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Archer consortium terminates Abano ‘bid’, looks to oust chairman

Two investors backed by private equity firm Archer Capital have withdrawn a proposed takeover bid for Abano Healthcare [NZX: ABA] , blaming a profit downgrade as part of their reason.

Investor James Reeves of Steamboat Capital claimed Tuesday’s annual shareholder’s meeting confirmed “concerns about the company’s current governance and performance.”

On Tuesday it was revealed that Steamboat, Peter Hutson’s Healthcare Industry (HIL) and Archer Capital had the previous Tuesday presented a proposal of $7.80-a-share to acquire 100% of Abano shares.

This was an increase on the previous proposal of $6.97-7.14-a-share made in September.

The Archer consortium had not made a formal takeover offer as it wanted to conduct due diligence first, a request that was denied by Abano on grounds that Archer is a potential competitor.

At the AGM on Tuesday, Abano released a report by Grant Samuel that values the company at between $8.30 and $10.05 a share and chairman Trevor Janes used that to back up the board’s stance that the Archer proposal “significantly undervalues” the company.

Also at the AGM, Abano signaled lower first-half revenues and profit.

The company forecast first-half sales of $104.9 million to $106.9 million, down from $107.9 million a year earlier.

Earnings before interest, tax, depreciation and amortisation would be $12.9 million to $13.9 million, from $14.8 million in the first half of the 2013 year.

The Archer consortium seized on this as one reason for pulling its proposal.

“It is disappointing to learn of a second downgrade in only eight months, and to have this information produced and downplayed without warning at the AGM, especially given the significant scale of the downgrade – some 15-20% lower than broker consensus for the 2014 financial year when the consortium first approached Abano on July 20, 2013,” Mr Reeves said in a statement released today.

“There are also serious concerns about the company’s governance, which were reinforced by the timing and poor quality of the information presented to shareholders.

“Over the past few months, we have repeatedly seen the board distort and delay releasing market sensitive information. We have not seen evidence the company is acting in the best interests of all shareholders. Distorted, selective and delayed information has only reinforced our concerns about the company’s governance and performance,” he says.

This view is not, however, shared by all shareholders.

At the AGM, investor Brian Gaynor, representing Milford Asset Management, stood up and congratulated Mr Janes and the independent directors for the stance they have taken on the takeover proposal.

Mr Gaynor said he was most pleased that Abano did not wish to approve a scheme of arrangement (requiring 75% shareholder approval for compulsory acquisition, rather than 90%) and that the company had not agreed to allow Archer Capital due diligence.

He said he was the chairman of a judging panel that had awarded Abano the prize of best corporate communicator for an emerging company at the 2013 Infinz awards.

The company was an excellent communicator, he said, so there was no need to allow Archer due diligence before it made a formal takeover offer under the Takeovers Code.

This was met with applause and prompted Mr Janes to thank Mr Gaynor: “That was very good of you.”

However, Mr Hutson was less impressed, saying the consortium will now unwind an exclusivity deed entered into on September 16.

He expressed surprise that Abano did not disclose the Archer consortium's revised proposal of $7.80 a share to the market until the AGM, one week later.

“We were very surprised this had not been disclosed to shareholders until a full week later at the AGM, and then, only in passing in the chairman’s address. We made a firm proposal and this was clearly understood by the company who then called the same day seeking clarification on several points. To suggest otherwise is incorrect.”

HIL and Steamboat Capital now intends to “increase efforts to bring about the change needed to deliver better value for all shareholders and improve on the poor 1.7% internal rate of return generated over the past four years,” he says, noting that Mr Janes was returned to office by a small margin: 56% votes for and 44% votes against.

More by Duncan Bridgeman

Comments and questions
2

It's well and good for Abano to have played "hard to get" but bottom line is that their bottom line ROA is average and their trackrecord operating businesses is average to poor. The Grant Samuel report is not independent nor particularly credible in terms of any cash flow based valuation modelling. Does Abano know when enough is enough? Well some history suggests they do, They have one great deal under their belt being the Hutson-lead audiology exit in 2009 to private equity. Other history however suggests that chairman, Trevor Janes may not - noting his less than spectacular chairmanships of Capital + Merchant Finance and Salvus and curious exits from Public Trust and Mighty River and his failed attempts at private investment (Trinity Hill). This current battle looks like a punt by private equity to ride the wave of dental corporatisation and credit is due to Abano for having created value by aggregating in a fertile space. But Hutson - the proven performer - is now saying let's exit (or at least partially exit) while the going is good to Archer. That is quite telling. A cursory study of the performance of even the more profitable dental rollups in Australasia suggests the model is not yet fully proven and rumblings about dentist disatisfaction in other groups is becoming louder.

If 44% voted against the Chair it is an outrage that the Company did not put Archer's proposal to a shareholder vote. This Board must be on thin ice.