The Age reported last week that a major shareholder in private equity target DCA Group has “stopped short of accusing the company management of a conflict of interest in endorsing a $2.7 billion private equity buyout.” The criticism comes after it was revealed that “DCA managing director, David Vaux, and other members of the senior management team, have agreed to invest alongside [private equity firm] CVC.”

The deal, which was announced on 25 September 2006, involves a friendly scheme of arrangement between DCA and CVC (which would need to be approved by both DCA shareholders and either the Supreme or Federal Court). In its announcement, DCA stated that CVC’s “$3.50 cash per share offer is approximately 37% above the volume weighted average share price of DCA in the three months to 8 September 2006” and a “premium of approximately 50% to DCA’s closing price of A$2.33 on 16 August.”

In Vaux’s defence, criticisms of a conflict of interests apply to every management buyout and in the end, if an acquirer is willing to offer a sufficient premium there is no legitimate reason why independent directors would have any reason to reject the offer. However, CVC’s offer of $3.50 per share isn’t really as generous as DCA made out in their announcement. Between June 2005 and April 2006, DCA traded around A$3.80 per share, above the value of CVC’s offer (and before any control premium is considered). The share price plunged in May this year after “the company issued a profit downgrade… and later missed out on two important contracts to provide diagnostic services in Britain.”

The critical major DCA shareholder may have a valid point – it seems questionable that David Vaux was so quick to join a private equity consortium in acquiring the company only months after a profit downgrade-induced the share price fall. DCA investors aggrieved about the loss of value on their shares would be incensed to find out that instead of focusing on rebuilding the share price their managing director turned around and picked up a stake in the company for a song. If Vaux thought DCA shares were undervalued, perhaps he should have recommended a share buyback that would benefit all shareholders.

While there is an element of conflict in all management buyouts the conflict in DCA’s case has been far more pronounced due to the short time frame between the share price collapse and the announcement of the Scheme. Nobody begrudges a widow who remarries, although questions can be asked when a grieving spouse drives straight from the funeral to a Las Vegas chapel.

DCA’s most recent Annual Report noted that total shareholder return over the past five years was 150.3%, versus 81.1% for the ASX200. Unfortunately for shareholders, they won’t be able to participate in any future growth, unlike their managing director.

Disclosure: The author has an economic interest in the performance of DCA shares.

Peter Fray

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