The toll of takeovers

Transurban, and AXA Asia Pacific for that matter, are in that uncomfortable first phase of an attempted bear hug, where there's nothing formal on the table but both they and the market are waiting for their prospective bidders to ratchet up the pressure.

It is a difficult period for target company directors. Despite the reality that they having nothing capable of acceptance before them, and have rejected what are inevitably very conditional approaches riddled with get-out clauses – more attempts to acquire a free option on an offer than real offers – the pressure for them to 'do something' to lock in an offer will intensify.

During the hiatus period, the aspiring acquirers – two Canadian pension funds in Transurban's case, and AXA SA of France and AMP in AXA APH's – will hope that hedge funds will build positions in the targets' stock, creating a constituency and momentum for a transaction to occur and undermining the defending board's negotiating position in the process.

For the targets, given that there is nothing actually on the table – Transurban's approach was "incomplete, non-binding, highly conditional" and hadn't even been approved by the funds' investment committees – all they can do to protect their negotiating leverage in the event the potential bidders get serious is to refuse to blink and make any concessions and make their case on value to their shareholders and the market-at-large.

They also need to convince the market that their initial rebuttals of the proposals they received were made purely on the basis of value and execution risk – that it isn't that they simply don't want to be taken over, regardless of price.

That is what Transurban presumably was hoping to do with the letter it sent to security holders today, referring to its collection of toll-roads, quite reasonably, as "among the world's best" and highlighting both the portfolio's performance during the financial crisis and its growth prospects.

The upgrade of the group's CityLink toll-road network is almost complete and it has in-principle agreement for a major upgrade of Sydney's Hills M2 toll-road. It is also building a new toll-road project in the US. It would no doubt argue that the market hasn't properly appreciated the impact of those investments on its prospects and value.

The Canadian funds – Canada Pension Plan Investment Board and Ontario Teachers' Pension Plan – have revealed their approach involved an offer of $5.25 per security, a 25 per cent premium to Transurban's three-month volume-weighted average price ahead of the approach. The funds, between them, own about 28 per cent of Transurban.

The challenge for the defending board is to convince local investors, and a market that is fixated with near-term performance, of the long-term value that can be created from established toll-roads where both volume and price will rise consistently in real terms over decades. The pension funds certainly understand the value of owning assets that will produce CPI-plus growth in cash flows in the long term.

AXA APH's independent directors have a similar, but slightly different and potentially even more difficult task.

Not only, given AXA SA's 53 per cent shareholding, is there no prospect of a competing bid if the AXA/AMP proposal goes live, but the proposal also involves a synergy-generating, value-adding merger of their Australasian businesses with their major competitors'.

The challenge is to convince the market that there is more strategic and tactical value within their Asian businesses than the market has appreciated, and that the share of the new Australasian super-institution created by a merger with AMP ought to be larger given that the deal can only occur if they endorse and cooperate with a scheme of arrangement.

AXA SA's willingness to put a big price on the Asian assets – $8.24 billion – has already alerted the market to the fact that they had previously been grossly undervalued. However, beyond their value, there is the value to AXA SA of removing the local business as an obstacle and complication to its Asian ambitions.

Under the terms of the undertakings it gave the Australian government when it initially invested in what was then National Mutual, AXA SA can't do anything in Asia without first offering the opportunity to AXA APH. That's an incredibly valuable option for the local group – a first right of refusal over any opportunity the parent group identifies in the region – and, therefore, is an option whose value could be capitalised in the terms of any takeover.

Like Transurban directors, the AXA APH board, having dismissed the initial approach, can't be complacent about the absence of an actual offer and will inevitably have to make its case persuasively, publicly and privately, to its shareholders and the market in order to raise their security holders' sights and expectations of value while awaiting their suitors' next move.