Terry McCrann: Zero interest rates have reset takeover offers
Dozy company boards need to wake up and realise zero global interest rates and multi-trillion dollar money printing have reset how takeover offers need to be valued, writes Terry McCrann.
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Dozy company boards and their financial advisers – and indeed investment managers – need to wake up to the investment reality of zero global interest rates and multi-trillion dollar money printing by central banks.
They need to fundamentally reassess – upward – their conventional understanding of asset and income value.
Takeover bids that offered a good price when official interest rates were five per cent – a time, now more than 10 years in the past – are actually seriously undervalue in today’s world.
There are a number of aspects to all this, but they all join at one destination – anyone owning an asset, from property to especially shares, should think very, very carefully about swapping it for cash.
In doing so, you give up an asset that has both income and all-but guaranteed – by the very excess liquidity and zero rates – capital appreciation; you acquire an asset which in direct contrast has zero income and zero capital growth.
Further, more broadly, you then join the trillions of dollars of similar cash around the world desperately looking for a return – like you would get from the very asset you have just surrendered.
In short, there is no way – NO way – you should consider selling ANY share at a price other than at what is clearly a super-premium.
This goes double for shares in companies which have premium assets or strong market positions or income streams. It goes double again for those with monopoly or oligopoly positions or strong utility-like revenues.
Both the $10bn ‘family’ bid for Coca-Cola Amatil and the very different – in form, but not in idea and intent and indeed hope – $3 billion bid for investment services group Link Administration show precisely these flavours.
Both would have been accurately described as opportunistic in more ‘normal’ times; they are even more precisely opportunistically tuned to these times of ‘free’ money and the desperate search for return.
The bid for CCA from its British associate SEEMS like an attractive offer. The board and its financial advisers have recommended shareholders accept it when it is put to them to vote on.
Now yes, the CCA board got the offer up from the first proposal. The price is a significant premium on recent market and 17 times last year’s EBIT (pre-tax profit).
But those metrics reflect a pre-zero rates, pre-excess liquidity mindset. It’s a mindset that fails to understand that’s precisely why the British company moved, and moved now with the added opportunity created by the virus turmoil impact on CCA’s immediate revenues and profits.
The – entirely – opportunistic nature of the Link bid should be even more obvious. It’s coming from a combination of private equity players; and on what planet, in what century, have PE bidders EVER offered a generous price?
Perhaps the guys down at Link’s biggest shareholder Perpetual could provide the answer. After all they rushed to accept $5.20 from the PE duo Carlyle and PEP (Pacific Equity Partners) – and they are ‘re-rushing’ to accept the still pathetically inadequately increased $5.40.
If they are prepared to offer $5.40, as a reasonable rule of thumb, they would be REALLY prepared to offer $6. As a further rule of thumb that would mean $6.50 would be getting into the real ballpark.
But again, even all that is judged on the ‘old reality’. Even if you could get $6.50, would it make sense to give up Link’s income and capital growth future for zero-growth, zero-income cash?
It sure as hell makes NO sense to give it up for the $5.40 at which Carlyle and PEP are trying to steal the company.
A big part of their shtick is to offer Link shareholders a share in an asset and its growth and income future – which they already own!
Instead of taking all cash for their Link shares, they would be able to opt for some of it to be paid in shares that Link owns in the PEXA electronic conveyancing business.
Have we got an offer for you – we’ll give you shares you already own! Plus, we will ‘value them’ at a price which REDUCES the value of everything else in Link.
Coming from ANY bidder, a half-intelligent investor would be wary; coming from ultra-greedy PE you sorta should know that this is an offer one cannot do anything other than refuse.
But Perpetual has fallen for it hook, line and sinker. As I noted when the PE vultures launched, Perpetual’s embarrassing enthusiasm for the $5.20 was an invitation to anyone who had money with it to reassess. As a matter of urgency.
Originally published as Terry McCrann: Zero interest rates have reset takeover offers