Link Administration – a merger arbitrager’s worst nightmare
Price at posting: $3.84
Link Administration Holdings Limited (ASX:LNK)
As winter temperatures dip lower, shops all over Australia are placing a sign on the door which reads ‘please keep door closed’ in a vain attempt to keep the heat in. Most customers oblige but there is one man that I assume refuses to do so. He is Michael Carapiet, the Chairman of LNK’s Board. I suspect he enters the store leaving the door wide open. As far as I can tell, he does not close things. Not doors and certainly not billion-dollar deals. He just lets the heat disappear.
LNK provides record keeping and IT solutions to the superannuation industry. LNK also holds a 43% stake in conveyancing software provider, PEXA (ASX:PXA).
On 22 December 2021, LNK announced that a scheme of arrangement had been entered into with Dye & Durham where LNK would be acquired at a price of $5.50 a share representing a 15% premium to the previous day’s closing price. Independent expert Deloitte subsequently valued LNK at $4.81 to $5.97 a share.
When a takeover is agreed, the target company’s share price normally moves to within 5-15% of the offer price. The spread between the target firm share price after the announcement relative to the offer price can be interpreted as a measure of investor optimism regarding deal outcomes. The wider the spread, the lower the chance investors assign to a deal completing.
In this case, the LNK share price closed at $5.51 on the day of the deal’s announcement indicating the market’s near certainty that the deal would close and some hopefulness that the final offer price may be even higher.
As the date has drawn nearer to the deal’s 30 September 2022 drop-dead date though, the share price of LNK has tracked lower reaching a nadir of $3.25 in June. If the deal were to go through at the announced price, this would have represented a 69% premium. Investors were clearly discounting any possibility of the deal being completed at the $5.50 price.
The deal is a difficult one to get across the line with approval from regulators in 10 separate jurisdictions required. The ACCC have already expressed concerns. Dye & Durham is also financing a large portion of the deal using debt at a time when interest rates are rising rapidly. Dye & Durham’s own share price has also cratered since it made the offer.
The lack of faith in the deal could also be because Carapiet has earned a reputation for repelling suitors over the last 20 months. The Board has previously rejected a $5.40 a share offer from Carlyle and Pacific Equity Partners and a $5.65 a share offer from SS&C Technology Holdings. The Board have also failed to sell LNK’s Banking and Credit Management Business which sits outside the $5.50 offer and so would be a free hit for shareholders.
No one is suggesting that any offer for LNK should be accepted just for the sake of selling the company but shareholders are right to wonder how long it may take for the company to deliver more value than these offers could have provided.
LNK is not the only target company whose current share price is trading far below the offer price. Twitter’s share price closed at US$38.38 on Tuesday, far below the $54.20 a share offer Elon Musk made for the company on 25 April.
While Elon Musk has been actively threatening to withdraw the offer or complete the takeover at a lower price, Dye & Durham had remained silent. That was until last week when LNK announced Dye & Durham’s proposed revisions to the scheme implementation deed which among other things would see the bid lowered to $4.30 a share, far below the price of bids previously made for LNK.
For its part, the Board indicated on Monday that the $4.30 a share offer could not be recommended. All eyes are currently on Dye & Durham to see whether it may raise the offer.
Betting on mergers
While all this M&A activity with no result has no doubt been frustrating for long term shareholders, merger arbitrage funds have also been bloodied.
Merger arbitrage is the practice of purchasing shares in a target firm during the period between the deal’s announcement and its completion. By buying the target company at the announcement of the deal, the arbitrager can lock in on average a 5-15% return as long as the deal goes through. The time period between deal announcement and execution is typically around 90 days and so returns on an annualised basis are much higher.
Not every merger is completed though and especially not if LNK is involved. It is understood that the dip leading to the $3.25 bottom in the share price was caused by merger arbitrage funds cutting their losses.
The failure of the Board to capitalise on the flurry of interest in LNK and its component parts or to maximise shareholder value in other ways is perhaps one reason that a first strike against the company’s remuneration report was recorded at the last AGM.
A second strike against remuneration could mean a board spill. If a spill resolution is passed at the AGM, a meeting to elect directors would have to be held within 90 days. If that happens, then Michael Carapiet and the rest of the Board may be looking for new roles. Perhaps a convenience store would fit better with their ethos?