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In late October McKesson announced it had signed an agreement to acquire the entire Celesio holding of Franz Haniel & Cie, i.e. the founding family, which currently owns a 50.01% stake in Celesio.
Mckesson also said then it would soon launch a voluntary tender offer for the remaining publicly-traded shares, and convertible bonds; ending up with a transaction valued in total at US$8.3 billion (€6.1 billion) including debt assumed with the transaction.
On December 5th, 2013 therefore, McKesson duly officially launched its tender offer, which will be open until January 9th, 2014 and, as well, a simultaneous offer to holders of Celesio’s convertible bonds which have voting rights in a takeover context.
A condition of the offer, including for the original 50.01% stake owned by the Haniel family is, as is typical in such takeovers, the achievement of a threshold combined voting position of 75% tendered.Once such a level is achieved other hold-outs are unable to prevent, though they may delay through a court process, an ultimate merger of the entities.In financial engineering terms 100% ownership is often critical to being able to have full control of a target company’s cash flows and to, for example, shelter the acquiring entity’s acquisition debt costs against the balance sheet and the cash flow of the acquired entity.
Sensing opportunity to cause trouble therefore and make a quick profit, Paul Singer started accumulating shares in Celesio himself and it was announced yesterday that Elliott has gained control of about 25% of the voting rights in the company’s common shares.
However, when additional shares from Celesio’s two outstanding convertible bonds are taken into account, Elliott’s voting stake is reported to be lower and to stand at around 22% percent to date.
McKesson has already said its US$31 (Euro 23) per share takeover offer is conditional upon it obtaining at least 75 percent of Celesio’s shares.
According to Reuters however, financial sources have said that in many such deals about five percent of a company’s shares are held in accounts whose owners do not even bother to tender, so Singer could in fact be on the point of being able to block the deal.
Anticipating a little greenmail therefore, the market has now bid Celesio’s shares up to slightly above the Euros 23 tender offer price in the last few days. Nobody thinks Singer wants to actually buy the company himself instead.
However a little risk arbitrage, to end up with a higher rice for everybody – including Elliott Management – based on potentially blocking the deal is very much his style.
“Elliott believes that McKesson’s offer for Celesio substantially undervalues the company and is not in the best interests of shareholders and bondholders, ” the hedge fund said yesterday. Instead, Elliott says it wants the company to consider splitting up its retail and wholesale operations.
McKesson is a big and fairly profitable company, and it would certainly trump Singer’s ace if they choose to remain content to keep just the founding family’s 50.01% stake in Celesio if the tender offer for all of them should fail to cross the 75% threshold; it would also cost only half as much.
In that event Singer could face a loss when he eventually unwound his position, and McKesson could potentially then pick up his shares even at a lower price. So there are risks for both sides and it is not yet certain who will come out on top.
I would tend to give McKesson the edge myself, however, at the moment, since it certainly seems they have at least majority control already locked up. That is always a good start.