Company value and offer price in the context of public takeovers – compliance with the minimum price provisions

Company value and offer price in the context of public takeovers – compliance with the minimum price provisions

In the first two articles on the topic of company value and offer price in the context of public takeovers in Switzerland, we focused on the relevant framework conditions for all public takeover offers.

 

In addition to the above-mentioned framework conditions, the minimum price provisions must be considered for mandatory and change of control offers. The minimum price provisions set the minimum price that must be offered to all recipients of the offer in the context of a mandatory or change of control offer. Hence, such provisions can significantly influence the determination of the offer price. For mandatory and change of control offers, the potential for additional stumbling blocks is consequently much higher. Accordingly, we focus in this blog on the handling of these additional requirements, what ensures the highest possible transaction security.

 

Introduction to the minimum price provisions

 

The minimum price is the higher of 1) the stock exchange price and 2) the highest price paid by the offeror in preceding transactions.

 

The following can be stated about 1) the stock exchange price: If a share is liquid in the sense of takeover law, the VWAP (Volume-Weighted Average Price) is considered the minimum price in the sense of the stock exchange price. In the case of an illiquid share in the sense of takeover law, on the other hand, a specific valuation must be carried out by a review body.

 

The following should be noted about 2) the highest price paid by the offeror in preceding transactions: The relevant price corresponds to the highest price paid by the bidder and the parties acting in concert with it for equity securities of the target company in the twelve months preceding publication of the offer or the pre-announcement, respectively, and is to be assessed taking into account non-cash mutual ancillary services and different share categories.

 

Liquid versus illiquid shares
Since a different procedure must be applied to determine the minimum price for liquid shares than for illiquid shares, it is important to distinguish between these two types of shares. To determine the minimum price, it is therefore necessary to define whether a share is liquid within the meaning of the takeover law. The criteria for assessing whether a share is considered liquid within the meaning of takeover law are defined in «TOB Circular No. 2». Accordingly, shares are considered liquid if they meet one of the following two criteria:

  • The relevant equity security is part of the SLI Swiss Leader Index («SLI»). The SLI contains the 30 most liquid and largest stocks on the Swiss stock market.
  • If the stock is not part of the SLI, it is considered liquid if the monthly median of the daily trading volume of on-exchange transactions in at least 10 out of 12 full months preceding the offer (or pre-announcement) is equal to or greater than 0.04% of the tradable portion (free float).

The following three examples cover the possible outcomes of these two criteria.

 

Lonza Group Ltd: Shares of Lonza Group Ltd are part of the SLI and are therefore considered liquid.

 

Forbo Holding Ltd: Shares of Forbo Holding Ltd are not part of the SLI. For this reason, it is necessary to check whether the monthly median of the daily trading volume is equal to or greater than 0.04% of the tradable portion in at least 10 out of 12 full months prior to the cut-off date (here notionally 1 October 2021). Chart 1 shows that the monthly median of the daily trading volume exceeded 0.04% of the tradable portion in each of the past 12 months. This share is therefore considered liquid in the sense of the takeover law.

Chart 1: Liquidity analysis of the shares of Forbo Holding Ltd (Own analysis, source: Refinitiv as of October 2021)

bild1

Airesis SA: Shares of Airesis SA are likewise not part of the SLI. It is therefore necessary to check whether the monthly median of the daily trading volume is equal to or greater than 0.04% of the tradable portion in at least 10 out of 12 full months prior to the cut-off date (here notionally 1 October 2021). Chart 2 shows that the monthly median of the daily trading volume exceeded 0.04% of the tradable portion in only one of the past 12 months. This share is therefore considered illiquid in the sense of the takeover law.

 

Chart 2: Liquidity analysis of Airesis SA shares (Own analysis, source: Refinitiv as of October 2021)

bild2

The VWAP as calculation base for the stock exchange price of a liquid share

 

In terms of takeover law, VWAP stands for Volume-Weighted Average Price and corresponds to the volume-weighted average price of the stock exchange trades of the last 60 trading days.

 

For determining the minimum price in the event of a takeover offer for the shares of Lonza Group Ltd as of 1 October 2021 (and also of Forbo Holding Ltd), the stock exchange price would accordingly be defined as VWAP over 60 trading days. The 60 trading days VWAP of the shares of Lonza Group Ltd was approximately CHF 725 as of 30 September 2021. This value was thus significantly below the market price of approximately CHF 702 as of 30 September 2021.

 

Due to the averaging over 60 trading days, the VWAP shows lower volatility compared to the share price development on a daily basis and may also deviate significantly from the current share price. Furthermore, because of the volume weighting, the VWAP cannot be derived from the daily closing prices.

 

Consequently, as an average price, the VWAP reacts more slowly to changing price levels. Since the VWAP over 60 trading days can act as a minimum price for a liquid share, its development must be anticipated accordingly as part of transaction planning. If, for example, the share price falls shortly before publication of the offer (or the pre-announcement), the offer price, which must at least correspond to the VWAP or the minimum price, respectively, may have to be significantly higher than the current market price.

 

Moreover, it is necessary to take into account that significant price influences due to special events within the relevant period, such as dividend distributions or capital transactions, require an adjustment of the VWAP. In its report, the review body must confirm the appropriateness of the adjustment and show the basis for its calculation.

 

The review body’s valuation as calculation base for the market price of an illiquid share

 

If a share is classified as illiquid within the meaning of takeover law, the minimum price is determined by the valuation of a review body. According to the preceding analysis, the minimum price determination for Airesis SA in terms of the stock exchange price would consequently have to be made via the valuation of a review body.

 

In the second blog of the series, we already reported in detail on the fairness opinion as an element in public takeovers in Switzerland. In the present context, the question thus arises of how the valuation of a review body differs from the fairness opinion. A significant difference is justified by the purpose of the valuation. The purpose of the valuation by the review body is to identify a specific value (the stock exchange price as the relevant value for the minimum price determination in the sense of takeover law). The valuation is therefore carried out with a specific value as the result. The fairness opinion, on the other hand, is prepared for the attention of the board of directors of the target company. The fairness opinion assesses whether the offer is fair from a financial perspective from the target company’s point of view (based on an identified value range).

 

The highest price paid by the offeror in preceding transactions
The second element to be considered in assessing the minimum price is the highest price paid by the offeror in preceding transactions. The relevant price for the minimum price assessment is the highest price paid by the offeror and parties acting in concert with the offeror for equity securities of the target company in the last twelve months. In addition to the price in cash, the quantification of this value must also take non-cash mutual ancillary services into account, among other things. We will go into more detail on this specific topic in Blog 4.

 

Practical example
The takeover offer announced in August 2020 by Liberty Global plc or its subsidiary UPC Schweiz GmbH, respectively, for all publicly held registered shares of Sunrise Communications Group Ltd was a change of control offer. In this specific case, the shareholders of Sunrise Communications Group Ltd were offered CHF 110.0 net in cash.

 

The takeover offer described is a change of control offer, as the offer is addressed to all publicly held registered shares of Sunrise Communications Group Ltd, meaning that the threshold of 33 1/3% is exceeded in case of success. Furthermore, the Sunrise articles of incorporation contained neither an opting-out nor an opting-up. Therefore, the minimum price provisions were to be applied.

 

In order to assess compliance with the minimum price provision, the higher of the stock exchange price and the highest price paid by the offeror in preceding transactions is relevant. The following can be stated regarding the stock exchange price:

  • The shares of Sunrise Communications Group Ltd are not part of the SLI. Consequently, a detailed assessment must be carried out. According to the publicly available fairness opinion on the takeover offer, the Sunrise share is considered liquid in the sense of the takeover law as the monthly median of the daily trading volume was greater than or equal to 0.04% of the tradable portion in at least 10 out of 12 months prior to the announcement of the takeover offer.
  • As the share of Sunrise Communications Group Ltd is considered liquid, the 60 trading days VWAP is used to determine the minimum price with regard to the stock exchange price. The share price prior to the announcement was CHF 86.0 and the price according to the VWAP method was approximately CHF 83.2. The offered price per share of CHF 110.0, however, is significantly higher than the stock exchange price in terms of the takeover law, showing a premium of approximately 32% compared to the VWAP. This example also shows that the minimum price can be below the then-current share price.

The following can be stated regarding the highest price paid by the offeror in preceding transactions:

  • No transactions occurred and therefore no price of preceding transactions exists.

The higher of the two values is therefore the VWAP, which amounts to approximately CHF 83.2. The offer price of CHF 110.0 therefore clearly meets the minimum price provisions.

 

Preview of Blog 4 of the series

 

When the highest price paid by the offeror in preceding transactions is to be considered, Swiss procedural practice shows that any non-cash mutual ancillary services between the parties involved must be taken into account in addition to the price paid in cash. This specific topic with the potential for significant stumbling blocks in the context of public takeovers in Switzerland will be addressed in detail in the fourth blog.

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IFBC Team

info@ifbc.ch