Tug of war
January 14, 2011
Can't get enough of the bitter back-and-forth between Spain's ACS and German construction giant Hochtief? Neither can hedge funds looking to squeeze out more of profit from the protracted tug-of-war.
Hedge funds are buying up Hochtief shares tendered to ACS in a move to prevent the Spanish company from being able to take over the German construction giant under the current condtions, German media reported Friday.
The Spanish company's offer of nine of its own shares in exchange for five from Hochtief has left hedge fund managers unsatisfied, according to the business daily Handelsblatt. The offer amounts to 62.23 euros ($83.18) per Hochtief share while the stock is publicly traded for 62.36 euros.
Instead of taking ACS' deal, the funds are buying shares tendered to the Spanish company for up to 65 euros. By buying approximately 262,000 of the tendered shares, the hedge funds could keep ACS from reaching a crucial 30-percent stake in Hochtief and torpedo the takeover.
Pricey takeover premium
It's unlikely the hedge fund managers are actively trying to prevent the takeover; they're simply doing what they can to make it more profitable for themselves, according to Xaver Zimmerer, managing director of the merger and acquisition consulting firm Interfinanz.
"When hedge funds go in and say they want to prevent the takeover and that they don't want any ACS stocks, it is because they are hoping to get a takeover bonus on their shares," he told Deutsche Welle.
Already suffering from heavy debt and limited liquidity, ACS had worked to avoid paying the premium, which Zimmerer said could amount to 20 percent to 30 percent of the current share price, by building up its Hochtief stake gradually instead of buying an outright majority.
According to German financial law, a 30-percent stake enables a potential acquirer to buy shares of the target company on the open market without making public disclosures on its way to reaching more than 50 percent and assuming control.
Chance for a sweeter deal
ACS, which stands for Actividades de Construccion y Servicios, had appeared to have cleared that hurdle last week when it announced its own stake and shares tendered to it reached 30.34 percent. But until January 18, when the tendered shares are transferred to ACS, they can be openly traded on the market and removed from tender.
If ACS' stake should fall below 30 percent as of January 18, the company would be forced to either give up its acquisition attempt or sweeten its offer to Hochtief shareholders.
"The hedge funds are hoping for a takeover but one with a bonus paid," Zimmerer said.
Comparing the two companies, Zimmerer said the hedge funds and other investors' actions were justified.
ACS' debt-laden balance sheet - 9.08 billion euros in 2009 - compared poorly with debt-free Hochtief. And while ACS depends on domestic construction projects, which have suffered dramatically from a housing bubble, the majority of Hochtief's 19 billion euros in revenues comes from outside Germany, mainly Asia, Australia and the United States.
An airy investment
"Hochtief's accounting has been too conservative and ACS has possibly been too aggressive," he said. "When I get an ACS share, I'm getting something with a lot of air in it."
But it remains unlikely that ACS would abandon its takeover plans, according to Kai Lucks, chairman of the German Mergers and Acquisitions Association.
"ACS is heavily under a lot of debt so it's hard to say how much a new deal would be worth, but I think they'd improve their offer," he told Deutsche Welle.
Zimmerer said he would advise clients to keep Hochtief stocks because of growing pressure on the Essen-based company's management to increase profits.
"One hopes that pressure, whether from ACS or the hedge funds, makes management take action that strongly pushes profits up," he said. "Hochtief's chances at improving profits are quite good."
Author: Sean Sinico
Editor: John Blau