On Thursday, the DUET Group (ASX: DUE) share price closed at $2.79 per stapled security, down an implied 8.6% to its takeover offer of $3.03 per security.
The flailing share price comes despite the board of DUET Group reporting it had received court approval for the scheme late last week. The obvious reason which could explain the differential of its current share price from the offer price is the lack of certainty around approval by the Treasurer. This follows his ongoing consultation with the Foreign Investment Review Board (FIRB).
Here's what it all means.
DUET takeover
DUET Group is subject to a $7.4 billion full takeover bid from Hong Kong-based utilities giant Cheung Kong Infrastructure (CKI).
Under the terms of the takeover offer, DUET Group shareholders will receive $3 per stapled security plus a special distribution of 3 cents (likely to be fully-franked).
The DUET Group board has recommended shareholders approve the takeover as it "fully recognises the value and future growth platform" of DUET Group.
Accordingly, the takeover is likely to proceed if all approvals are received.
FIRB approval
Last week, the board of DUET Group reported that the Supreme Court of NSW had approved the scheme of implementation and that the group had lodged its scheme booklet with ASIC for approval (a regulatory requirement).
However, the takeover offer's success remains on edge given Federal Treasurer Scott Morrison is yet to provide formal takeover approval following consultation with the FIRB.
FIRB process
By way of background, any large scale investment in Australia requires Treasurer approval.
As was seen with the NSW government's privatisation of AusGrid and inbound takeover offers for Asciano Limited (ASX: AIO) and Graincorp Ltd (ASX: GNC), the Treasurer has the power to block the acquisition if he believes the foreign purchaser's acquisition of the asset or business poses a risk to Australia's national security interest. The FIRB can guide the Treasurer on these risks.
CKI background
Relevantly for DUET Group, CKI has previously been knocked back from acquiring a stake in AusGrid on security concerns. This possibly explains the market's pessimism on the success of the current takeover offer.
Although commentary from the Treasurer suggests he's "confident" the acquisition will be allowed, investors of DUET Group bear substantial downside risk in the event the bid is blocked.
Based on DUET Group's 2017 half-year results, I do not believe the current share price for the owner of Multinet Gas and Energy Developments (amongst other investments) is justified.
Financials
The group reported underlying net profit after tax fell 0.8% to $98.1 million, despite reporting a 5.3% increase to revenues. Even more concerning was its reported 13.3% drop in earnings per security (to 9.58 cents), implying Thursday's closing price of $2.79 places it on a lofty price-earnings of 29x.
Whilst some investors may see the current discount to DUET Group's takeover offer as sufficient enough reason to buy the stock, I for one, will not be buying its shares at current prices given its lacklustre results.
Foolish takeway
Admittedly, this may cause me to lose out on a quick 9% return if all goes well. However, given long-term investment is about buying sound companies at the right price, I believe the downside risks at DUET Group's current share price (i.e., if the takeover offer fails) far outweigh the measly 9% potential return on offer.
Accordingly, I would rather invest in other promising businesses which offer solid growth prospects and stable dividends, albeit at lower rates of returns (initially).
