Unlikely to shut up

CVC have to put up or shut up on Monday, with regard to their mooted, Richard-Koch-partnered, bid for Betfair. Like everyone else out there, I don’t have the first clue what will happen: first, I have had no contact with either side; and second, I have no experience of this sort of thing. But as I keep being asked what I think, here are my ill-considered and ill-informed thoughts.

I confess to being confused by the price at tonight’s close: £8.98. Indeed, with an hour of trading to go, the shares stood at £8.75, which was more confusing still. It suggests to me not just that the market doesn’t think that the deal will be done, but that they aren’t expecting a bid to be confirmed at all – a scenario I find unlikely, to say the least.

A great deal of focus has, unsurprisingly, been on the Founders’ view of the world, but in many respects, what they think is irrelevant to the immediate process. The Board’s decision as to whether to open their books to due diligence will depend not on what Ed and Bert (who I suspect would be offered shares in the newly-privatised company) want, but on what the Board considers fair value for people who would be carried out of the shares and have no further participation in the upside from the day the deal is done. Logic dictates that the number that excites them and the “interests of all shareholders” that they represent would therefore need to be significantly higher than one which might entice someone who will be carried into the deal and remain part of the future prospects.

As such, forget what any final price might be: CVC need to put a number on the table on Monday which prevents the Board from simply shutting up shop and not allowing the process to get anywhere near to a vote. That number surely now needs to be at least £9.50, because if it isn’t, it will be far too easy for the Board to reject. Why? Because a combination of the existence of the bid (with people knowing that a company like CVC, which requires a set return over a set period, sees value at or around the £8.80 mark) and  the update on Tuesday (which was followed by most analysts putting out ‘buy’ recommendations) have probably set a new floor on the shares at around (or slightly above) the £8 mark (certainly, at least, well above the £7 it was at before Mark Kleinman broke the news of private equity interest); and because the Board knows that even if the price crashed back down to that level, it has £168m with which it could, if it chose (and if the company strategy hasn’t delivered that £9.50 price itself by the third quarter), use to pay a special dividend of up to £1.50 before it had to face shareholders at a  Q4 AGM. (I know they said they were holding onto it for acquisitions, but I think their hand would be forced if they rejected a bid without referring it to shareholders, and then failed, by the time they had to face those shareholders, to deliver comparable value.)

All of which is why, as I say, tonight’s close makes no sense to me.  I can see that it’s somehow weighted 2/3rds-1/3rd between the floor of £8 and the potential (at the low-end) £9.50, but it seems to me that the probability of the latter is significantly greater, not to say extremely high. Monday must, in my view, see either the granting of an extension (which suggests both sides think a deal could be done, since (if I understand correctly) Betfair is the side which would have to apply for it); or a firm bid – which, self-evidently, CVC will not want to be dismissed out of hand. The alternative – that they walk away – would seem a very odd thing to have needed six days since Tuesday to decide.