HomeBusiness DigestKingdom 'over-pricing' worries Old Mutual

Kingdom ‘over-pricing’ worries Old Mutual

Shakeman Mugari

THAT the plan to create a conglomerate from the merger of Meikles, Tanganda and Kingdom is facing stiff resistance from one influential shareholder is no

t anything new.

The corporate world is littered with examples of deals that have been threatened by strong shareholder resistance. In some cases shareholder activism has led to a total collapse of the deals while in some instances a better value has been achieved.

In the end it boils down to a compromise by the parties involved.

In this case, Old Mutual which holds the key to the deal by virtue of its 13,10% of Meikles has protested at the valuation of Kingdom Financial Holdings (Kingdom). There is a huge difference between what Kingdom believes it is worth and what Old Mutual says it is. Old Mutual fears that Meikles could be buying an overpriced company.

According to the prospectus of the deal Kingdom is valued at about two times less than Meikles. Old Mutual however believes that Meikles should be 12 times larger than Kingdom on the bottom end and 22 times on the top end. Old Mutual also believes that Kingdom’s capital does not support the valuation used in the transaction.

One thing that could comfort Kingdom shareholders is that Old Mutual has not rejected the deal completely. Old Mutual supports the concept in principle but they are worried about the valuation of Kingdom which they believe has been over-priced in comparison to its peers.

It seems they will support the deal if there is a “fair price”. That “fair price’” will obviously come out of a compromise by both parties. Given the differences between the respective valuations it would seem the parties will need to make huge compromises if the deal is to pull through. Analysts say finding a common ground might be difficult but not impossible.

Kingdom is understood to have already started working on a counter plan in case the deal collapses. “While we have every faith that the deal will be consummated on the basis of its merits, any business worth its salt will naturally have a strategic fallback position; possibly another means of getting to the same end! At this juncture it is premature to moot these options,” said Nigel Chanakira last week.

Sources close to Chanakira say he insists that “there are many ways to skin a cat”.

The other comforting aspect is that this is not the only deal in the corporate world that has stumbled.

Many more and even bigger deals have staggered and even failed altogether.

The market still vividly remembers TA’s proposed deal with Intermarket which died a natural death. There were other deals which might not be of the same magnitude as the Kingdom-Meikles one. These include the Innscor/CFI and Radar’s attempt at delisting.

Then there is Colcom’s proposed takeover of Cattle Company of Zimbabwe which fell through after the Competition and Tariff Commission withheld their approval.

The international scene has also witnessed some troubled deals. Old Mutual plc might have successfully taken over Swedish insurer, Skandia, but the deal had problems in its formative stages.

Skandia’s board of directors had initially rejected Old Mutual’s offer of $6bn saying the bid grossly undervalued its market position and growth potential. Eight of Skandia’s 11 board members rejected the offer. The board was joined by the management of Skandia which immediately went all out to lobby against the deal.

Old Mutual however stuck to its offer price but compromised slightly by extending the acceptance period by three weeks.

In the end Old Mutual successfully took over Skandia whose biggest market is the United Kingdom.

Some shareholders can fight against a deal until the company pulls out. When Barclays announced a 67,5 billion euros bid for Netherlands’s ABN Amro its shareholders protested that the deal would not bring much value to the group.

A fund manager whose company controlled 1% of Barclays said: “The area that worries me most is Barclays effectively turning itself more into an international, diversified banking group like Royal Bank of Scotland or Citigroup. Rightly or wrongly, these are not the flavour of the month with the equity markets. Such a combined entity would more likely attract a downward rating rather than an upward re-rating.”

Others were outrightly hostile to the proposed deal. “Our strong preference, given the history of Anglo-Dutch mergers that haven’t been good for shareholders, would be that this kind of dual management structure be avoided,” said another shareholder who controlled just less than 1% of Barclays. “We have to be confident that Barclay’s management would have full control to restructure assets and run the business as they choose.”

Perhaps under pressure from shareholders Barclays pulled out of the race in late October paving way for a consortium led by the Royal Bank of Scotland to snap up the bank. Royal Bank of Scotland and its bidding partners — Fortis (a Belgian-Dutch bank) and Spain’s banking giant Banco Santander Central Hispano eventually paid 72 billion euros ($101 billion) for ABN Amro.

South Africa’s fixed telephone company Telkom last month announced that talks to sell its stake in mobile operator Vodacom to venture partner Vodafone Group plc had collapsed after it failed to agree a merger of its fixed-line assets with MTN Group Ltd.

Telkom had been discussing the combination of some or all of its fixed-line business with MTN.

The company said the parties were unable to seal the transaction in the best interests of their respective shareholders.

According to the deal Vodafone Group plc might have increased its 50% stake in Vodacom (SA).

The deal was however subject to an agreement being reached with MTN. One salient point about all these deals is that shareholders have started taking a closer look at their investment. Zimbabwe’s corporates need such shareholder participation if they are going to perform well.

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