Bloomberg news reported that Carlyle Group walked away from a potential bid for CHG (Chemring). Negotiations had been extended twice, and there were two downgrades by Chemring.
Chemring said today after Carlyle pulled out that it will continue to feel the strain from governments cutting defense budgets. “Carlyle realized Chemring’s problems were far deeper than expected,” Oliver Sleath, a London-based analyst at Credit Suisse, said in a telephone interview. Another bidder is not likely to emerge in the short term, he said.
The CEO had resigned a few weeks ago due to its latest profit warning.
CHG closed at 258p -12.90 (-4.8%). Ouch.
I note that there was an article on Stockopedia suggesting it as a value idea. In my view, it was an extremely dangerous tactic to buy whilst there was a potential bid. It is so incredibly easy to come unstuck by buying on bid speculation. It’s true that if there was a bid, shareholders would likely have done well. But there’s always a non-trivial risk of something going wrong. That, alas, is what happened. Simple moral: don’t buy on bid talk. That way you don’t have to see a significant percentage of your holding go up in smoke.
In his “Genius” book, Greenblatt lists risk/merger arbitrage in the chapter “Don’t try this at home” – which, as the title states, is an area to avoid. He gives a couple of case studies. Florida Cypress Gardens is the first example. A bid was announced, approved by the shareholders, and it looked almost certain the deal would go through. Before the deal closed, Gardens fell into a sinkhole, which scuppered it. Another case was Combined International, where a controlling shareholder got cold feet even at the meeting where the deal was to be ratified. Even during “done deals” – for which CHG falls far short – there is enough that can go wrong.
Should be interesting to see how this plays out. The analyst’s comments sound rather ominous to me, and my hunch (and Iet’s face it, it’s only a hunch) is that we haven’t seen the bottom of this, in multiple senses of the word. In my inexperienced and simplistic view, this one is going to be very tricksy and dangerous, despite the seeming attractive PE of 5.
We shall see.
Happy investing to you all.
