Duet swallows poison pill to deter Spark

I shouldn't be surprised. Only last week I responded to an Intelligent Investor member that pipeline and energy distribution company DUET Group (ASX: DUE) was a potential takeover target. Spark Infrastructure (ASX: SKI) has been stalking the company since acquiring a 14% stake in May 2014.

Instead, today DUET announced that it has made a $1.9bn takeover bid for Energy Developments (ASX: ENE), an operator of remote and green energy power generation projects. While DUET has attempted to rationalise the transaction, it looks suspiciously like a defensive manoeuvre.

There aren't many 'synergies' in this deal. DUET's takeover of Energy Developments simply makes it larger and more diversified.

The takeover will be funded by a $1.7bn capital raising, which obviously increases the number of shares on issue. In turn, the capital raising will seriously dilute Spark's stake in DUET. This capital raising comes on top of another $400m equity issue in December, which had already diluted Spark's stake to 12.4%.

If Spark wanted to bid for DUET now, it would have to pay considerably more than $5bn. Last year DUET's market capitalisation was approximately $3bn.

Not shareholder-friendly

This isn't shareholder-friendly behaviour. Instead, it looks very much like DUET trying to maintain its independence.

Swallowing a 'poison pill' – such as making an acquisition or launching a capital raising – is all too common when a company is under threat of takeover. Indeed, we covered exactly this topic in Management motives: A tricky business last year.

The next time you consider takeover targets as investment prospects, keep this in mind. All too often a target turns predator in an attempt to throw its stalkers off the scent.

You could you end up owning shares in a very different business than you thought – and paying for the privilege.

Disclosure: The author owns shares in Energy Developments. While he will benefit from DUET's takeover, he doesn't have to be happy about it.

To get more insights, stock research and BUY recommendations, take a 15 day free trial of Intelligent Investor now.