Dulux increased its offer to $2.05 per share in cash plus up to 18c of franking credits. The effect of this is to give those shareholders who can use the franking credits –not all shareholders – a bid worth up to $2.23, Elliot told Eureka Report today. That is the minimum of the threshold ($2.23 to $2.52) from the independent valuation Alesco’s board provided.

“Alesco got an independent valuation and stuck to that price,” Elliott says. “The range was more reasonable than Billabong’s (12%) and had some credibility.”

However, the Alesco board might be about to make its first mistake: it has announced it will not support the revised offer, which Elliot believes is a big mistake. “The offer may collapse and the shares will slide,” he says.

Alesco’s position weakened today when it issued a statement to the Australian Securities Exchange, reporting a net loss after tax of $13.9 million in the 12 months to May 30.

Although Alesco has used the dragged-out negotiations to its advantage, Elliot says it’s usually best to get deals done quickly. “If it’s too hard, bidders won’t bother and will make a deal with someone else,” he says.

Elliott gives companies three pieces of advice if they are approached with a takeover offer:

1         Bring in an independent expert to provide a valuation. “It’s what Alesco did successfully.”

2         Talk to shareholders.  “They’re not dummies,” Elliot says. “Many are institutional investors who have done their own valuations. They have an idea as to what the shares are worth.”

3         Don’t be afraid to do a deal. While Alesco was successful in forcing a higher bid, Elliott say the company should now take Dulux’s revised offer.