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Ex­pres­sions of in­ter­est and un­so­licited pro­pos­als

This month’s cover on buyouts co­in­cided with ex­tra­or­di­nary events in the JSE’s pri­vate ed­u­ca­tion sec­tor, where feisty PSG-con­trolled up­start Curro made a grab for its more eru­dite coun­ter­part, AdvTech.

The sub­se­quent events are in­struc­tive in the buy­out process, where share­hold­ers are not usu­ally privy to what goes on be­hind board­room doors.

At the time of writ­ing it looked as if hos­til­i­ties might en­sue, but mat­ters may have changed dra­mat­i­cally by the time this ed­i­to­rial is read.

Still, one of the in­trigu­ing as­pects of the in­ter­ac­tion be­tween Curro and its some­what re­luc­tant quarry is the re­spec­tive boards’ per­cep­tions of what con­sti­tutes a “firm ex­pres­sion of in­ter­est” and what jus­ti­fies tabling an of­fer to share­hold­ers.

From the out­set Curro and AdvTech clearly held dif­fer­ent views on the na­ture of the en­gage­ment. Curro is­sued a cau­tion­ary no­tice in mid-June. AdvTech opted to warn its share­hold­ers of an “un­so­licited pro­posal from a third party which it is obliged to con­sider” only on June 25.

Last week, mar­ket watch­ers were faced with a cu­ri­ous sit­u­a­tion. AdvTech — its board firmly re­ject­ing Curro’s ad­vances — with­drew its cau­tion­ary, while Curro — clearly not giv­ing up on snatch­ing ei­ther neg­a­tive con­trol or all of AdvTech — said its cau­tion­ary was still very much in force.

Adding to the gen­eral in­trigue is that Curro seems to have the sup­port of Coro­na­tion Fund Man­agers and Kag­iso As­set Man­age­ment, which hold around 35% of AdvTech’s is­sued shares. In a move not typ­i­cal of an in­vest­ment in­sti­tu­tion, Kag­iso openly ques­tioned the lack of trans­parency in the AdvTech board’s de­ci­sion to with­draw its cau­tion­ary. The board’s de­ci­sion cited the best in­ter­ests of the com­pany, but Kag­iso ar­gued that the de­ci­sion ef­fec­tively marginalised the view of AdvTech’s largest share­hold­ers.

The most con­tentious is­sue is that Curro seems to openly con­tra­dict AdvTech’s opin­ion that the pro­posed of­fer was not backed by a “firm in­ten­tion”.

AdvTech talks of a “con­di­tional pro­posal” from Curro. AdvTech CEO Frank Thompson main­tained the “draft pro­posal re­ceived” was not a firm of­fer. He added that the ap­proach was “hedged” with a num­ber of un­ac­cept­able pre­con­di­tions like the fur­nish­ing of con­fi­den­tial in­for­ma­tion to a com­peti­tor.

Curro, on the other hand, dis­closed that it had been in dis­cus­sions with AdvTech since April, and had moved to a point where dis­cus­sions led to a “firm ex­pres­sion of in­ter­est”. This firm ex­pres­sion of in­ter­est, ac­cord­ing to Curro, was sub­mit­ted to the AdvTech’s board rep­re­sen­ta­tives on April 29 — con­tain­ing, crit­i­cally, not only an of­fer price but also the terms con­tem­plated.

By mid-May, it ap­pears, rep­re­sen­ta­tives of the two com­pa­nies had met to dis­cuss the pro­posed of­fer and a po­ten­tial in­crease in the of­fer price.

Clearly a lot of wa­ter has flowed un­der the bridge. AdvTech share­hold­ers, whether they welcome Curro’s ad­vance or not, might rightly feel miffed that their board has not tested the pre­mium priced of­fer (which sur­pris­ingly con­tains a cash set­tle­ment por­tion) with them.

It’s not un­com­mon for the board to dif­fer with its share­hold­ing body on the mer­its of an of­fer. This may be the case where ex­ec­u­tives of an un­der­per­form­ing com­pany want to buy time for turn­around ef­forts (not to men­tion keep their jobs and board seats), when share­hold­ers would welcome a chance to exit.

AdvTech share­hold­ers, whether they welcome Curro’s ad­vance or not, might rightly feel miffed that their board has not tested the pre­mium priced of­fer

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