Following-on from its acquisition on 13 February 2019 of a 19.9% stake in Xenith IP Group Limited (ASX:XIP), IPH Limited (ASX:IPH) has now announced [PDF, 3.0MB] that it has submitted a proposal to acquire Xenith in its entirety for a combination of cash and IPH shares valued at $1.97 per Xenith share (based on the IPH closing price as it 11 March 2019). The announcement weighs-in at a hefty 204 pages, because it includes the complete proposal, along with a deck of presentation slides, and the proposed Scheme Implementation Deed. I understand that IPH has chosen this mechanism to present its proposal because it has been unable to enter into any discussions with Xenith due to the terms of an agreement between Xenith and QANTM IP Limited (ASX:QIP) established in relation to their proposed merger, which was announced back in November 2018.Xenith has acknowledged receipt of the proposal [PDF, 76.3kB], advising that it ‘is currently reviewing the IPH proposal’ and noting that ‘its proposed merger with QANTM Intellectual Property Limited remains on foot.’
QANTM has provided a more substantive initial response [PDF, 204.7kB], in which it takes issue with two specific aspects of the IPH announcement.
Firstly, QANTM contends that the IPH announcement understates the value of the proposed QANTM/Xenith merger consideration. This appears to be a fair criticism. IPH compares the value of its offer, i.e. $1.97 per Xenith share, with the value of the QANTM merger proposal at the time of its announcement on 26 November 2018, when it was just $1.85 per Xenith share. Since then, however, the QANTM share price has risen, and as at the close of the market on 11 March 2019 was $1.66, making the implied merger consideration $2.03 per Xenith share. QANTM also notes that the one month VWAP (volume weighted average price) of its shares is currently $1.64, on which measure the implied merger consideration is $2.00 per Xenith share.
The other point of contention raised by QANTM relates to an implication in IPH’s proposal that that its acquisition of Xenith would be subject to similar risks regarding clearance by the Australian Competition and Consumer Commission (ACCC) as the QANTM/Xenith merger. The ACCC began its review of the QANTM/Xenith proposal on 10 January 2019, and is scheduled to announce its findings on 21 March 2019. It commenced a similar review of potential acquisitions by IPH of either QANTM or Xenith on 22 February 2019, following IPH’s acquisition of its 19.9% stake in Xenith. The provisional date for announcement of the findings of that review is 2 May 2019.
QANTM’s first point is thus that the clearance risk in relation to the QANTM/Xenith merger will be resolved far sooner than that associated with an acquisition of Xenith by IPH. This is true, but is only relevant if there were some great urgency for a transaction to be completed. I cannot see why that should be so, other than the fact that Xenith is hoping to have shareholders vote on the proposal to merge with QANTM at a Scheme Meeting that I understand is already scheduled to take place on 3 April 2019.
QANTM’s second point is that, in its words, ‘a takeover of Xenith by IPH would lead to a materially different market structure than the merger of QANTM and Xenith’. Again, while there may be some truth to this, I am not sure that it is ultimately relevant. Given the structure of the listed groups, the continuing independent operation of the firms within each group, and the fact that numerous privately-held firms collectively retain a larger – and growing – share of the market than even all three listed groups combined, I cannot see how a merger between any two of the three groups would result in a substantial lessening of competition in the market for IP service in Australia. This is the only consideration that is subject to review by the ACCC.
I am beyond predicting what is likely to happen next. However, my guess is that Xenith’s fate is in the hands of its institutional investors. It requires a 75% majority vote in favour at the Scheme Meeting in order to proceed with the QANTM merger. IPH holds 19.9% of Xenith shares, and will vote against. So unless Xenith can secure the votes of all of its remaining institutional investors (i.e. the ones that did not already sell out to IPH), along with a majority of smaller shareholders (including, presumably, the various present and past employees of Xenith group firms who hold shares), then the QANTM merger is dead in the water.
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