The Bake-Off Judges Must Decide on Elliott’s Dish

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It was too much to hope that Elliott Management Corp.’s attempted takeover of the firm behind Otis Spunkmeyer cookies would stay amicable. The hedge fund on Monday made a thinly veiled appeal to shareholders to pressure Aryzta AG’s board into swallowing its 794 million-franc ($891 million) takeover offer, pointing out the directors hold the key to putting it to an investor vote. This is a risky strategy compared to presenting the board with a knockout bid, but that’s Elliott’s choice.

The U.S. asset manager is best known for its shareholder activism, often pushing bidders higher. Here, Elliott’s private equity arm is the suitor. Troubled Aryzta effectively invited takeover offers in May with the announcement of a strategic review. It’s a natural target for being repaired out of the glare of public markets.

Private equity’s tactical disadvantage, a reliance on debt funding, has been amplified here. Aryzta is overstretched already. It’s little wonder that Elliott has needed months to assemble a financing package, especially in a pandemic. Nor is it a surprise Elliott’s lenders have applied a condition — they won’t finance any offer to which Aryzta is opposed.

Unluckily for Paul Singer’s investment firm, Aryzta’s governance has undergone a revolution since talks began. The bun-maker’s biggest shareholders have installed a new chairman, now also interim CEO, who’s voiced reservations about selling the company right now. Other directors have gone too, and markets have rallied.

Elliott’s 80 centimes-a-share offer has been on the table for weeks as a preliminary proposal. Elliott now wants an immediate answer. The financing isn’t guaranteed beyond today, which Elliott could surely get round by paying commitment fees to secure it for longer. Either way, Aryzta has little excuse for dithering on whether to say yes or ask for more. Elliott points out that Aryzta doesn’t need to endorse the price, the board could simply sign a deal and maintain a “neutral” stance. This would satisfy the financing condition, thereby giving shareholders an offer they could actually accept.

But Elliott’s decision not to sweeten the number is strange. This bid is hardly compelling. True, it’s 32% above Aryzta’s share price in November just before Elliott's continued interest in a purchase became clear following the collapse of earlier talks. But it’s still around 25% below Aryzta’s pre-Covid price. Given the company’s leverage, a small uptick in its enterprise value as a multiple of Ebitda would generate substantial gains for equity investors. Assume the stock can command a roughly 8.5 times forward enterprise multiple later next year, it would touch the bid price. The average in the 12 months prior to the pandemic was around 7.5 times.

Aryzta’s board shouldn’t faff around with a half-baked “neutral” position and delegate matters to shareholders. Nor should it run out the clock just because Elliott’s financing commitments are time-limited. This process has gone on long enough and the directors, new and existing, should know what they think the company’s worth. True, four board members face ejection at this month’s annual meeting. Nevertheless, the job of evaluating this bid still falls on the board that’s in place today.

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.

©2020 Bloomberg L.P.

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