The Grantchester bid shows company valuation is a very black art, says Alex Catalano
Has Hammerson’s 250p a share offer for Grantchester put paid to bargain MBOs? Over the past couple of years, we’ve seen an unprecedented shift of quoted companies being taken private.
Their managements either got fed up with the low value the stock market was putting on their shares, or decided to cash in on bargain prices and buy the company.
In fact, most of the companies have been bought out at less than, or close to, their break-up value – the so-called triple net asset value. It’s the baseline, break-up value of a company: the best guess at current asset value minus liabilities – that is, capital gains tax payable if the properties were sold, and debt (which now includes the third element of the netting, the so-called FRS 13 adjustment for the market value of the debt).
This triple net pricing formula has taken hold of the sector quite recently. Takeovers in the 1970s, 80s, and 90s didn’t have the FRS 13 debt adjustment, and, more crucially, you didn’t knock off 100% of CGT, either.
The rule of thumb back then was that you took into account perhaps 50% of the potential CGT. Offers were couched in terms of discount to net asset value, premium to share price.
Critics of the triple net formula say it values them too cheaply. As Chris Nicolle and Hugo Lewellyn argued in Estates Gazette a year ago (1 September 2001, p39), directors shouldn’t be drawn into the triple-net way of thinking about value. They should assume a bidder is taking the company as a going concern.
Knocking off 100% of CGT is wrong in principle, and even if a break-up is planned, disposals are usually phased, and there are methods of mitigating CGT – the full whack is very rarely paid.
Break-up value
No one has forced companies to accept offers based on this formula – they can hold out for more, or invite other offers. But when the quoted property sector was deeply out of favour with investors in early 2000, companies such as Allied London and Scottish Metropolitan went out at prices around 13% below break-up value.
As the sector recovered some of its appeal, this discount has been narrowing. Saville Gordon recently went out at a 2.8% premium to triple net and the management’s 218p offer for Grantchester’s was at a 6.3% premium.
But – and here’s the rub – most, though not all, of these deals have been pitched by the managements themselves. With MBOs, it’s rare for someone else to step in with a rival bid. They might be interested, but they figure it’s not worth the expense and hassle, given that existing management usually has the best grasp of where both the bodies and opportunities are buried. This means shareholders mostly get only one choice: the management’s offer or nothing.
So it says something about the triple net pricing levels that Stephen Vernon’s MBO for Green Property wasn’t exactly uncontested. Alternative offers from serious players such as Lehman Brothers/Whitehall Fund and Deutsche Bank/Treasury Holdings also surfaced and were considered.
And now Grantchester’s MBO offer has turned out to be a triple net too far – 32p a share (ie 13%) too cheap. Hammerson may have been the first to pounce, but there were others about to do so.
Delicate job
These latest, contested MBOs also say something about the bid process. With MBOs, it’s up to the independent directors to get the best deal for shareholders. If they don’t think an offer is good enough, they don’t have to go for it – and it’s their responsibility to see if there’s a better one out there. And since they’re dealing with fellow directors, all the more reason to handle the offer/bid process with extreme care. It’s a delicate job, needing experience and, well, independence.
Grantchester’s shareholders now have a better offer, but no thanks to the independent directors, who recommended the MBO.
If nothing else, this experience shows that independent directors shouldn’t be taking triple net as the touchstone for assessing price and that they should be pretty careful to make sure they’ve canvassed alternatives properly before recommending MBOs.
Shareholders should be also given the right facts to make an informed judgment. Among the various criticisms of the Grantchester recommended offer was a lack of clarity over possible tax losses in the company.
And let’s face it, valuing companies is a black art. All sorts of calculations can be argued over, depending on the nature of the business: price/earnings ratios, net asset values, triple net asset values, etc. The small punter is relying on the directors’ judgment in all this.
But professional shareholders, like institutions, have only themselves to blame if they sell too cheaply. They, more than the small punter, should have some grasp of how to value firms. After all, it’s their business.
