September 4, 2017 / 11:11 AM / a year ago

Breakingviews - Elliott shows tail wags dog in German M&A

LONDON (Reuters Breakingviews) - The investor who snoozes, loses. But maybe not in Germany. The takeover of drugmaker Stada by buyout firms Bain and Cinven is playing out in a way that suggests sometimes the best thing to do is nothing at all. That sets an unfortunate precedent in corporate dealmaking.

The logo of the pharmaceutical company Stada Arzneimittel AG is pictured at its headquarters in Bad Vilbel near Frankfurt March 14, 2012. German generic drugmaker Stada, under pressure to curb its reliance on a weakening home market, embarked on two takeover attempts in Russia over the last two years but failed both times following months of exclusive talks. REUTERS/Alex Domanski

When the two private equity groups offered to buy Stada last month for 66.25 euros per share, hedge fund Elliott Management was among the 36 percent of investors that didn’t sell. It now wants a price that’s 12 percent higher, and the buyout firms have agreed, in principle, to play along. Without Elliott’s support, they can’t pass the important 75 percent threshold after which they can tell management what to do, and siphon off its cash flows. In other words, Elliott and other minorities had the buyers over a barrel.

All this is compatible with Germany’s odd rules, which run thus. Minority investors who are asked to give up influence, through a so-called domination agreement, can in return negotiate an exit price, and claim a generous fixed dividend until they get it. Negotiations have been known to take years – and the dividend removes the incentive to tie things up quickly.

Inert investors have added a twist, though, and made it even easier for the tail to wag the dog. Bain and Cinven wouldn’t need to butter up minority investors had they made their bid conditional on receiving 75 percent of the shares. But their first bid failed through lack of interest, so they ultimately agreed to settle for just 63 percent. That left them reliant on pursuing that domination agreement. With a growing proportion of companies’ shares held by index-tracking funds which don’t always vote, such situations will become more common, and bidders will have to leave more in their back pocket for holdouts.

Some investors who sold out earlier might now cry foul. Then again, the price Elliott will receive would in theory also have been available to them if they had sat on their hands. And roughly half of Stada’s retail investors, many of whom seldom bother to vote or turn up to annual meetings, still hold shares, according to a source. If Elliott wins a generous price, so do they. Laziness has never been so lucrative.


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