Clever bid tactics to snare Navitas

These days private equity bids are less 'Barbarians at the Gate' and more 'prise open the back door'. Newish private equity player BGH Capital's smart ploy to win over Navitas has been to convince the company's former managing director, Rod Jones, to join a bidding consortium along with AustralianSuper.

Jones's 13% stake means the BGH consortium has its foot on 18% of Navitas. With Jones obviously happy to sell at the proposed $5.50 - although that's only partly true, as you'll see soon, it's a powerful position from which to launch a takeover.

As usual, the $5.50 proposed bid is 'preliminary, conditional and non-binding'. Directors will need to grant the consortium due diligence, the consortium will need to be happy with what they find, and they'll need to secure a board recommendation before they put a scheme of arrangement to shareholders. These are high hurdles and private equity bids fall over regularly.

The BGH consortium's April bid for hospital operator Healthscope is a recent example. Healthscope's directors rejected its bid in favour of a sale-and-leaseback of the company's hospital properties. The company simply copied what the BGH consortium planned to do itself, outmanoeuvring its suitor.

However, with the proposed $5.50 bid for Navitas representing a 26% premium to Tuesday's closing price, it will be harder for directors to reject this one. A 10-cent sweetener might be all that's needed to get it over the line.

D'oh!

The bid timing is unfortunate given our recent recommendation downgrade. Even though we see Navitas as both a quality business and 'not expensive', we chose to sell at $4.25 in July. Navitas seemed to be missing out on favourable tailwinds in the education sector, making earnings growth difficult to achieve. The bid suggests Navitas was indeed reasonably priced, but the ship has nevertheless sailed without us.

There may, however, be an interesting opportunity for (very) risk-tolerant investors who still own shares in Navitas. The opportunity arises because Rod Jones presumably had to be enticed to participate in the consortium.

There are in fact two alternative bids. The first is $5.50 in cash, which most shareholders will probably prefer. However, the second alternative allows accepting shareholders to retain some exposure to Navitas's business after it delists. Jones will take this second alternative, giving him upside in the event the business performs well under private equity ownership.

This second alternative is $2.75 a share in cash plus one share in the new unlisted entity - 'RollCo' - for every two Navitas shares held. RollCo will own the unlisted Navitas business assuming the scheme is implemented. This alternative is available to all shareholders, although participation will be capped at between 5-15% ownership of RollCo's post-acquisition equity (excluding Jones's interest).

Smart money?

It's sometimes said you should follow the smart money, and Rod Jones knows the Navitas business inside out. If he's prepared to bet on the unlisted company, maybe you should too.

However, RollCo is likely to be highly leveraged. You'd only consider the second alternative if you're comfortable with very high risk, and aware any exit is completely out of your control. Remember that Jones will receive $124m in cash for his Navitas stake, so he won't be short of a bob even if RollCo ends up failing down the track.

As we've already sold out of Navitas, we won't be providing further information on this strategy - and, in any case, following unlisted businesses is outside our remit. You'd need to do your own research on the second alternative once the Scheme Documentation is released.

If you're still holding Navitas shares, you're presumably of independent mind. In that case, it might be worthwhile holding the stock for now given we judge the likelihood of a successful bid as reasonably high.

We won't provide a running commentary on the bid given we've sold out and are focusing on other opportunities. We've also removed the price guide. Our official recommendation remains SELL, but we note that this might not be appropriate for independently-minded investors.