The trouble with non-binding offers
Tuesday, 21 July 2015
By: RISEN JAYASEELAN
IT has happened again. A buyout deal in which the offerer had stated a takeout price but subject to a due diligence exercise, has fallen through. This again raises the question of whether such conditional buyouts should have a disclosure of the proposed buyout price. The perennial concern in deals like this has been that the disclosure of a buyout price would create a false ceiling for the target company’s shares. There are numerous examples of where such buyouts have ended in tatters and some investors getting burnt (see table).
Shouldn’t offerers be prohibited from disclosing a price when they are making an offer to buyout the assets of a listed company that is subject to a due diligence exercise? What is so wrong with the offerer stating that it intends to take over Company A, but that the takeover and takeout price is subject to a due diligence exercise? In such an instance while the market is informed of developments taking place in Company A, there is no chance of the market being misled into believing that the buyout is going to happen at a particular price.
The counter argument is that the reason why target companies have to release the conditional buyout price is because that is in the spirit of full disclosure.
The regulator has taken the stand that if there is any wrong doings by parties wishing to mislead the market and illegally benefit from such activity, that is a matter for market surveillance.
Meaning that the regulator’s surveillance department will be alerted to watch out if there’s any spike in the trading activity of such companies before and after such announcements.
Such a stand has its merits.
However, there is always the chance that even the best of surveillance can’t catch the savviest of crooks. Why take the chance? Why not prohibit offerors from the chance of duping the market by disallowing such offers to have a stated price?
If that’s too drastic, perhaps another tweak of the rules ought to be considered. As illustrated by the Cocoaland Holdings Bhd case, the offerer, Hong Kong-listed First Pacific Group Co Ltd, made the surprising announcement yesterday to back out entirely from a buyout deal of the former, after making a non-binding bid for the candy maker last month at a price that worked out to RM2.70 per share.
According to Cocoaland’s filing with Bursa Malaysia, First Pacific, a private equity firm, aborted the deal on this basis: “that the strategic fit offered by Cocoaland differs from what First Pacific had envisaged”. This reasoning seems difficult to accept. Any acquirer can easily discover the strategic fits of a potential target by researching all the publicly available information. Does one really need a full blown due diligence exercise to determine that? It is also odd that First Pacific did not go ahead with a lower bid post the due diligence exercise. If they discovered that the values inside the company were not at the level that they envisaged, then shouldn’t First Pacific have revised their bid downwards, at the very least?
Hence perhaps the buyout rules should insist that company’s that make an indicative non-binding bid should either go ahead with an offer post due diligence or provide the market with a detailed explanation on why it intends to abort the deal. Only then will minority shareholders be assured that they are not being taken for a ride.
China Cord Blood Corporation Announces Receipt of Non-Binding Acquisition Proposal
(Note: The non-binding bid for CCBC, not less than RMB6bn ($966m) comes from A-share listed Nanjing Xinjiekou (600682 CH) whose book equity is only around $250m (negative tangible book value of $593m!) and has around $1bn interest-bearing debt (excluding undisclosed off-balance sheet debt).
HONG KONG, Aug. 6, 2015 /PRNewswire/ — China Cord Blood Corporation (NYSE: CO) (“CCBC” or the “Company”), China’s leading provider of cord blood collection, laboratory testing, hematopoietic stem cell processing and stem cell storage services, today announced that its board of directors has received a non-binding acquisition proposal letter from Nanjing Xinjiekou Department Store Co., Ltd. (the “Potential Acquirer”), pursuant to which the Potential Acquirer offered to acquire all the Company’s China business, including all of the Company’s equity interests in its China subsidiaries and its assets and resources relating to its business in China(the “Proposal”). The purchase price offered is not lower than RMB6.0 billion, to be paid in cash or shares or a combination thereof.
The special committee of the Company’s board of directors, in consultation with its legal and financial advisors, will carefully review and evaluate the Proposal. The Company cautions its shareholders and others considering trading its ordinary shares that no decisions have been made with respect to the Company’s response to the Proposal. There can be no assurance that any agreement will be executed or that this or any other transaction will be approved or consummated.
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