Make no mistake, the takeover battle for Consolidated Minerals is starting to get ugly.

The ConsMin board, which had previously endorsed an offer from Brian Gilbertson’s Pallinghurst Investment fund, is under siege after rejecting a rival bid from Michael Kiernan’s Territory Resources on Friday.

Territory’s indicative bid (which was subject to due diligence) valued ConsMin at $3.72 per share, well above Pallinghurst’s original offer of $2.30 per share (which was recommended by ConsMin) and 30% higher than Pallinghurst’s revised offer of $2.82 per share.

In rejecting the offer, ConsMin chair, Dick Carter, noted that “the current share price of Territory Resources does not reflect the true underlying value of those shares”, and that “Territory shares have traded substantially below $1.00 until this month”.

Kiernan was incensed by ConsMin’s rejection, deeming it “scandalous” and that the board “are making decisions on behalf of shareholders that they will refuse another group the same courtesy that Pallinghurst received.”

Kiernan didn’t stop there, pointing out that the ConsMin board “agreed to a previously low-priced bid from Gilbertson, and this is the same board that refuses an alternative proposal to be submitted to shareholders.”

The ConsMin board’s decision to dismiss what appears to be a materially higher offer, regardless of their belief of Territory’s intrinsic value, does not seem to be in the best interests of shareholders. At the very least, ConsMin should enter into negotiations with Territory to perhaps increase the cash amount offered if they are concerned about the underlying value of Territory shares.

The ConsMin battle is reminiscent of the two-way battle for Revlon which occurred during the last LBO boom in 1985. Back then, corporate raider, Ronald Perelman (who, at the time, owned a relatively small supermarket chain called Pantry Pride), attempted to undertake a junk-bond backed buy-out of the cosmetics company. Unfortunately, Perelman’s New Jersey demeanor didn’t impress the aristocratic Revlon boss, Michel C. Bergerac.

To ensure that Revlon didn’t fall into Perelman’s hands, Bergerac engineered a deal with buyout firm, Forstmann Little, for a lower price than what Perelman offered. Revlon also undertook several defensive measures, including a poison pill, to prevent Perelman from taking over the company. In addition, Revlon permitted Forstmann to conduct due diligence, but did not afford Perelman the same luxury.

Perelman sued, arguing that after the Revlon board put the company up for sale its only duty was to shareholders’ to maximize the price they received. Therefore, the board could not favour one bidder, regardless of any “personal antipathy” they felt towards it.

The Delaware court agreed, noting that the “directors” role had changed from “defenders of the corporate bastion to auctioneers charged with getting the best price for shareholders.”

While the US precedent certainly doesn’t legally apply in Australia, from a corporate governance perspective, ConsMin seems to be in the “Revlon zone”. In agreeing to sell control of the company to Pallinghurst, the ConsMin board’s responsibility shifts to gaining the maximum consideration for ConsMin shareholders.

Regardless of the board’s wishes, for the scheme of arrangement facilitating the Pallinghurst merger to be successful, 75% of votes (and 50% of shareholders) need to support it. With the specter of Kiernan, Noble Group and a potential rival bid looming in the background, such support is looking increasingly shaky.

Disclosure: The writer holds an economic interest in the performance of ConsMin shares.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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