David Jones Ltd. should have halted trading in its shares because of doubts about a A$1.65 billion ($1.7 billion) bid, according to takeover lawyers and one of the company’s largest investors.
Australia’s markets regulator said July 3 it is examining “potential issues regarding disclosure and trading in David Jones stock” after the offer from EB Private Equity collapsed. EB’s U.K. address is a rented mailbox at the same address as a company with one pound ($1.57) in assets whose only director shares the name of EB’s chairman, John Edgar.
“They should have done some due diligence to see if this guy was legitimate or not,” said Jason Beddow, chief executive officer of Argo Investments Ltd. (ARG) and the 10th biggest shareholder in the company with a 0.65 percent stake, according to data compiled by Bloomberg.
The offer for Australia’s second-largest department store chain would have been the biggest retail takeover in the country since Wesfarmers Ltd. (WES) paid $15.2 billion for Coles Group Ltd. in 2007, according to data compiled by Bloomberg. David Jones, founded in Sydney in 1838, rose the most in 17 years on June 29 after it announced the proposal. EB withdrew the bid July 2, wiping off 79 percent of the previous session’s share price gain.
“We were very concerned about the authenticity of the offer,” Helen Karlis, a Sydney-based spokeswoman for David Jones, said in a July 3 interview by phone. “The legal advice that we got was to proceed” with an announcement to the Australian Securities Exchange.
Lack of Information
The company should have asked for its shares to be halted given the lack of information about the bidder, said Beddow, Melbourne-based corporate governance adviser Ownership Matters, and takeover specialists at lawyers Baker & McKenzie, Allens, and Clayton Utz.
An initial approach from EB, whose website states it is based in the U.K. and Luxembourg, was received on May 28, David Jones said in a response to a query from the Australian Securities Exchange on July 2. David Jones wasn’t able to “obtain any meaningful information” about the bidder and said it had to disclose the proposal June 29 after a U.K.-based blog named newcastleetcfinance published details.
David Jones “did act properly in releasing that information at that time”, said Paul Xiradis, chief executive of Ausbil Dexia Ltd., the second-largest shareholder in the retailer, according to data compiled by Bloomberg. “If people are taking advantage of that, they’ll be found out.”
David Jones rose 2.15 percent to close at A$2.38 in Sydney trading yesterday, compared with a 1.1 percent increase for the benchmark S&P/ASX 200 Index.
While Australian companies are obliged to disclose takeover offers, such approaches need to be assessed for credibility, said Andrew Finch, a partner specializing in mergers and acquisitions at Allens law firm in Sydney. There’s a risk of “misleading the market into believing there’s a credible bid there, when in fact you don’t have any basis to decide,” he said.
Karlis said David Jones raised its concerns in its statements. The initial announcement on June 29, which didn’t name EB, said the suitor was “a non-incorporated U.K. entity about which no usual public information is available.”
When the shares opened 13 minutes later at 10:15 a.m. they surged 19 percent to A$2.69 within two minutes, their sharpest rise since 1995.
“Regardless of the face value of the wording, it didn’t seem to deter people from trading in David Jones shares,” said Steven Glanz, lead mergers and acquisitions partner at Baker McKenzie lawyers in Sydney. “People didn’t appear to differentiate it from the usual run of announcements where directors caution investors about reacting to a potential takeover.”
“They didn’t disclose who it was,” Karen Evans-Cullen, a partner in the mergers and acquisitions department at Clayton Utz in Sydney. “Not saying anything in some ways created more credibility to the proposal than if they’d said who it was.”
A separate announcement at 2:11 p.m. named EB and said the bidder hadn’t given David Jones details of its financial capacity, management, or deal terms. The shares rose again to A$2.67, before closing at A$2.59. The Australian Securities and Investments Commission, the country’s markets regulator, said it was “examining the proposed takeover”.
EB, which isn’t on the U.K.’s corporate register, listed its address in its first letter to David Jones at Suite 28, 58 Low Friar Street, in Newcastle-upon-Tyne, England. That’s inside a branch of Mail Boxes Etc., a post box rental company. The same address is listed on internet domain registries as the contact for EB’s website.
It’s also the registered office for three other companies, Mimu Ltd., Motion in Motion Ultra Ltd., and Goodinvestor Ltd., which list a John Edgar, born August 8, 1970, as the only director or shareholder. A John Edgar with the same birth date is sole director and shareholder of two other companies on the U.K. register, Luxury Beverage Co. and Ellen’s Brands Ltd.
None of the five companies has ever lodged more than summary financial statements, and all except Motion in Motion and Luxury Beverage were dissolved in the past seven months. The only other officer mentioned in a review of 20 regulatory filings is Ellen Edgar. She’s named as company secretary of all five companies, with the same contact address as John Edgar.
In summary accounts signed by Edgar and filed Dec. 31, Luxury Beverage said it made no profit in 2011 and had 1 pound of cash on its balance sheet. Motion in Motion Ultra was incorporated on Jan. 27 with 1 pound of share capital.
Such details, if given to the market, would have helped investors evaluate the bid, said Martin Lawrence, research director of Ownership Matters. “If David Jones knew about this, why didn’t they say so?” he said. “If they didn’t know about it, why didn’t they know about it?”
Three telephone messages left on a mobile-phone number listed in Mimu Ltd.’s filings as a contact weren’t returned. A message left on another mobile phone and two e-mails sent to the address listed on EB’s internet registry weren’t returned. A statement on EB’s website on July 3 said “unfounded, inaccurate and ill-informed publicity around our proposal has made it difficult” for the takeover talks to proceed.
The lack of a financial track record would have been “throwing warning signs at me”, said Allens’s Finch. “For companies to have been wound up without ever having lodged accounts -- that would raise questions about someone acquiring an asset the size of David Jones.”
David Jones’s board discussed the matter and external financial and legal advisers Gresham Advisory Partners Ltd. and Freehills looked into EB after the initial approach May 28, Karlis said. With details of the bid on the newcastleetcfinance blog prompting media inquiries on June 29, the company decided it was safest to disclose the approach.
“We didn’t know if it was a front for a reputable private equity firm or a syndicate of wealthy individuals,” she said. “We warned shareholders to act cautiously.”
Freehills spokeswoman Daya Lichtenstein sent an e-mail declining to comment, citing client confidentiality. Officials at Gresham didn’t reply to three phone messages seeking comment.
Ownership Matters’s Lawrence said David Jones was constrained by Australian corporate rules, which have demanded ever-faster disclosure of material information in recent years.
“If they’d decided not to announce it and EB had been credible they’d have been hung out to dry,” he said.
Allens’s Finch said “the pendulum has swung too far to boards immediately disclosing approaches.”
With hindsight, the company should have halted its shares from trade, said Argo’s Beddow, Baker McKenzie’s Glanz, and Clayton Utz’s Evans-Cullen.
“If the proof is in the pudding, the wording of their statements didn’t deter people from reacting,” said Glanz.
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