The IPH Ltd (ASX: IPH) share price has fallen this morning after the Xenith IP Group Ltd (ASX: XIP) rejected the company's unsolicited takeover proposal as it tries to scupper a planned merger between Xenith and QANTM Intellectual Property Limited (ASX: QIP).
What was the update?
The Xenith Board of Directors announced that after careful consideration, it had concluded that the IPH proposal put forward by the company on 12 March 2019 was not a Superior Proposal as defined under the Scheme Implementation Deed for the Xenith merger with QANTM.
The main reasons for the Board's decision are summarised below:
- Structure & benefits to Xenith shareholders: The IPH Proposal is a fundamentally different transaction from the proposed Xenith/QANTM merger, which results in shared future control with Xenith shareholders holding 45% of the merged entity and benefitting from the 45% of earnings accretion expected to result from the merger. Xenith shareholders would also have half the board representation of the merger Xenith/QANTM entity versus IPH's outright control transaction in which Xenith shareholders would own less than 5% of the merged entity.
- Value: The IPH proposal was framed to be approximately equivalent to the implied value to Xenith shareholders arising from the Xenith/QANTM merger without an adequate control premium for the outright control proposed.
- Execution risk: The Board determined that the IPH proposal had significantly higher execution risk (i.e. ACCC clearance) than the Xenith/QANTM deal given IPH has a significantly higher market share than either entity and the merger group would be by far the largest market player.
- Employee shareholder approval: Xenith employees hold over 40% of outstanding Xenith shares and the Board is unsure if the IPH proposal would receive approval from this voting group.
- Tax implications: The significant cash component involved in the IPH proposal is unlikely to attract capital gains tax (CGT) rollover relief normally available from a pure scrip (i.e. shares for shares) consideration as proposed in the Xenith/QANTM merger.
The outcome
The ACCC ruling on the Xenith/QANTM merger is expected to land on 21 March 2019, well before the ACCC ruling on IPH's acquisition of 19.99% of Xenith shares and the IPH proposal in May 2019.
IPH made waves last week when it made its unsolicited proposal, with QANTM's initial response similarly citing an underestimate of the implied QANTM/Xenith merger consideration (based on IPH's proposed $1.97 per Xenith share) and higher execution risk.
The IPH share price has climbed over 25% since the start of the year and at $6.82 per share at the time of writing is near its 52-week high valuation of $6.89 per share. The stock offers a decent 3.37% dividend yield, franked to 50%, to go with a $1.34 billion market capitalisation. I'm personally not bullish on the intellectual property (IP) sector but believe that IPH has plenty of room still to grow in the sector despite today's setback.
For those who are similarly not sold on IPH, I'd suggest these top growth shares as a growth alternative to add to your portfolio.
