Hugo Venter's Air on a G-string

Friday 7th December 2001

This week's bland announcement by the board of bra and knickers company Bendon that it had agreed in principle to sell the company to a management buyout team for $38.5 million has the alarming ring of a fait accompli.

If Shoeshine were a minority shareholder in Bendon he would be needing something far more substantial than the uplift provided by a padded bra to raise his spirits. He would have grave misgivings about the structure and source of the offer and the way the board of Bendon has handled it so far.

The management buyout scheme is structured to avoid much of the protection afforded to minorities by the Takeovers Code as it requires the support of only 75% of shareholders to go ahead.

The timing of the offer over the Christmas period makes it look as though directors are allowing no serious chance for a competing offer to materialise. Even though the matter will not be voted on until mid-February the effective sale date is December 30.

Any acquisition of this size by a listed trade player would be subject to 90% shareholder approval and it would be difficult for most companies to give the required notice and organise shareholder meetings over the holiday season.

The timing further advantages the management bid as it doesn't allow for another party to conduct due diligence.

Shareholders might like to ask themselves why the board hasn't built into the timetable ample room for such processes.

That the Bendon board has agreed to the offer in principle without publicly putting the company on to the market to test its true value might give some the impression that the directors are not as focused on maximising value for shareholders as they might be under the circumstances. It seems an obvious thing to do when the offer on the table is from insiders.

Bendon has just announced a September half-year loss of $1.2 million. The company blamed the deficit on start-up costs in the UK and on that perennial Bendon excuse, "poor market conditions."

Shoeshine has always been a little sceptical when incumbent management announces extraordinary losses and then offers to buy the company at rock-bottom prices. In these circu mstances shareholders need to ask what management will do for themselves that they can't or won't do for the existing owners of the business who, after all, pay their salaries.

The independent advisers reporting on the deal are largely dependent on management, which clearly has a vested interest in the valuation being as low as possible, to produce the numbers that form the basis of the valuation. The conflict of interest for management is more obvious than a visible panty line.

It's possible to speculate that the board might have got its knickers in a twist over the fear management might walk if its offer isn't accepted. That sort of threat, stated or implied, has been a frequent feature of deals of this sort.

Bendon's earnings performance has been below industry norms throughout the tenure of managing director Hugo Venter, the principal of the buyout deal. Its sharemarket performance has been lacklustre to say the least. Blaming trading conditions year after year is a lame excuse when comparable companies have managed to do significantly better in the same markets.

The company has lurched from one downwardly revised forecast to the next for many years. The latest board prophecy is that no positive contribution can be expected from the UK until 2004. The one before that was for profits from 2003.

Those more cynical than Shoeshine might wonder whether management, having observed the shareholders' funding of tens of millions of dollars of restructuring costs and millions more for UK development, now see the moment as opportune to buy the company cheaply and reap the rewards.

In buyouts overseas, managers have been known to suppress earnings and forecasts before making an offer. Some firms have then made a near-miraculous recovery.

The warm and uncontested reception this offer has received from directors might make seasoned investors a little uneasy.

This is after all the same board that spent over a year working out how to return excess cash to shareholders tax-efficiently and came up with a laborious and time-consuming scheme that involved paying the IRD approximately $7.5 million to produce $17.5 million of cash for shareholders.

Shoeshine has it on good authority something far more beneficial could have been achieved in a fraction of the time and for a fraction of the price.

The board's extraordinary decision not to pay a dividend when the company is sitting on $18.36 million of surplus cash, the low level of imputation credits notwithstanding, might cause shareholders to question its sense of priorities.

Directors themselves, despite a pretty much continuous stream of rosy-but-soon-to-be-revised-downward forecasts, are notable by their absence to any significant degree from the share register. They do not appear to have put their money where their mouths are.

AMP, which speaks for some 26% of the shares, will play a key role in whether the deal goes ahead or not.

When Shoeshine had his ear to the ground a few months ago market rumour was that it turned down a higher offer.

All eyes will be on AMP and the other institutions who between them own about 60% of the company.

Shareholders may be longing for rescue by a white knight but finding one fleet enough of foot to mount an opposing bid, in a time frame as uncomfortable as a tight g-string, may prove a tall order.

Comments from our readers

No comments yet