DMG Mori eyed for domination agreement play or activism (Deal REporter)
The takeover of DMG Mori Seiki AG [ETR:GIL] (DMG AG) is being watched for signs of activism or positioning to play a domination agreement (DA) process after shareholders criticised DMG Mori Seiki Company’s [TYO:6141] (DMG Co) 7.5% offer premium as too low.
DMG Co is offering EUR 27.50 per share to 100% of DMG AG’s share capital. DMG Co is aiming to increase its 24.3% stake through the offer and has set a 50% plus one share minimum acceptance threshold for the bid. Following the announcement on 21 January, DMG AG shares rose through the offer price. They opened on Tuesday at EUR 28.50.
Industry sources are speculating whether the buying could be linked to activist hedge funds acquiring a stake big enough to block the transaction. But a mitigating factor is that DMG Co only requires a quarter of the register to reach 50%, they noted.
This leaves open the possibility that investors are positioning for an expected DA process, industry sources said. Offering such a low premium initially could indicate that DMG Co has an eye on the DA process, one industry source said.
Initial industry reaction was that of surprise that the takeover would be happening now. DMG Company President Masahiko Mori had previously suggested that the two companies would look to a merger of equals by 2020.
A domination agreement allows a party to secure full control of a German company with the approval of 75% of shareholders voting/present at a general meeting. The bidder can simultaneously add a profit and loss pooling agreement into the domination agreement. This means the group can qualify for consolidated tax accounting.
In return for full control, the bidder offers to compensate shareholders for any losses. Shareholders can either tender to an independently valued purchase offer or hold on to their shares and receive a guaranteed dividend. Remaining minorities are able to appeal this valuation through the courts.
DMG Co President Masahiko Mori said at an analyst conference on the deal last Thursday that he has no intention of delisting the German company. Mori said he wants to keep the listing of DMG AG in Frankfurt, noting it would be more convenient if the company remains on the stock exchange. Mori also said at the conference he is confident of clinching 75% ownership, based on talks with large shareholders.
Over the last two years, domination agreements have been back in the headlines, with McKesson’s [NYSE:MCK] takeover offer for Celesio [FRA:CLS1] and Vodafone’s [LON:VOD] takeover of Kabel Deutschland [FRA:KD8]. London-based hedge fund Elliott Advisors has been a key activist in each situation.
“I wouldn’t be surprised if it was a usual suspect [buying up shares],” a second industry source said. “I do think there’s bound to be something here,” said a person following the situation. About 12% of DMG AG’s shares have traded since the announcement, or about 16% of the free-float, according to Thomson Reuters data.
DMG Co announced on Monday it had increased its stake to 26.5%, without disclosing the price paid for the shares. As yet, there have been no disclosures from other shareholders of a change to their holdings following the announcement. Germany requires disclosures at 3, 5, 10, 15, 20, 25, 30, 50 or 75% of the voting rights.