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back to index backEUROtalk May,  2005

Win some, lose some

The contrasting cases of Wella and Celanese illustrate the tricky nature of Germany's takeover code.

In late February, at an analysts' conference in New York, Procter & Gamble's affable CEO, Alan A.G.” Lafley, was asked why investors should believe that the company's $57 billion (€44 billion) merger with Gillette would deliver the promised synergies when the smaller 2003 acquisition of German hair product-maker Wella had so far failed to meet targets. Lafley answered: Because of the—how should I say it—idiosyncrasies of German law, and because of the actions of some minority shareholders, we spent the first year-plus working our way to a ‘domination agreement.

Indeed, P&G's awkward takeover of Wella is proving to be a lesson in the pitfalls of German takeover law. Having bought a controlling interest in Wella in February 2003, P&G didn't seek the legal authority to push through decisions—under a Domination and Profit Transfer Agreement—until June 2004. In the intervening period it was hassled by a minority shareholder group that owns 19% of the company. Though the group never won any of the litigation against P&G, they endured threats from CFO Clayton Daley to delist Wella's shares and cut the dividend, and eventually P&G caved into the pressure.

What changed? Last year, Daley said P&G sought the domination agreement because it wanted to move through the acquisition according to our own schedule and timetable, as opposed to what the hedge funds want us to do.” Today, when asked why the company took so long, Daley's spokesman, Thomas Tippl, maintains that P&G never needed a domination agreement but did so because it was the right thing to do.” A straighter answer might be what Lafley hinted at in his remarks: that P&G badly misjudged German law when it made its initial offer for Wella.

Under the 2002 takeover code, P&G could offer different prices for different classes of shares. The code also introduced a squeeze out” clause. Having been outmanoeuvred by the Herz family for control of Beiersdorf, maker of Nivea cream, P&G was determined that Wella didn't fall to rival Henkel, which owned 10% of it. So, in early 2003 it paid €92.25 a share for nearly 78% of Wella (93% of voting) owned by the Ströher family, a whopping premium over the €50-to-€60 price range that both share classes traded at in preceding months. It then offered €61.50 for preferred shares.

It was this unprecedented discrepancy that raised the hackles of minority shareholders and brought in the arbitrageurs. Under German company law, if a bidder fails to reach the 95% squeeze-out threshold, it must manage the company at arm's length or seek a domination agreement.

P&G raised its offer to €65 with a guarantee that sellers would get any difference it had to pay if it sought a domination agreement within a year. Henkel sold, giving P&G 99% of the voting shares, but only 81% of the total equity. Total cost at that point was €4.65 billion.

The year of attrition ensued. Daley had to emphasise P&G's distance from Wella to German courts. Exactly one year and one day after the offer—thus avoiding paying Henkel an additional €20m under the tender agreement—it sought the domination agreement, offering €72.86 cash, or a €3.83 dividend (4.8% yield), to preferred shareholders. An award proceeding will now decide, adding between €40m and €100m to P&G's costs, not counting the dividend payments.

Acquirers have learned the lesson from the Wella situation,” says Josef Broich, a Frankfurt-based partner at law firm Broich Bayer von Rom, which acted for Wella's minority shareholders. Nobody will make the same mistake, paying such a disproportionate premium for different classes of shares.”

The lesson appears to have been learned by Blackstone, a buy-out firm where partner Chinh Chu moved with blazing speed last year to get control of Celanese, a German chemicals company, in a €3.2 billion leveraged takeover. Having bought 84% of the company at €32 a share in the spring, Blackstone quickly put in place a domination agreement, with a cash offer of €41.92 a share.

That allowed Blackstone to reorganise Celanese swiftly, moving headquarters to Dallas (most operations are in the US), and do an $800m IPO in New York. Blackstone also took out a $1 billion dividend and arranged the sale of a food unit and the purchase of two chemicals companies.

Celanese minority shareholders (holding 16%) are contesting the domination agreement valuation. But Blackstone didn't have P&G's delays, nor the argument about a huge discrepancy.

Nonetheless, Germany's takeover quirks still may deter potential buyers. Maximilian Schiessl, a Dusseldorf-based partner at law firm Hengeler Müller advised Celanese, says: Celanese is a wonderful example. Everybody should be happy; and still I'm doing major litigation over the outcome.”

Source: CFO Europe magazine - GAI

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