Shares in adventure gear retailer Kathmandu Holdings Ltd (ASX: KMD) rallied to a one-week high after its board told investors to reject Briscoe Group's takeover offer.
The stock jumped 3% to $1.55 even as the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) slumped 0.7% but shareholders shouldn't get too excited as there's an air of scepticism hanging on the stock.
Kathmandu called the takeover bid "inadequate" as it fails to reflect the true value of the company and is far below the valuation range of $NZ2.10 to $NZ2.41 ($1.87 to $2.14) given by its independent adviser Grant Samuel.
New Zealand-listed Briscoe is offering to swap five of its shares for every nine Kathmandu shares and pay a NZ20 cent cash consideration for each Kathmandu share.
At Briscoe's current share price, it implies an offer price of $NZ1.83 per Kathmandu share, although Kathmandu is trading around 5% below the offer.
This might mean that the market doesn't believe the deal will get done, and perhaps more ominously, a sweetened offer from Briscoe might not be forthcoming even though Kathmandu said the bidder "can afford a lot more".
Briscoe has also been astute in choosing its timing as Kathmandu's share price has tumbled around 50% in the past year due to poor sales and competitive pressures.
The proposed deal is a little more complicated because Briscoe will have to seek a listing on the ASX to win over Kathmandu's local shareholders (Kathmandu trades both on the NZE and ASX) but the bidder has not given any financial projections to support its case that the merged entity will be more profitable than a standalone Kathmandu.
It would be a lot easier to win support if Briscoe made an all-cash offer, although I think the company may not be in a position to cut such a deal.
What should Kathmandu shareholders do? At this juncture they are probably better off playing the waiting game.
I don't think the stock is particularly attractive at current levels on fundamentals but an improved offer can't be ruled out either.
Briscoe generates over $NZ500 million in annual sales from its 34 Rebel Sports stores and 46 homewares stores.
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