The board of Affinity Education Group Ltd (ASX: AFJ) got back to the market today with a recommendation for shareholders regarding the takeover offer proposed by G8 Education Ltd (ASX: GEM).
It's safe to say the announcement was not ambiguous:
Furthermore:
- Your Directors recommend that you REJECT both of the G8 Offers (off-market and on-market takeover)
- Each of your Directors intends to REJECT both of the G8 offers in respect of the shares which they own or control
- The Independent Expert has concluded that the G8 Offers are NEITHER FAIR NOR REASONABLE
(emphasis as in the original document)
This creates an interesting dilemma for shareholders and management at both companies, given that G8 Education now holds 24.48% of Affinity as of Friday, August 21.
G8 has apparently attracted high levels of interest from among Affinity shareholders, but Affinity management has attempted to forestall the rot with a trading halt today, pending a market update. According to the announcement released by Affinity:
"The Company is requesting a trading halt as it is currently in advanced discussions which may lead to a material corporate announcement including the sale of the business and a return to shareholders."
The plot thickens…
It looks as though Affinity is bending over backwards to get out from under G8, and potentially considering selling the business to other buyers and returning the cash to shareholders. Unless those buyers are willing to pay a substantial premium to G8's current offer I don't see investors getting their money back – remembering that Affinity launched at $1 per share.
The sale of Affinity to a third party would also result in substantial lost opportunity costs to Affinity and G8 shareholders, as they are no longer able to benefit from either synergies or a turnaround in Affinity's performance. Despite being against the deal initially I believe now that G8 shareholders may be better off if the deal progresses because of the difficulties in backing out now.
Affinity shareholders, on the other hand, face a much more difficult decision over what to do with their shares. Despite the poor performance of the company's centres in recent times, Affinity is trading cheaply compared to other ASX stocks and I personally would not be satisfied with an offer of $0.80 for Affinity shares, if I owned them.
However, I own G8 (disclosure below) shares, so readers may take that opinion with a grain of salt.
