The Australian Securities and Investment Commission didn’t need to announce that it was examining the peculiar proposed takeover offer for David Jones that was aborted yesterday. It wouldn’t have been doing its job if it weren’t investigating both the disclosure issues and trading in the retailer’s shares.
Despite some stinging criticism from some quarters of the disclosure by David Jones itself, however, that doesn’t look like as much of an issue as the way in which the board was forced into revealing that the approach by EB Private Equity had been made. That is of concern.
It is apparent from David Jones’ response to an ASX query last evening that the board, after receiving an unsolicited letter containing a "highly conditional, uncertain and incomplete" expression of interest from EBPE on May 28, was sceptical of the source of the proposal from a UK entity about which there was no meaningful publicly available information and essentially told EBPE to go away. There was nothing to disclose at that point.
On May 30 EBPE told the company it would make further contact and David Jones learned from its share registry service that EBPE had been asking for information on its shareholders.
On June 28 it got another letter from the UK firm expressing its interest in making an offer, which David Jones said was expressed as being conditional only on due diligence but which remained "highly conditional, incomplete and uncertain in many material respects" and which had no details of the prospective bidder’s financial capacity, management or the terms of the $450 million of residual equity David Jones shareholders were supposed to retain.
To that point David Jones’ knowledge of EBPE and its proposal would appear to fit within the carve-outs in the ASX’s continuous disclosure regime for incomplete proposals or negotiations and information that involves matters of supposition or which is insufficiently definite.
Indeed, given David Jones’ obvious reservations (which appear to have been borne out by events) about the credibility of the proposal it would have been potentially misleading for it to have told the market about the approach.
On the morning of June 29 – last Friday – the company said it became aware that information about EBPE's approach was likely to be known to several third parties, including two financial market participants and one property market participant, although it didn’t know the precise extent of their knowledge.
Under the ASX’s listing rules, once confidentiality is lost, so are the exemptions from disclosure provided by the carve-outs, so David Jones made the first of its two announcements that day.
The first, before trade opened, was to reveal the approach without any detail, while warning shareholders to treat any market comment about it cautiously. Subsequently it learned that a numbers of wire services had the details of the EBPE proposal after they were published on an obscure UK blog so it disclosed them, while again pointing to its lack of information about EBPE’s financial capacity and management.
It is quite clear that David Jones’ board and management were very suspicious about EBPE and its motives and anxious not to give the proposal credibility without more information and that they did their best to signal their reservations to shareholders.
The board appears to have acted in line with, and in the spirit of, the continuous disclosure regime, initially trying not to give the market incomplete and potentially misleading information and subsequently to give it sufficient information, studded with clear warnings, to ensure that the entire market was properly informed.
It is not clear, given the peculiar circumstances of the approach, how the board could have handled it much differently.
It could, as it did ahead of its second announcement on Friday, have sought a trading halt before disclosing the approach in its first announcement but given the character of that approach and the aspiring offerer that would have been an overreaction. You can’t halt trading every time some fantasising tyre-kicker without a public CV says they might like to buy your company.
Anyone who bought or sold David Jones shares on Friday morning, when the price soared, should have been doing so with their eyes open to the risk that no offer would materialise.
EBPE, of course, walked away from David Jones yesterday, citing the impact of the publicity on its ability to proceed. From what’s been learned about the firm, the publicity it attracted wasn’t its only obstacle to mounting a $1.65 billion offer.
There are some quite murky aspects to the events and inevitably ASIC and its UK counterparts will want to talk to EBPE and the blogger who played a role in forcing David Jones to reveal the approach, as well as examining trading in David Jones shares ahead of and after the trading halt.
From David Jones’ explanation of its response to the unusual approach and then its subsequent disclosures, however, it doesn’t look like it has much to fear from the probes and nor, on the basis of what is known, does it deserve some of the criticism that has been directed at it.
David Jones' decent disclosure
While it would be no surprise if wrongdoing was yet uncovered, an examination of the David Jones-EB Private Equity saga timeline suggests DJs will not be among those in the dock.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free