In Subprime, There’s Winning and There’s Winning

(Bloomberg Opinion) -- Hostile bids are often a battle to win over 50 percent of the target’s shareholders. A simple majority confers board control, and once that’s in the bag, the naysayer investors tend to follow.

But it may not always work out so smoothly. Just look at the 1.2 billion-pound ($1.6 billion) battle for Provident Financial Plc. The British subprime lender is trying to fend off an unwanted bid from John Philip De Blocq Van Kuffeler, its former chief executive officer.

On Tuesday, Van Kuffeler’s vehicle, Non-Standard Finance Plc, said it had surpassed the magic 50 percent level of acceptances. A handful of Provident’s key shareholders, among them Neil Woodford, turned their existing non-binding commitments of support into  irrevocable undertakings. They also happen to be NSF shareholders.

As things stand, NSF’s offer is conditional on it being accepted by owners of 90 percent of Provident’s equity. The purchaser could now waive that condition, leaving only regulatory approval in its way. Once a bid looks sure to succeed, tracker funds invested in the target tend to switch sides. That leaves holdouts in an awkward minority position, and they often then cave in.

There are several obstacles to this outcome. First, it isn’t clear how keen NSF is to proceed without getting full control, which would require it to keep Provident publicly traded. Second, regulatory approval has yet to arrive. Finally, Provident’s shares are trading above the value of NSF’s offer. That may reflect faith in the company’s earnings prospects, or it may be technical – both stocks are thinly traded. It is strange, though, given NSF’s effective 51 percent hold should, in theory, be a deterrent to any counterbid.

Provident is still fighting. Its emphasis has switched from talking up the possibility of alternative buyers to talking down the bidder’s currency. It produced an analysis on Tuesday which questioned whether NSF’s past dividend payments and buybacks were legal under U.K. company law. (NSF has yet to respond.) For an all-paper bid in this industry, any suggestion of financial incompetence that sticks is going to make it all the more difficult to win over investors.

The latest mud-slinging is unlikely to change the view of NSF’s supporters who straddle both share registers. But if NSF actually wants the other 49 percent and to keep regulators happy, the battle may only be just beginning. The support of Provident’s board has some value and could still be worth paying for.

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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