It’s a novel takeover defence when the target company dismisses a $2.2 billion offer out of hand while arguing that combining with its bidder would generate $US250 million a year of synergies.
The nature of Recall Holdings’ response to the bid by Iron Mountain, however, says that Recall’s board isn’t opposed to the concept of the long-touted merger with the dominant player in its sector but purely to its terms.
The board makes a compelling case for the deal, as long as Recall shareholders get a fair share of the value it would create.
The Recall argument actually has two planks. The first is that the starting point of $7 a share represents too skinny a margin over Recall’s standalone value.
While Iron Mountain would argue that speculation about the possibility of a bid has inflated the recall share price, a premium of only 11.7 per cent to the three-month volume-weighted average of Recall shares does appear to be light on value. Recall makes the point that over that period it has upgraded its earnings guidance for this year and made a meaningful acquisition.
It believes that if Recall can deliver on the board’s growth expectations over the next three years -- double-digit growth in revenue and earnings before interest, tax, depreciation and amortisation --an independent Recall could be worth more than $11 a share and potentially more than $12.70 a share in three years’ time.
The larger case, however, is that in an offer proposal that is weighted towards Iron Mountain scrip -- 82 per cent of the offer consideration is in paper -- the terms don’t share enough of the upside with Recall shareholders.
Recall has known for a long time that Iron Mountain would eventually come knocking. Iron Mountain looked closely at the company when Brambles conducted a sales program last year before opting to de-merge the group in the absence of an acceptable offer, and therefore was prepared for the approach.
It has undertaken a detailed analysis of the potential synergies from combining the two companies to come up with its $US250 million a year estimate. It says that estimate is conservative, given Iron Mountain’s own record of extracting synergies from last year’s acquisition of Cornerstone Records Management.
On Recall’s numbers and at the $7 a share price offered, its shareholders would get only 4 per cent of the value the combination would release if Iron Mountain achieved the $US250ma year of synergies.
Recall would, at its current market value of about $2bn, represent a little less than 20 per cent of the merged group. If its shareholders were to receive 20 per cent of the synergistic value, the offer price would need to be closer to $8.50 a share.
The extent of the weighting of the offer to Iron Mountain scrip means the US group is unlikely to succeed with anything other than an obviously generous offer. There will be a lot of Recall shareholders who won’t want (or be able) to hold shares in a US company.
The current scrip-dominated mix of the offer consideration is, in the absence of an obviously generous control premium and a reasonable share of the value the combination would unlock, is going to make it very difficult for Iron Mountain to generate any momentum for the offer or put any real pressure on the Recall board to do anything other than hold out for a much higher price.
Iron Mountain needs the board’s endorsement, given that its approach was conditional on access to due diligence and a unanimous board recommendation. US companies generally don’t like making offer without conducting a due diligence investigation.
Recall shareholders will also be very aware that Recall is, as it has been for a long time, a compelling opportunity for Iron Mountain and that won’t change if its current approach fails to gain any traction. Even if it walks away today, Recall will remain on its radar for years.
There’s not a lot of downside for the board or shareholders in rejecting the approach and potentially, with or without Iron Mountain (but particularly with the US group) potentially considerable upside.