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MergerMarket

Gategroup [SWX:GATE] activist investor Cologny Advisors would accept a buy-out price less than CHF 100 per share, but maintains that HNA Group’s CHF 53 per share offer is far too low, according to Cologny managing partner Jonathan Herbert.

Herbert, who had no knowledge of Gategroup’s negotiations with HNA until the deal was announced this morning, said he would not be surprised if other strategic bidders were stirred into action by HNA’s bid.

Cologny's activist fund partner in the company - RBR Capital Advisors - stated it believed the fair value of Gategroup to be CHF 100, in reported comments this morning. Together the activists own 11.3% of the company.

Singaporean company Sats [SGX:S58] and Emirates Airline via its ground-handling and catering arm Dnata would be most likely rival bidders, he said.

Other potential buyers include Cathay Pacific [HKG:0293], or in the broader catering universe, Compass Group [LON:CPG] or Sodexo [EPA:SW], he said.

Herbert ruled out close peer Do & Co Restaurants & Catering [VIE:DOC] as more of a “cherry-picker” of acquisitions that would not want the broad exposure Gategroup has.

Private equity buyers would usually seek a high level of due diligence which may now be available given HNA’s bid, he said.

“At CHF 53, it properly values the company, but with the very mediocre margins they have right now. With just a little bit of effort they could do much better and hence the CHF 53 bid is just way too low for us,” Herbert said.

Despite the sale talk, Herbert said Cologny is in for the long-run in terms of helping to improve Gategroup’s margins towards those of their peers, as the activists have indicated several times during a year-long public campaign.

Peers Do & Co and Satz have double-digit EBITDA margins compared to Gategroup’s margin of below 5%, depending on how you adjust for restructuring costs, Herbert said.

The activists have good support for their margin-improving and restructuring ideas among other institutional shareholders “behind the scenes”, he said.

A motion to oppose the management’s remuneration package will be put before the company’s AGM this Thursday (14 April).

The announcement of the deal “is not necessarily disconnected” from the pressure put on by the activists which was set to culminate in votes over new board members and management remuneration at this week’s meeting, Herbert claimed.

Swiss institutional shareholders often followed the advice of ISS, which has supported the activists’ opposition to the remuneration policy, he said.

If the remuneration package is voted down there would need to be an EGM to approve a new one, “and that would open the door for further changes in the board”, Herbert said.

Gategroup was not immediately available for comment.

Gapping up
In reaction to strong earnings/guidance: LITB +10.2%, SAP +0.7% (guidance)

M&A news: HTS +8.4% (to be acquired by Annaly Capital Management (NLY) for $15.85/share in cash)

Select EU financial related names showing strength: BCS +3.3%, ING +3.3%, CS +2.4%, RBS +2.2%, LYG +1.6%,DB +1.6%, HSBC +1.4%

Select metals/mining stocks trading higher: AU +6.1%, IAG +3.2%, PAAS +3.1%, MT +2.8%, RIO +2.6%, SLV+2.5%, BHP +2.4%, GDX +2.1%, SLW +1.8%, HMY +1.8%, CLF +1%

Other news: SUNE +11.6% (continued volatility in the pre-mkt action), VKTX +11.6% (presents 'positive' phase 1b clinical data on VK2809 in hypercholesterolemic subjects), CANF +8.4% (announces new pre-clinical data for cf602 demonstrating 'statistically significant full recovery' from erectile dysfunction after a single dose), TRXC +5.7% (still checking), CHK +5.1% (announces amendment to revolving credit facility; borrowing base reaffirmed at $4.0 billion), PRAN+3.5% (regains compliance with Nasdaq continued listing requirements continues to work towards FDA submission), AUY+2.8% (announces Q1 production; updates outlook including Riacho Dos Machados), VRX +1.6% (Board requests CEO J. Michael Pearson cooperate in connection with a subpoena for deposition from the Senate Committee on Aging)

Analyst comments: HCM +1.5% (initiated with a Buy at BofA/Merrill)

private Chinese aviation and tourism company HNA. The deal makes

strategic sense, we believe. However, despite a 38% premium to the 60-

day average, we note shares have been depressed by uncertainty

regarding shareholder activism, and shareholders could hold out for a

higher offer of CHF60-70 per share. Prospectus seen published on 11 May.

Gategroup’s board has accepted a CHF53 per share takeover offer from

China’s HNA, a private company specialising in aviation and tourism with

CHF29bn in revenues. The all-cash offer represents a 38% premium to the

average trading price for the last 60 days. HNA is committed to

Gategroup’s Gateway 2020 strategy, and it will operate autonomously and

remain headquartered in Switzerland under current management.

We believe the offer looks low at <8x EV/EBITDA and <13x P/E 2017E.

Gategroup is in the middle of what looks like a successful turnaround

strategy, and we believe it is evolving into a growth case after struggling

for many years as much of the airline industry has gone no frills. As a result,

we believe that a fairer value could be CHF60-70 (between <9x

EV/EBITDA <15x P/E and <10x EV/EBITDA <17x P/E).

Shareholders could hold out for higher bid

While working under an Asian partner makes sense, as likely future growth

in the industry will be centred on the region, we believe that shareholders

could hold out for a higher bid. The public tender offer is subject to a

minimum 67% acceptance and approval of all regulatory authorities. HNA

is expected to publish a prospectus

(www.hnagroup.com/en/discl/HNA_Website/legal.html) on 11 May with

the main offer expected on or around 27 May, ending on or around 23

June, followed by an additional acceptance period seen starting 30 June

and ending 13 July. Gategroup’s AGM will still go ahead on 14 April, and

Q1 results will be published 19 May.

- will pay in cash BRL30.75 per Cetip share andswap the equivalent of 0.8991 of a BM&F Bovespa share for each Cetip share.

MergerMarket

Osram Licht [ETR:OSR] could attract activist attention in light of shareholder criticism over strategy and a potential sell-down by 17% shareholder Siemens [ETR:SIE], two German M&A advisors following the company suggested.

An activist fund’s way forward could be influenced by whether Siemens’ stake is sold to a new strategic cornerstone or to financial investors more conducive to activist involvement. Demands could include a rethink on Osram’s recently announced strategy, management changes and the sale of assets from its diverse portfolio of businesses, they said.

The world’s second largest lighting company appears a good fit for an activist, the advisors said. Despite the criticism and share price turmoil, Osram is a relatively healthy company, they added.

Osram is valued at an EV/EBITA ratio of 13.66x, compared to peer Philips’ [AMS:PHIA] 18.89x, Dealreporter analytics show. Osram’s EBITA margin of 5.27% came in just below Philips’ 5.66%. On a price to earnings ratio, Osram’s 26.88x compares to Philips’ 33.28x, Dealreporter analytics show.

A recent change in strategy resulted in a 25% drop in Osram’s share price towards the end of 2015. Several large shareholders, including Siemens, openly criticised and voted against CEO Olaf Berlien at its recent AGM on the back of this.

Siemens was taken by surprise by a new five-year strategy announced by Berlien on 10 November and subsequently raised concerns about the decline in its investment value from EUR 940m to EUR 680m in 23 December statement.

A spokesperson for Osram declined to comment other than to say the company’s announced strategy was not a “U-turn” as has been portrayed in reports, but rather a “step forward” from its previous strategy.

Between 9 November 2015 and 23 December, Osram’s share price declined 24.5%. It had recovered to open at EUR 44.70 Monday morning (11 April 2016), marking a drop of about 15% since the November announcement. Siemens spun-off 80% of Osram in 2013 at EUR 24/share.

Prior to the November strategy announcement, Siemens was viewed as keen to sell-down its remaining stake, the two advisors said. Siemens declined to comment on its intentions regarding its remaining Osram shareholding.

Siemens might have looked foolish selling its stake in the immediate aftermath of the strategy announcement, the first advisor said. Six months later, there could be greater willingness to sell, particularly given its vote against CEO Berlien’s reappointment at Osram’s 16 February AGM and due to the partial recovery in Osram’s share price, he said.

A key factor is who could purchase the stake. Siemens is less likely to sell directly to an activist investor due to reputational factors, the advisors said. If an activist is able build a stake on-market it could look to align itself with any new cornerstone or buyers that end up taking sizeable positions, the advisors said.

A financial investor taking a stake could be more appropriate for an activist fund to work with, over a strategic buyer, the first advisor said. Having a financial investor take the cornerstone holding could mean an activist faces less risk of pushback if advocating a split of the company, he suggested.

A fund seeking to influence strategy or a corporate governance change could do well with about 10% of Osram shares, or support from shareholders amounting to around 10%, the first advisor said. Osram has a market capitalisation of EUR 4.6bn as of closing 07 April 2016.

Activist strategy

The big question is whether Berlien’s five-year plan is really so flawed, and what type of strategy might be favoured to replace it, the advisors said. A call would also need to be made on whether to push for a replacement for Berlien.

German institutional investor Union Investment senior fund manager Ingo Speich confirmed Union had sold almost all of its former 3% stake in Osram because it was not convinced by the new plan.

“We asked them to change the strategy because we believed it was wrong but they didn’t react and we sold almost all of our position immediately,” Speich said.

“We would have preferred Osram to focus on profitable niches such as automotive rather than entering the mass market business in LED Lighting, including a new factory in Malaysia, which means strong competition with aggressive Asian competitors.”

In terms of buyers for any divisions put up for sale, several strategic players have been linked with interest for certain Osram businesses. China’s MLS is reportedly interested in some operations, as is Shanghai Feilo Acoustics [SHA:600651].

Other Asian competitors in the LED space include China’s EUR 6.7bn market cap Sanan Optoelectronics [SHA:600703] and Taiwan’s Epistar Corporation [TPE:2448].

The focus on Osram also comes as competitor Philips is in the spotlight. The Dutch company has been running sale processes of its Lumileds and Philips Lighting businesses, highlighting strategics and financial buyers interested in the industry.

China’s GO Scale Capital was blocked by US regulators from buying Philips’ Lumileds business and has said it is now looking at non-US acquisitions. GO Scale was reportedly in line for Philips’ Lighting business.

Others interested in Philips Lighting include a Blackstone/Onex consortium, and Apollo Global Management with the Abu Dhabi Investment Authority. That process also drew early stage interest from private equity firms CVC Capital, KKR and Bain, it was reported.