Livewire readers will undoubtedly be aware that Fairfax Media is now firmly in play. The revised, indicative proposal by the TPG consortium whereby they would acquire all outstanding shares in FXJ at a price of $1.20 cash per share was the biggest financial markets news story of the day (including in the Fairfax owned newspapers). In response to the news, Fairfax closed $0.07 higher on the day, at $1.14. An increase of 6.54%.
The low ball bid
It was only a week ago today that the consortium submitted their initial proposal that would have seen FXJ shareholders receive $0.95 in cash and 1 share in a newly listed company that would hold some of FXJ’s residual media assets (and which the TPG consortium had valued at between $0.25 - $0.30 as part of their proposal).
Existing shareholders were quick to give this offer short shrift and it was expected that the FXJ board would do the same in due course. TPG and its advisors clearly saw the writing on the wall and elected to submit a revised proposal in advance of being formally (and publicly) rebuffed.
A new offer on the table
So is the new offer good enough to succeed or will a further improvement in the offer terms be required and if an improvement is required, can one make money by buying FXJ shares now?
I should at this stage point out that no Harvest Lane Funds currently hold shares in FXJ so that probably gives you a fair idea of our position. However, given that M&A transactions are our bread and butter, the situation is firmly on our radar and has been for some time.
Improving our chances of a profitable position
So, why don’t we own FXJ and what would need to change in order for us to want to alter our stance?
To begin with, many years of participating in transactions of this nature (with the odd bad experience along the way) has taught us a thing or two about the types of transactions that are most likely to be profitable for our Funds.
This experience has led us to create a list of criteria that improves our chances of identifying opportunities that are likely to produce a successful outcome. In essence, we are aiming to eliminate those transactions where we are most at risk of losing our capital usually because the likelihood of the transaction proceeding is uncertain. For example:
- We try to avoid offers that are too conditional (i.e. those that have too many conditions attached to the bid).
- We generally prefer bids that are binding, not subject to due diligence nor subject to financing and
- We like bids where regulatory approvals are either not needed or else very likely to be granted (and the list goes on).
In our opinion the current offer for FXJ is just too risky to enter given that it is indicative, preliminary, non-binding and subject to due diligence. Oh, and the offer also requires regulatory approval!
"Put simply, it meets very few of the criteria"
Although we do think that the TPG consortium are serious and may at some stage lob a formal bid, the previous words infer an unwillingness to commit at the present time.
When would Harvest Lane get interested?
For us to take a position in FXJ we would like to see the terms of the deal firm up. At a minimum, this would include the offer becoming binding. If this were to happen and that is still a big if, the proposal would likely still be subject to various regulatory approvals so any position entered may not be a ‘full risk’ position but rather a smaller position to maintain some optionality over the deal completing either on the currently proposed terms or on further improved terms if required.
Given the fact that FXJ shares are trading at a small discount to the terms of the proposed offer, it would seem that for now the market agrees with our view and has deemed that the current deal is too conditional and far from certain to proceed. Of course, the market is not always right and therein lies the opportunity.
For now, we are happy to keep the stock on our radar and see how things unfold in the coming weeks. If capital preservation is atop your list of investing priorities you may want to consider doing the same.
Luke Cummings is the Chief Investment Officer of Harvest Lane Asset Management