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A Lowball Takeover Bid? Thanks, That'll Do Nicely

A Lowball Takeover Bid? Thanks, That'll Do Nicely

(Bloomberg Opinion) -- It should be easy to dismiss a takeover that is cheap enough to be called a take-under. Yet the bid for Oriflame Holding AG by its founding Jochnick family has prompted some embarrassing choices by the board and some of the beauty group’s biggest shareholders. They are bizarrely backing an offer they admit fails to capture the group’s full value.

Directors of companies with dominant family shareholders like this have a special obligation to protect minorities on the register. It’s a live issue. The Jochnicks own 31% of Oriflame. At Axel Springer SE, the Springers are trying to take the German publisher private with the help of buyout firm KKR & Co.

Sadly, the Oriflame situation shows a dispiriting lack of conviction. The independent directors say the 8.9 billion Swedish kronor ($950 million) offer for the shares not already owned by the family doesn’t reflect the “full intrinsic value of the company.” Such a statement should lead to a vigorous defense. It wouldn’t be difficult to attack a bid that values the business at a 35% discount to its peer group, based on estimated earnings. Nor would it be a stretch to suggest its timing may be opportunistic: The offer came after the shares had fallen nearly 60% in the preceding 13 months.

A Lowball Takeover Bid? Thanks, That'll Do Nicely

Instead, the directors have reached just the opposite conclusion: a recovery is a long way off, the short-term risks to the share price are high, and consultant PwC says the offer is fair, so, in fact, shareholders should accept.

Call it quantum governance. Like subatomic particles, Oriflame’s independent committee is in two places at the same time.

Some of the company’s top shareholders seem to have been influenced by this, as you might expect. Swedish state pension funds AP1 and AP4 say the offer undervalues the company – yet they will accept. This is despite their clearly stated commitment to invest for the long term.

It is easier to excuse the funds than the board. Their decision isn’t against the interests of the company as a whole, given the family should be a good owner. Redeploying capital into other investments may well deliver higher returns if the funds have smart investment ideas; the bid offers a chance to exit hard-to-sell stakes at a premium instead of a discount. Nevertheless, selling out jars with their patient investment philosophy.

The independent directors, to their credit, looked for a counter-bidder – a tough job given the family's blocking stake. But they should have also sought a better deal from the family by suggesting ways the company could boost its value without a takeover. A standard toolkit is available: Oriflame could take on more debt to fund a buyback or special dividend. It could tell its story better. The snag is that a defense needs a defiant leader – and the longstanding CEO is sitting on the sidelines, having recused himself from the independent committee. The Jochnicks have indicated they want to keep current management.

At both Oriflame and Springer, shareholders can be grateful the bids provide the option of getting out at a premium. But if Oriflame shareholders really believe in the long-term prospects of the company, you would expect them to hang on.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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