Target Company Statement and Independent Report
Abano Healthcare Group has today released the Target Company Statement and an Independent Appraisal Report from KordaMentha, in response to the takeover offer from Crescent Capital Partners Limited.
Copies of the Target Company Statement, Independent Report and Letter to Shareholders are attached at the bottom of this release.
COMMENTARY TO SHAREHOLDERS
The Board of Directors of Abano Healthcare Group Limited UNANIMOUSLY RECOMMEND THAT YOU REJECT the Takeover Offer from Crescent Capital Partners Limited.
You will by now have received an Offer document from Crescent Capital Partners Limited, under which Crescent is making a full Offer for the shares in Abano Healthcare Group Limited at a price of $5.20 per share.
Enclosed with this letter is a new Target Company Statement prepared by the Board of Directors of Abano in response to the Offer. The Statement also includes a new Independent Adviser’s report prepared by KordaMentha (formerly Ferrier Hodgson) who were appointed to prepare a report on the merits of Crescent’s Offer, for the beneﬁt of all shareholders.
YOUR DIRECTORS UNANIMOUSLY RECOMMEND THAT YOU REJECT CRESCENT’S OFFER:
KordaMentha recommend a valuation range of $5.15 to $5.90 (mid point $5.52) and note that the company’s performance and reforecast has increased their comfort regarding the achievability of the upper end of the assessed range.
Abano is at the very early stages of a growth phase, and we appreciate that this will have caused considerable difficulties for the Independent Adviser as earnings forecasts are increased as new agreements and initiatives are consolidated and realised.
This is most apparent in comparing the DCF valuation which shows a range of $5.61 to $7.06 (mid point $6.33), to their recommended range, which is based more on ‘comparable company’ ratio analysis. The Board has difficulty thinking of any other New Zealand companies in a comparable stage of their growth cycle.
The Board considers this growth potential to be significant and its confidence in achieving such growth has been further reinforced by positive initiatives including recent negotiations on contracts and partnership relationships which are either well advanced or have been achieved in the last two months.
Your directors have endorsed a business plan prepared by management that we believe to be achievable, and we note that the company has exceeded all of its forecasts and market guidance since this new business plan was adopted three years ago. We have absolutely no reason to believe that this will not continue to be the case, or that the company’s growth rate will not continue for the foreseeable future.
The upper end of the KordaMentha range is a premium of 13.5% on the Crescent Offer, and the upper end of the DCF valuation which directors believe to be highly achievable is a premium of 35.7% on the Crescent Offer. Your directors therefore recommend that you REJECT the Crescent Offer as it does not adequately reflect the value of Abano as a successful and growing company.
Private equity firms typically seek assets which have the potential to generate higher future earnings and Abano is no different.
The Board is concerned about a number of misleading statements made by Crescent in respect of its future intentions for the business, for instance closing down the Australian audiology business, which may affect the value of your investment if Crescent becomes the controlling shareholder. Crescent claims to be attracted to Abano because of its successful record, but then are highly critical of our business plans.
If the Crescent Offer succeeds at the minimum 51% level, shareholders will be left with an investment in a company where the governance has passed to a majority holder running its own agenda; we think it unlikely that our shareholders will be offered full participation in that agenda.
BACKGROUND TO THE CRESCENT OFFER
Following a period of due diligence, Crescent indicated to the Board that it would be prepared to make an Offer for Abano shares at a price of $5.20 per share.
The Board indicated to Crescent that it considered the Offer price to be below that at which it was likely to recommend the Offer. However, the price was at a level that the Board believed was appropriate to present to shareholders in the light of the valuation range established by KordaMentha (then Ferrier Hodgson), and of the signiﬁcant interest that had been generated by the improving results and by the Masthead takeover bid.
We made it clear to Crescent that, if it elected to proceed, it would do so without any endorsement by the Board and without any expectation that any Offer would be recommended by the Board for acceptance.
The Board also made it clear to Crescent that its ultimate position on the Offer would be dependant on, among other things, the content of the Independent Adviser’s report, relevant circumstances at the time (including Abano’s trading position), and the obligations of directors under the Takeovers Code.
CONTINUED GROWTH OF ABANO
Since the date of Crescent’s takeover notice, Abano has continued to experience strong performance across its dental, audiology and radiology businesses. Consistent with the company’s acquisition program over the last 12 months, in the two month period since the last Target Company Statement prepared in response to the Masthead offer, Abano acquired four more dental practices, opened or acquired nine new audiology clinics in New Zealand and Australia, and signed a multi-year, multi-million dollar orthotics contract. The company is also about to enter into new partnership agreements with key audiology suppliers which are forecast to produce enhanced margins and give Abano a signiﬁcant competitive advantage.
The Board was also pleased to recently announce its interim results for the six month period to 30 November 2007, which were above forecast and indicated another record performance in the period. These results serve to underline the strong value growth delivered to shareholders over the previous 12 months, and the Board is of the view that Abano remains ideally positioned for a period of further sustained growth.
The Board is expecting a signiﬁcantly stronger second half result compared to the ﬁrst half, and the results for the full year are now expected to be above our previous market guidance.
The Board totally rejects Crescent’s suggestion that to achieve the growth projected in KordaMentha’s (then Ferrier Hodgson) previous valuation range will require “six years of near prefect execution of Abano’s business plan and for market and competition factors to remain strongly in Abano’s favour.” The Board is surprised at the assertion that Abano’s forecasts are unrealistic and not achievable, and notes that Crescent, due to it being a competitor, was at no stage provided access to the information necessary to make such a judgment. While the Board acknowledges that there are always risks associated with any growth strategy, indeed with any business, the Board has full conﬁdence in the ability of Abano’s management team to deliver continued growth in line with recent performance and expectations. We repeat that over the past few years, Abano has met or exceeded all guidance provided to the market.
While there is every possibility that the share price may fall in the event the Crescent Offer is unsuccessful, I remind shareholders of the potential of the Abano Group and that adoption of a medium to long term investment horizon, in a growth business, may well deliver (or in our case continue to deliver) above market investment returns. Those primarily interested in short term returns may seek to realise their gains, but should consider the availability or otherwise of suitable investment alternatives.
As signalled to the market on 3 December 2007, the Board intended to declare an interim dividend of 8.5 cents per share upon lapse of the Masthead offer.
Crescent was aware of this prior to lodging its Offer, and the Board repeatedly sought conﬁrmation from Crescent that any Offer would expressly provide for payment of the dividend. Upon receipt of the Offer document it became clear that Abano could not declare and pay the dividend without Crescent’s consent, as to do so would constitute a breach of the Offer terms and would allow Crescent to withdraw its Offer.
The Board believed that it had Crescent’s agreement to proceed with declaration and payment of the dividend during the Offer period, however Crescent has subsequently advised that it is now not currently in a position to authorise the interim dividend, although remained open to discussing the matter at an “appropriate time”. The Board continues to be disturbed and disappointed with Crescent’s changed position on this matter, and has invited Crescent to reconsider the issue in the interests of all shareholders.
While the Offer price is within the value range determined by the Independent Adviser, it is well below the midpoint and falls at the lower end of the range. A business with signiﬁcant growth history and potential such as Abano is difﬁcult to value on a forecast multiple basis, which only looks at short term earnings. There are many methods of valuing a business, and a multiple based valuation is generally suitable for stable, slow growth companies. Discounted cashﬂow valuation is generally used for high growth companies, and is usually a more accurate reﬂection of future cashﬂows. The low end of the valuation range provided by the Independent Adviser is based on a multiple based valuation, which also does not reﬂect the signiﬁcant increase in value which will be achieved through a number of new contracts. The Board is pleased to note that the Independent Adviser shares this view provided new hearing aid manufacturing contracts are signed. The Board appreciates that as these agreements are in the ﬁnal stages of negotiations, they could not be included in the current multiple valuation, however the completion of these agreements in the coming weeks will make a material difference to the performance of the business. The Board has therefore determined that the Offer price is inadequate and shareholders should decide that the company is not for sale at this price.
In the opinion of the Board, certain statements made by Crescent in its Offer document and the media may be misleading. In particular, the Board notes inconsistencies between Crescent’s disclosed intention not “to make any material changes in respect of the business activities of Abano and its subsidiaries” and statements made by it in the media and to selected shareholders subsequent to the takeover notice being given indicating an intention to abandon Abano’s expansion into Australia if the Offer succeeds. The Takeovers Panel shared similar concerns to the Board and required that Crescent send shareholders a letter correcting its earlier statements.
The Crescent Offer also states that due to its existing 10.9% shareholding, there is “no reasonable prospect of an alternative Offer for 100% of Abano” being made, which, in the Board’s opinion, is misleading as the likelihood of an alternative proposal emerging is not necessarily affected by Crescent’s Offer or its existing shareholding. In fact, an alternative partial Offer at a substantially higher price may be more attractive to shareholders wishing to sell their Abano shares than Crescent’s full Offer. The Board notes that other parties continue to show interest in Abano.
Crescent has also stated that you should accept early, as the Offer allows you to withdraw your acceptance in the event of a higher cash Offer for 100% the company. This does not, however, allow you the right to withdraw should another Offer come along at the same price but on more favourable terms, nor if the market price of the shares should exceed the Offer price once you have accepted. There is no beneﬁt to shareholders in accepting the Offer early as it must remain open until 29 February 2008, and cannot be withdrawn without the consent of the Takeovers Panel.
IMPORTANT MATERIAL ATTACHED TO THIS LETTER
I urge shareholders to take the time to read the attached Target Company Statement and the KordaMentha report which accompanies this letter. They contain important information on the Offer including further information supporting our recommendation not to accept the Offer.
The Board of Directors, having reviewed the Offer and, and having taken into account further correspondence with Crescent, unanimously recommend that shareholders REJECT the Offer.
Directors and management who own shares do not intend to accept the Offer in respect of their personal holdings.
You should TAKE NO ACTION and disregard the Offer document sent to you by Crescent.