IPH Ltd (ASX: IPH) share price opened lower on the ASX this morning as the company responded to yesterday's announcement by Xenith IP Group Ltd (ASX: XIP) which rejected IPH's takeover proposal.
How did IPH respond?
IPH said it was "disappointed" that the Xenith Board formed the view that the IPH proposal is not a superior proposal to the proposed merger between Xenith and QANTM Intellectual Property Ltd (ASX: QIP).
IPH maintains that its proposal is superior to the QANTM merger and delivers "compelling benefits" for Xenith's shareholders and other stakeholders, with management believing that IPH's proposal values Xenith at $1.99 per share compared to the QANTM merger value of $1.74 per Xenith share.
The intellectual property group also requested that the Xenith Board defer the date of the scheme meeting to vote on the QANTM Merger (currently scheduled for 3 April 2019) to allow for the IPH proposal to be considered and the outcome of the pending ACCC reviews of each transaction to become known.
What did Xenith say yesterday?
The Xenith Board rejected the IPH proposal in an announcement yesterday and outlined the following as key reasons behind the decision:
- Structure & benefits to Xenith shareholders: The IPH Proposal is a fundamentally different transaction from the proposed Xenith/QANTM merger, which results in shared future control with Xenith shareholders holding 45% of the merged entity and benefitting from the 45% of earnings accretion expected to result from the merger. Xenith shareholders would also have half the board representation of the merger Xenith/QANTM entity versus IPH's outright control transaction in which Xenith shareholders would own less than 5% of the merged entity.
- Value: The IPH proposal was framed to be approximately equivalent to the implied value to Xenith shareholders arising from the Xenith/QANTM merger without an adequate control premium for the outright control proposed.
- Execution risk: The Board determined that the IPH proposal had significantly higher execution risk (i.e. ACCC clearance) than the Xenith/QANTM deal given IPH has a significantly higher market share than either entity and the merger group would be by far the largest market player.
- Employee shareholder approval: Xenith employees hold over 40% of outstanding Xenith shares and the Board is unsure if the IPH proposal would receive approval from this voting group.
- Tax implications: The significant cash component involved in the IPH proposal is unlikely to attract capital gains tax (CGT) rollover relief normally available from a pure scrip (i.e. shares for shares) consideration as proposed in the Xenith/QANTM merger.
The verdict
Based on today's response from IPH, I expect to see further back-and-forth as IPH tries to block the proposed QANTM merger, and I'd be steering clear until the ACCC approvals come through and the situation becomes more clear.
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