Foster's considered that Southcorp's share price had traded above its fundamental value for a considerable period before the takeover offer, because it was expected to become a takeover target. The firm believed that this was exacerbated by industry consolidations. At $4.17 per share, Foster's argued that target shareholders were getting a 51% premium on the average of Southcorp broker valuations of $2.76 per share. Foster's further argued that the offer represented a 33% premium to the volume weighted average price (VWAP) for the month prior to the recapitalisation, and a 25% premium to the VWAP for the month prior to the most recent industry consolidations. It used price multiples to show value: the one-year forward enterprise value (EV) to earnings before interest, tax, depreciation and amortisation (EBITDA) based on consensus broker estimates was 14.9, representing a 48% premium to the average one-year forward EV/EBITDA trading multiple for comparable companies.

 

Southcorp directors were not pleased with the offer of $4.17. They steadfastly rejected the Foster's offer. While the Southcorp share price had been only $3.14 at the end of its previous financial year, it had risen to over $3.50 prior to the price run-up associated with the takeover speculation, and immediately prior to the takeover offer it had traded above $4.17. Southcorp directors countered with an unusual step in this takeover battle, proposing a merger with Foster's wine business as an alternative to the Foster's $3.1 billion takeover bid. They also released an independent report valuing Southcorp shares at $4.57 to $4.80 - well above the Foster's bid of $4.17. Following these announcements, Southcorp shares traded 13c higher at $4.44. Foster's was up 4c at $5.30. 

 

However, Southcorp continued to resist the takeover. The board took another unusual step, restoring dividend payments that had been suspended in 2003. A 3c-per-share dividend was declared in February, on the strength of cash flows that had grown by 35% and a fall in net debt by $390 million from the level of $842 million 18 months before. The 3c unfranked dividend was paid on 31 March. Southcorp chairman Brian Finn told shareholders in a letter that the turnaround was clear evidence that they should ignore Foster's Group's $4.17-a-share bid, as Southcorp was back in town. 'These results further underline why your board believes you should reject Foster's Group's unsolicited bid for your shares as inadequate and opportunistic,' Mr Finn said. The market seemed to agree, with Southcorp shares closing 1 cent higher at $4.41 - 24¢ above the bid.

 

1. Summarise the actions taken by Southcorp directors to resist the takeover. Using both economic and noneconomic motives, provide two explanations for their resistance.

 

2. The price of Southcorp rose throughout this period. To what extent do you see this increase as a response to an expected higher premium from a likely successful takeover, or as a response to information revealed about the value of Southcorp?

 

3. If you were an analyst during this period, how would you separate out the value of Southcorp as a standalone firm, from the increases due to the takeover bids? How would Fosters' management determine the value of Southcorp to them, first as a standalone firm, and then post-merger?