Europe's Bitterest Takeover Battle

If Sika's board and the Burkard family put aside their enmity, a revised Saint-Gobain deal might work for everybody

The main players in Europe's most hostile bid situation are digging in. Saint-Gobain said last week that its bitterly contested plan to take control of building materials rival Sika was still a strategic priority -- even though the Swiss target's board and minority shareholders are prepared for a multi-year fight. There are peaceful ways out of the situation, if only emotion wasn't involved.

Sika is controlled by Switzerland's Burkard family through a 16 percent shareholding that carries super-voting rights. The family cut a deal in December 2014 to sell this stake to Paris-based Saint-Gobain for 2.75 billion Swiss francs ($2.86 billion). This was done in secret, despite the family being on Sika's board.

Sika's other shareholders are rightly livid. They get zero compensation for the change of control, despite provisions in the company's statutes that seemed to protect them. They also face being stuck in a company controlled by a competitor, which would have a block on future M&A whether as buyer or seller.

Friend or Foe

Sika stock has recovered after tanking on fears that Saint Gobain taking control would be a bad thing

Source: Bloomberg

The Sika board is furious too and has promised to quit if the deal goes through. It has succeeded in halting the transaction for now by curbing the Burkards' voting power, using certain clauses in Sika's company rules. This move is now subject to litigation that could last years.

Suppose a judge restores the Burkard's voting rights and the transaction can proceed, who wins? The Burkards achieve their aim of finding a new industrial owner for the stake, but at the expense of becoming an enemy of a company founded by their ancestors. Not a great legacy. As for Saint-Gobain, the deal doesn't look so good anymore. Sika minorities are getting a special committee to oversee how Saint-Gobain runs the company -- a thorn in its side.

If only a small number of Sika's top brass carry out their threat to quit, the company's performance will surely be at risk. Saint-Gobain will be tying up 2.5 billion euros of capital effectively just to receive dividends worth about 30 million euros on its stake, a meager 1.1 percent return.

Sika and some analysts want Saint-Gobain to walk away. However, Saint-Gobain owes it to its own shareholders to make the best of its hand. One option would be to re-work the deal as a takeover offer to the entire Sika register. After all, Saint-Gobain identified future savings and revenue gains of about 180 million euros from controlling Sika.

While these will be hard to realize, they could help fund a fair bid. They're worth nearly 3 billion Swiss francs when valued using Sika's 22 times earnings multiple and 24 percent tax rate. Saint-Gobain could perhaps find extra savings with Sika's help. If so, it could justify offering a 30 percent premium above Sika's current market value of 10.4 billion Swiss francs, a bid of 13.5 billion Swiss francs. It might need to do a share issue to finance it, but the logic would be there -- especially if Sika's approval was secured.

In this scenario, the Burkards would need a better price than the minorities, since their super-charged voting shares are worth more. For example, they could sell their holding for 2.4 billion Swiss francs, receiving a 50 percent premium, and the minorities sell theirs for 11.1 billion Swiss francs, roughly a 25 percent premium. True, the Burkards were being offered more by Saint-Gobain --- but that deal came with stigma.

A cheaper and less risky option would be for Saint-Gobain to shrink the deal into a joint venture, and for the Burkards to sell their stake to Sika itself for, say, 2.4-2.75 billion Swiss francs. That would push Sika's leverage to almost 3 times Ebitda -- uncomfortable, but it could raise cash from non-family shareholders to bring that down.

The snag is that the mistrust between Sika and Burkards, which may have preceded the Saint-Gobain bid, seems to be so intense that it's hard to see anyone sitting down for constructive talks yet. It may take the damage from a prolonged legal fight to eventually focus minds.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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