We all know G8 Education Ltd's (ASX: GEM) attempted takeover of its smaller rival Affinity Education Group Ltd (ASX: AFJ) got investors excited.
A series of bids ultimately concluded with G8 Education's 80-cent scrip bid being rejected by the Affinity board. G8 Education was beaten at its own game by private equity business, Anchorage Capital, which offered to pay 92 cents per share in cash.
It's simple, Affinity shares were cheap, a bidding war broke out and a cash takeover was accepted. Nothing unusual nor mysterious. G8 Education, which owned just shy of 20% of Affinity prior to the bidding war, stood to receive the same cash offer as ordinary shareholders if it was unsuccessful in taking the business over.
However, what happened next raised a few eyebrows.
After Affinity rejected G8 Education's offer in late August and Anchorage offered a value in line with the independent experts fair value range, G8 Education's Chairperson, Jenny Hutson, stood down to, "pursue other opportunities", according to an ASX filing.
"Under Ms Hutson's leadership the Board resolved on 3 July 2015 to make a scrip takeover offer for all of the shares it did not already own in Affinity Education having acquired a pre-bid stake of 19.89% at $0.70 per Affinity Education share," read the company's ASX filing on 24 September.
"On 3 August 2015 G8 Education made a cash on-market offer at $0.80 per Affinity Education share and increased the scrip offer to the equivalent of $0.80 per Affinity Education Share. G8 Education declared that its takeover offers were final."
So far, so good.
Takeover Panel: Unacceptable
Under takeover law, a person is prohibited (subject to a few exemptions) from buying more than 20% of voting shares in a company.
However, according to a media release by the Australian government's Takeovers Panel there may have been one too many tricks played in the bidding war for Affinity.
The Panel's report stated that on 3 July 2015, G8 Education had 19.89% of all Affinity shares when it announced its intention to make its first takeover offer for the company.
On 26 August 2015, a separate on-market scrip bid was opened with a price of 80 cents per share.
- Paraphrasing directly from the report, JB Super Fund Pty Ltd acquired 0.04% of Affinity shares on 6 July 2015.
- Taxonomy Pty Ltd acquired 4.54% on 9 and 10 July 2015.
- Finally, between 13 July and 28 July 2015, West Bridge Holdings Pty Ltd acquired a further 4.88% of Affinity shares.
- By 24 August 2015, JB Super and Taxonomy accepted its shares into the scrip bid.
This is where it gets interesting.
The Takeovers Panel made a declaration of "unacceptable circumstances" because according to the Panel (among other things):
- There are family links between Ms Hutson and the owner of JB Super
- There are, or have been, structural links, common investors and common dealings between Ms Hutson and each of the three parties above
- There were unusual funding arrangements and unusual use of common intermediaries
- The acceptances of the scrip bid by JB Super and Taxonomy occurred in uncommercial circumstances
The report concluded with observations regarding the Corporations Act and stated, "The Panel is considering what final orders to make and will publish details in due course."
Foolish takeaway
Takeovers can provide opportunities for enterprising investors, however, there are many regulatory hurdles to cross. That's why it can be a risky game for those seeking arbitrage opportunities from bidding wars, without proper insight.
Much like Slater & Gordon Limited (ASX: SGH), G8 Education and other serial acquirers have had a tough time impressing investors in 2015 and make me think once again that it might be a good idea to avoid this growth strategy altogether.
G8 Education shares finished the day down 3.3%.
