Private Equity firm Anchorage Capital may have just started something that could have enormous consequences for takeovers and mergers on the ASX in the future.
Childcare operator G8 Education Ltd (ASX: GEM) has bid 80 cents for rival Affinity Education Group Ltd (ASX: AFJ), but Anchorage Capital has trumped that with an offer worth 90 cents.
In itself, the higher bid is fairly normal. Companies compete for assets they find attractive and rival bids can often emerge.
The problem for Anchorage was that G8 Education already owns 24.5% of Affinity – usually enough to block a normal takeover.
The kicker is that Anchorage has bid for the underlying assets and business of Affinity – not Affinity itself for $208.3 million – equivalent to 90 cents per share. There's an important distinction.
Anchorage doesn't want Affinity's board and management, debt or equity – just the child care businesses.
Anchorage's bid still needs the approval of the majority of Affinity's shareholders, so G8 still holds the best cards at the table. The company could increase its bid if it wants, reject Anchorage's proposal or simply hold onto its shares in Affinity.
If Anchorage's bid does get up, Affinity will in effect be a cash shell company – with $200 million-odd in cash and no business or assets. Affinity says it intends to return that capital to shareholders, effectively winding up the company.
But the major implication for future takeovers is that unless a bidder has a substantial stake in the business it is bidding for, it could see the assets sold out from under it and be left holding a bunch of cash. Whether those underlying assets are sold at a fair value could also be a problem. Boards and management are free to sell some or all parts of their business if they see value in doing so.
Companies are taking innovative means to get around or solve issues with takeovers and majority blocking stakes. TPG Telecom Limited (ASX: TPM) was recently thwarted trying to stop Vocus Communications Ltd (ASX: VOC) taking over Amcom Communications Ltd, despite holding a 20% stake in Amcom. As Vocus was not allowed to vote its stake in favour of the takeover, the company sold its stake to some friendly fund managers who voted in favour of the merger.
Foolish takeaway
G8 Education may still end up winning the takeover war with Anchorage thanks to its 24.5% stake – especially if it increases its bid. The company certainly knows now what price Affinity Education's board is willing to accept.
