It’s the last throw of the plastic dice.
On Wednesday, shareholders in Poundland will vote on whether to accept Steinhoff's 610 million pound ($809 million) takeover bid.
The South African retailer was forced to raise its offer after hedge fund Elliott Associates built a 17.5 percent stake in the British discount chain. Yet since then, Elliott has kept on increasing.
It now has almost 25 percent of shares in Poundland -- a shade above Steinhoff's 23.6 percent. And it has switched its interest from contracts for difference to actual shares, which means it can vote at Wednesday's meeting.
For the deal to go through, by way of a scheme of arrangement, 75 percent of the votes cast -- excluding those held by Steinhoff -- must be in favor of the offer. Elliott's incremental additions have given it the power to scupper. The question is, why would it?
It's hard to see the wisdom of it blocking the transaction. The most plausible explanation for Elliott's actions is that it's simply increasing its economic exposure to the deal, and gaining more influence in the poll to help nudge it over the line.
Steinhoff is unlikely to have increased its offer without some confidence that Elliott would back the deal. The firm has form in allowing deals to proceed in the end -- it had a 20 percent stake in F&C Asset Management, but didn’t prevent its sale to the Bank of Montreal two years ago.
Elliott has been hoovering up shares in Poundland at below the offer price -- the last tranche was acquired at 223 pence per share. That guarantees a decent return after the costs of funding the purchase with debt.
Steinhoff has made its offer final, and U.K. takeover rules forbid it from raising. So Elliott cannot push it to pay more without killing the deal outright and agitating for a re-run next year.
By holding onto its near 25 percent stake and waiting, the hope would be for a raised offer from either another bidder or Steinhoff, which will be eligible to make another approach in three months, with Poundland's assent. It can return with a hostile bid only after 12 months have elapsed after the present deal's failure.
True, Steinhoff could probably have paid more for Poundland. As Gadfly has argued, even at the revised level of 227 pence per share, the price earnings ratio is only just around the average of the last two years. So while that's reasonable, it's hardly a knock out.
But before Steinhoff's approach Poundland was floundering, after the messy acquisition of 99p Stores. It also faces higher costs for the products it buys from Asian suppliers, because of the Brexit-induced slump in sterling. And there is no let-up in competition from rival B&M, as well as the big supermarkets.
Hedge funds make money from taking risk. But blocking this deal looks like a gamble too far.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects time frame within which Steinhoff may return with a renewed bid for Poundland in the event of deal failure.)
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