Vodafone finds better German M&A pain threshold
22/12/2020 15:11
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By George Hay
LONDON, Dec 22 (Reuters Breakingviews) - Vodafone VOD.L
has finally exited its German M&A hurt locker. Seven years after
acquiring 77% of Kabel Deutschland (KDG) KD8Gn.H , the UK
telecommunications group on Tuesday agreed to pay minorities
like Elliott Advisors up to 2.1 billion euros to go away.
Crazily, that isn’t even the company’s longest such ordeal in
the country’s legal purgatory.
There’s a common thread connecting Vodafone’s KDG deal with
the 18 years it took to squeeze out Mannesmann after buying it
in 2000. Both sagas were the product of a strict piece of
corporate law peculiar to Germany: the domination agreement.
These allow buyers to squeeze out recalcitrant shareholders so
they can take full control of an acquisition. The catch is that
they have to pay said minorities a fixed dividend until the
courts decide how much the company is really worth. And those
rebel shareholders often include shrewd hedge funds, well versed
in German law.
In the case of 10 billion euro KDG, minorities received a
3.17 euro a share annual payment. That wasn’t their only reward
for taking Vodafone on. Back in 2013 they were offered 84.53
euros a share. Under the domination agreement, they retained the
right to sell to Vodafone at a price that increased each year in
line with the German base rate, plus 5%. That put option was as
of September worth 92 euros a share.
The fact that Elliott and Co have now managed to squeeze an
even higher price of 103 euros per share suggests they got a
good deal. Yet KDG’s 30-day volume-weighted average price is 108
euros. And Vodafone will be pleased to get rid of a growing
liability.
Why didn’t Elliott et al just continue to watch their
winnings tick up? Last year’s ruling by a Munich court that
Vodafone’s original price was adequate may have made them keener
to settle. But the hedge funds have probably made a more than
decent return anyway, especially if they used lashings of
leverage.
Assume a hedge fund bought KDG shares for 84.53 euros in
2013, and used borrowing to cover 90% of its outlay. With
interest and legal costs equal to 2.5% a year, the annual
dividend plus a 103 euro payoff would have delivered an internal
rate of return of over 27%, according to Breakingviews
calculations. Not bad for a one-way bet.
On Twitter https://twitter.com/gfhay
CONTEXT NEWS
- Vodafone on Dec. 22 offered over 2 billion euros to buy
out minority shareholders in Kabel Deutschland (KDG), aiming to
end a long-running legal battle with hedge fund Elliott
Advisors and others over the cable company.
- The British firm, which bought a nearly 77% stake in the
German cable company in 2013 for 7.7 billion euros, said it
would offer all minority shareholders of KDG 103 euros in cash
for each outstanding share.
- Vodafone said shareholders representing 17% of shares had
accepted the offer, which valued all remaining minority holdings
in Germany’s largest cable company at up to 2.12 billion euros
($2.59 billion).
- Elliott, D.E. Shaw and UBS O’Connor had all accepted the
offer. Elliott has agreed not to take further legal action
against Vodafone, the statement added.
- KDG minority shareholders had previously appealed a 2019
decision by a Munich district court that ruled that Vodafone’s
compensation for the 2013 takeover was “adequate”.
- “As a result of the agreement to tender their shares in
KDG to Vodafone, the accepting shareholders will withdraw their
appeal from the court of appeal in Munich,” Vodafone said.
- KDG shares fell 2.8% to 105 euros as of 1130 GMT on Dec.
22. Vodafone shares fell 0.7% to 121 pence.
- For previous columns by the author, Reuters customers can
click on HAY/
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UPDATE 2-Vodafone to pay up to $2.6 bln to end German legal
fight urn:newsml:reuters.com:*:nL4N2J21RF
Vodafone statement https://investors.vodafone.com/individual-shareholders/kdg-offer
BREAKINGVIEWS-Germany’s takeover rules are more S&M than M&A
urn:newsml:reuters.com:*:nL8N27D1S9
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(Editing by Neil Unmack and Oliver Taslic)
((george.hay@thomsonreuters.com; Reuters Messaging:
george.hay.thomsonreuters.com@reuters.net))