Risks behind Independent deal with APN

Business Opinion:Finally, some six months or so after the idea was first mooted, Independent News & Media's takeover of APN, its antipodean associate, is on the home straight.

Shareholders will now be asked to approve the transaction at an extraordinary general meeting on May 18th, but the road to the meeting has been more than normally tortuous. An initial approach to APN from Independent and its private equity partners Providence and Carlyle came to naught before Christmas.

The parties then returned in late January with a new offer of A$6.10 a share which was recommended by the APN board. That found little favour with the Australian institution which holds much of the 60 per cent of APN not controlled by Independent.

The offer was revised in April to A$6.20, which is a 19 per cent premium to where the shares stood before the first approach last year.

Detail of the deal are contained in the information memorandum being sent out to shareholders, but in summary, Independent will end up with €375 million in cash and a retained 35 per cent interest in the business. It will relinquish control, which it exercises through its majority on the board of APN, but will have various pre-emption rights over the other shareholders.

There is also a mechanism to ensure Independent remains in the driving seat should the business come back to the market.

Independent would appear to have agreed very favourable terms with its private equity partners, which is hardly surprising given that no deal was possible without its participation, but for all that, the rationale for the deal is not really that clear.

The document advances a number of reasons for the transaction, but none of them is that compelling.

It states that "INM will maintain a significant interest in APN, which is considered by the board to be a both a a valuable and strategic asset", and adds that Independent will be able to increase its stake if Providence or Carlyle exit.

These are indeed attractive elements of the deal, but they don't really amount to a reason for doing it in the first place, given that all they represent is a diminution of the status quo.

Equally, the argument expressed that the deal "means that INM will be able to protect its stake in APN at a time when there is a significant amount of market activity" does not really hold much water.

It presupposes that there is some threat to INM's stake, which is a bit of a stretch when the leisurely progress of the leveraged buyout indicates that the only entity capable of making a bid for Independent's stake in APN is Independent itself.

Another rather circular argument advanced in the document is that Australian media asset prices are enjoying something of a purple patch and thus the deal is an opportunity to capitalise on this.

This would be a reasonable point if Independent was not also the buyer of what the prospectus seems to be hinting is an overvalued asset. There is little to be gained for selling something to yourself at an inflated price.

The prospectus also alludes to a report from an independent expert claiming the price being offered is fair. Once again, this is good to know, but does not really a constitute a reason for doing the deal.

Indeed, it is hard to see what Independent is really getting out of the deal, apart from €375 million in cash delivered in what one hopes is an efficient and cost-effective manner. Although given that part of the deal is the surrender of control of the business, even that may not be as good as it seems.

The document appears to indicate that the pillaging usually associated with private equity ownership will not be carried out on APN.

It is the intention of Independent and its partners to retain the current businesses, assets and management of APN, although it adds the important rider that "final decisions will be made by the consortium only after having conducted a detailed review of APN and its business when the transaction is completed".

This is in effect carte blanche for the private equity players in the consortium to bleed APN white should it need to.

While Independent will enjoy the upside in this, it will also have to deal with any negative impact this may have on the long-term value of the business, as there is a presumption that it will be buying out Providence and Carlyle in time.

It would appear then that the transaction which is about to be put to shareholders is in effect a mortgaging of one of the company's prize assets. The financial terms seem attractive, but the intangible costs and risks are significant.

This would be understandable if there was any great need for the money, or any clarity as to what Independent will do with it, but there isn't. A number of possible options are referred to in the document: maximising shareholder returns, expanding the group and strengthening the balance sheet.

There appears to be some confusion in the document itself as to the order of priority of these objectives and it has been made clear that no decisions have been made.

Reading between the lines, a very substantial distribution to shareholders looks to be on the cards, the biggest beneficiary of which will be the chief executive, Sir Anthony O'Reilly who owns 26.4 per cent of the company.