In the world of Takeover Law, a "firm intention letter" is the document that kicks off the process in earnest. Until such a document exists, the deal is nothing more than a potential transaction that could fall over at any point.
After the firm intention announcement goes out, the deal is in the hands of shareholders and regulators. At that stage, there's no going back for the buyer except in very specific circumstances, like a material adverse change clause that allows a company to get out of a deal in the case of extreme events.
Take-privates have been the flavour of the past couple of years on the JSE. Companies have struggled to trade at high multiples, which makes them sitting ducks for opportunistic buyers. Long4Life (JO:L4LJ) is just the latest company in this saga.
An offer has been made to acquire all the Long4Life issued shares at a price of R6.20 per share, which is higher than the price has been at any stage since 2018. As of 31 August 2021, the financials reflected a net asset value per share of R7.27, so the acquirer has made an offer at a discount of nearly 15% to what the directors have been telling the market that the company is worth.
The acquirer is Old Mutual (LON:OMU) Private Equity (OMPE), which has executed 31 deals since 2000 and 19 exits. The fund claims to have one of the best private equity track records in South Africa over a 20-year period. Notably, the portfolio companies of the fund benefit from 37% flow-through of B-BBEE credentials.
The original proposal submitted by OMPE was for only R5.80 per share. Subsequent negotiations with Long4Life increased this number to R6.20 per share.PSG has acted as independent expert and has already provided a report to the independent board that the offer is fair and reasonable.
To give an idea of how profitable a take-out basket can be for investors, the offer is represents a 59% premium to the price on 19 April, the day before Long4Life informed the market that a strategic review of the business was underway. There was still plenty of time to get in for those who were happy to stomach the risk, as the offer is a 39.3% premium to the price on 13 October, just before interim results were released and shareholders were informed that an unsolicited expression of interest had been received.
There's an important condition in the announcement related to the Competition Commission. If any conditions imposed by the authorities create costs of at least 5% of EBITDA or if Long4Life needs to sell companies which contribute more than 5% of EBITDA, then OMPE can walk away.
There are many other conditions related to the usual regulatory approvals and other legal concepts. A further commercial condition is that the balance sheet at the last month-end before the deal must reflect working capital of at least R591 million, normalised capital expenditure for the year ended February 2022 of not less than R123.4 million, unencumbered cash of at least R750 million and the ownership of a distribution centre in the group valued at no less than R70 million. These conditions are there to protect OMPE from bad behaviour where companies strip out cash and assets and cut back on capital expenditure ahead of a deal closing.T
The working capital conditions also allow for an effective change to the deal price if the company performance is so poor that it eats into its balance sheet between now and the deal closing.
Interestingly, holders of only 14.11% of shares in issue have provided irrevocable undertakings. That's a long way off the level required to approve this scheme of arrangement, so the shareholder vote isn't a foregone conclusion by any means.
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