In line with media speculation last week, Greencross Limited (ASX: GXL) announced to the market this morning that it expects to receive a substantial shareholder notice from private equity firms TPG Capital and The Carlyle Group ('the Consortium') today.
The would-be buyers have increased their bid for Greencross to $6.75 per share, up from $6.65 recently, which was itself an improvement from the initial bid of $6.45 per share.
No Deal
Greencross informed investors that "the Board is of the view that this modestly increased price also fundamentally undervalues Greencross, and accordingly the Board has declined to engage with the Consortium."
Shareholders are advised to take no action in response to the bid.
Management promised a further update with the interim results announcement tomorrow, indicating that strong performance of its east coast Australian retail operations combined with 'robust cash performance' underpinned their confidence in the value of the company.
For me the announcement is a positive, as it shows Greencross management is confident in the company's prospects and is also willing to hold out for a price closer to what they perceive the company to be worth.
However…
Shareholders should be cautious that additional, higher bids may not materialise after the rejection of this one. Naturally a buyer doesn't want to pay more than necessary, particularly when Greencross shares have been 'advertised' below $6.40 many times in recent months.
The Consortium may have been interested in picking up an undervalued business for re-packaging and eventual resale, but that interest could evaporate if experience shows that the Board and shareholders are holding out for a substantially higher price.
Additionally, if Greencross struggles over the next 18 months or more, potential buyers could theoretically convince a disenchanted Board and shareholders to part ways for less than today's prices.
I'll be using the interim results tomorrow to guide my eventual decision on what to do with my shares, but based on management's statements and the known facts about Greencross, I believe existing shareholders should continue to hold on to their stake.
