In brief

  • In its hostile bid for Alesco, Dulux announced a proposed ‘best and final’ offer, comprising $2.05 cash and franking credits of up to $0.18 per share. Such franking credits would require the declaration of a dividend of $0.42 per share – thus causing the $2.05 offer price to comprise of $1.63 from Dulux and $0.42 from Alesco in the form of a dividend. Dulux presented this as a $2.23 per share headline offer price.
  • Following negotiations, Alesco announced that it could support a $2.05 per share offer, comprising $1.30 from Dulux and $0.75 from Alesco in the form of a dividend. This would see total franking credits of $0.32 per share (instead of $0.18 under the Dulux proposal).
  • ASIC stated that it would consider Alesco’s proposal a breach of its ‘truth in takeovers’ policy as Dulux had already announced its ‘best and final’ offer.
  • Bidders should not include the value of franking credits in their headline offer price. Any franking credits should be the subject of a separate qualified statement which makes it clear that not all shareholders will capture the full benefit and value of the franking credits.

Background

On 1 May 2012, DuluxGroup Limited (Dulux) announced a takeover bid for Alesco Corporation Limited (Alesco) at $2.00 per Alesco share. Dulux’s offer terms provided that Dulux was entitled to deduct from the cash offer price the amount of any dividends, together with the value of the franking credits (if any) attached to any such dividends, which were not received by Dulux.

Dulux’s 23 July proposal

On 23 July 2012, Dulux announced that it was increasing its offer to $2.05 per share. In addition, Dulux said it would allow Alesco shareholders to retain up to $0.18 per share in franking credits without deducting this amount from the offer price.

In its announcement Dulux noted that, in order for shareholders to receive $0.18 per share in franking credits, Alesco’s board would need to declare a fully franked dividend of $0.42 per share. The amount of this dividend would be deducted from Dulux’s cash offer price of $2.05. As such, Alesco shareholders would receive $1.63 per share from Dulux and $0.42 per share from Alesco in the form of a fully franked dividend.

Whether shareholders could utilise the franking credits would obviously depend on their individual tax circumstances.

Dulux presented this revised offer as having a $2.23 per share headline price. Given the difficulty in valuing franking credits, this $2.23 figure was essentially just a notional figure.  

Dulux also declared that this revised offer was its ‘best and final’ offer, subject to no competing proposal emerging.

On 23 July 2012, the Alesco board rejected the revised offer as ‘materially inadequate’.

The Takeovers Panel proceedings

The disclosures by Dulux and Alesco relating to the description and presentation of the revised offer were the subject of Takeovers Panel proceedings.

The Takeovers Panel stated that Dulux’s stated headline offer price should not have incorporated the value of the franking credits and that the appropriate way to describe, in an announcement, an offer comprising of a cash sum from the bidder and a cash dividend from the target is simply to add those two components together.

The Takeovers Panel also stated that, to the extent that any reference is made in the announcement to the potential value of franking credits, this should be done by way of a separate statement which makes it clear that the value from the franking credits may only be realised by certain shareholders.

Alesco’s 15 August proposal

During the course of the Takeovers Panel proceedings, Alesco and Dulux continued to negotiate with a view to seeing whether a recommended bid could be agreed.

During the proceedings, ASIC said that the market expectation from Dulux’s 23 July 2012 announcement was that, if Alesco declared a franked dividend higher than $0.42 per share, Dulux would enforce its right to deduct from the cash offer price the value of franking credits in excess of $0.18 per share. In other words, ASIC was of the view that its ‘truth in takeovers’ policy applied to Dulux’s announcement.

On 15 August 2012, Alesco announced that the Alesco board could support a proposal which delivered shareholders a cash offer of $2.05 per share, comprising $1.30 per share from Dulux and $0.75 per share from Alesco in the form of fully franked dividends. (Alesco noted that franking credits of $0.32 per share would be attached to those dividends). A dividend of this size would mean that shareholders who could utilise the franking credits would notionally receive a total value of $2.37 per share (which exceeded the notional figure of $2.23 announced by Dulux on 23 July 2012).

There is no difference in the aggregate actual cash amounts payable under Dulux’s 23 July proposal and Alesco’s 15 August proposal. The only difference is essentially just $0.14 per share in franking credits.

ASIC has made clear to Dulux and Alesco its strong opposition to Alesco’s 15 August proposal as it would involve a departure from Dulux’s ‘best and final’ offer on 23 July 2012. This would, in ASIC’s view, contravene ASIC’s ‘truth in takeovers’ policy.

Although this issue was noted by the Takeovers Panel in its reasons, the Takeovers Panel stated that it did not need to decide whether Alesco’s proposal did, in fact, breach the ‘truth in takeovers’ policy as negotiations between Dulux and Alesco were still continuing at the time the Takeovers Panel proceedings concluded.

Takeovers Panel process to resolve the matter

On 28 August 2012, Dulux announced it was willing to engage in ‘a Takeovers Panel process’ to finally determine the matter but only on the condition that, in the event that Takeovers Panel proceedings determine that Alesco’s 15 August proposal cannot be implemented (or cannot be implemented without significant financial consequences), then the Alesco board will unanimously recommend Dulux’s best and final offer of $2.05 per share, comprising $1.63 from Dulux and a total of $0.42 from Alesco in the form of dividends.

In the same announcement, Dulux advised that if Alesco did not confirm to Dulux by 5.00pm on 29 August 2012 that it agreed to engage in the Takeovers Panel process on the above terms, then Dulux considered that discussions in relation to the Alesco proposal would be at an end.

On 29 August 2012, Alesco responded to Dulux’s announcement. Alesco confirmed its rejection of Dulux’s 23 July proposal and again called upon Dulux to support its 15 August proposal, which Alesco stated ‘is the only pathway that the Alesco board is prepared to recommend to its shareholders’. 

On 29 August 2012, Alesco made an application to the Takeovers Panel seeking, among other things, an order that the ‘truth in takeovers’ policy should not apply to prevent the implementation of Alesco’s 15 August proposal.

Commentary

This is an interesting development on the ‘truth in takeovers’ front. In 2007, as part of the CEMEX/Rinker takeover bid, ASIC and the Takeovers Panel made it clear that they regarded a bidder’s decision to allow target shareholders to retain the cash amount of a dividend following a ‘last and final’ statement to breach the ‘truth in takeovers’ policy.

However, we have not previously seen ASIC or the Takeovers Panel seek to apply the policy in circumstances where shareholders are proposed to be allowed to retain the value of non-cash items, such as franking credits which, unlike cash, scrip or dividends, do not directly form part of the consideration received by target shareholders.

ASIC’s ‘truth in takeovers’ policy relevantly states:

‘Market participants that make a last and final statement should be held to it, as with a promise. … A bidder cannot depart from a no increase statement, even if it compensates those who have sold on-market.’

The Dulux/Alesco situation begs the question as to what the Takeovers Panel will do to determine this matter. For instance, might the Takeovers Panel say that, if Dulux and Alesco were to press ahead with Alesco’s 15 August proposal, it would:

  • simply make another compensation order as it did in the CEMEX/Rinker (2007) and FLS/Ludowici (2012) transactions – thus enabling Alesco shareholders to receive additional value, albeit at the expense of the market integrity principle, or 
  • actually uphold the letter of the ‘truth in takeovers’ policy and prevent Dulux from departing from its best and final statement – thus depriving Alesco shareholders of additional value but upholding the market integrity principle?

Another possibility is that the Takeovers Panel may conclude that:

  • the value of franking credits is outside the ‘truth in takeovers’ policy altogether (particularly given the difficulty in valuing, and the inability of many shareholders to use, franking credits), and
  • the only thing that was ‘best and final’ about Dulux’s 23 July proposal was that the maximum aggregate cash amount receivable by Alesco shareholders from Dulux and Alesco would be $2.05 per share.

In any event, the market will certainly be watching how the Dulux/Alesco bid unfolds with great interest. We will provide a further update in one of our upcoming newsletters.