The Simonds Group Saga

The Simonds Group Saga

Simonds Group (SIO) is a homebuilder that listed on the ASX in a public offering in late 2014. Since then, the share price has fallen steadily, starting at $1.75 and falling as low as $0.27 in July this year. A few months ago, SIO was approached by a consortium of bidders (which included the Simonds Family Office) who offered $0.40 per share to effectively take the company private again after just two years as a public company. Although the bid price was a premium to the recent trading prices at the time, it was far below the IPO price and almost certainly below the buy prices of most investors who traded in the stock between the IPO and the takeover offer. Nevertheless, an independent board committee and an independent expert (KPMG) were commissioned to judge the fairness of the offer. Both the Independent expert and all independent board members supported the deal and determined that $0.40 was a fair price.   

The initial deal had an unusual clause relating to a lending facility provided by the Commonwealth Bank. The agreement stated that SIO would seek to get a confirmation from the bank that it would agree to extend this facility on the same terms to the privatised company. If such a confirmation was not received within five days, the deal could be terminated. This was an unusual clause and was the first indication that this takeover would not follow a typical course. Although the CBA did give this confirmation, the share price had already jumped above the offer price by the time this was received. This signalled that the market believed a higher bid was likely.

A few weeks later, another development occurred that further increased the risk of this transaction not completing. The former CEO, Paul McMahon, brought an injunction against the scheme on the basis that the timing was specifically designed to frustrate a share price indemnity that he held. The deal documents stated that the completion date of the scheme must occur by 17 November. Coincidentally (or not) Mr McMahon’s share price indemnity would be nullified if he sold his shares before 18 November (which he would have to do if the scheme proceeded) and therefore it appeared that the date had been set to specifically to void Mr McMahon’s indemnity. The court agreed with Mr McMahon although it didn’t impose an injunction. Instead it stated that it would ensure Mr McMahon’s shares were not acquired before 18 November. Interestingly, the share price barely reacted to this news and continued to trade as much as 10% above the offer price despite the fact that this could potentially give the consortium the opportunity to terminate the arrangement.

Although the consortium decided to proceed, the scheduled date for the implementation of the agreement was pushed back one day to 18 November. However, the agreement was modified in such a way that gave the consortium the ability to walk away from the deal for any reason at all. This was a particularly troubling development for the acquisition as it made it very difficult to judge the likelihood of the deal proceeding. Based on the share price, the market wasn’t the slightest bit concerned by this and continued to expect a competing bid as the SIO share price remained above the offer price of $0.40.

By early November, the expected implementation date had been pushed back to 7 December and things were looking very shaky for the deal. It emerged that other home builders, McDonald Jones in particular, were acquiring stakes in SIO and publicly stating that a price closer to $0.60 would be required for their support in the deal. This would prove to be the final nail in the coffin of this takeover.

SIO announced today that is has terminated the scheme implementation agreement and therefore cancelled the shareholder vote. The reason for this is that it didn’t expect to gain enough votes to pass the scheme resolution. For investors looking to participate in merger arbitrage, it is failed transactions like this that provide the best learning opportunities. The pathway of this deal highlights some of the things that can go wrong in takeover/merger transactions and also indicates that the market can misprice deals like these. The Rivkin Event strategy is a portfolio that participates in merger/takeover activities (among other things) but this was a trade we avoided trade because the red flags that came up early on. Profiting from these trades is as much about picking the profitable deals as it is about avoiding the bad ones. Readers interested in investing in takeover/merger transactions should contact the Rivkin team to find out how to subscribe to our event strategy.

This article was written by William O'Loughlin - Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3600.

comments powered by Disqus

DISCLAIMER: Rivkin aims to provide clear and simple information to those visiting our website. If any part of this disclaimer does not make sense, please phone Rivkin and ask to speak with a member of our Dealing and Relationship Management Team. Rivkin provides general advice and dealing services on securities, derivatives and superannuation (SMSF). Rivkin also provide SMSF administration and accounting services. Rivkin does not provide advice that takes into account your, or anybody else's, investment objectives, financial situation or needs. We strongly suggest that you consult an independent, licenced financial advisor before acting upon any information contained on this website. Investing in and trading securities (such as shares listed on the ASX) and/or derivatives (such as Contracts for Difference or 'CFDs') carry financial risks. CFDs carry with them various additional risks that differ from more simple securities such as fully-paid company shares. Some of these risks include not owning the underlying instrument from which a price is being derived, settling trades 'over the counter' with a financial institution rather than on a stock exchange, and using leverage to gain access to trades that may have a higher face value than your initial deposit. This risk of leverage means that it is possible to lose more than your initial investment. Our aim is to create more life choices for our clients, which means improving the wealth of clients throughout many market cycles by nurturing a relationship spanning many years. If you are not comfortable with your understanding of the risks involved before using a Rivkin product and service, please contact our office to seek further information or a Product Disclosure Statement, or make an appointment to sit with one of our friendly financial experts. It is in our interest for your Rivkin experience to be a rewarding and comfortable one. Rivkin is a trading name of Rivkin Securities ABN 87123290602, which holds Australian Financial Services Licence No. 332 802.