International research and consultant company ISS and Israeli consultants Emda are recommending that their investment institution clients support the merger of Osem Investments Ltd. (controlled by Nestle SA (SWX:NESN)) (TASE: OSEM) into its parent company, Nestle. Entropy, on the other hand, this week recommended that investment institutions should oppose the deal, among other things because it regarded the price as too low.
The ISS report said it was recommending support for the merger because it gives "the minority shareholders a convincing premium." Emda states, "The price for the deal is fair and reasonable, in view of the regulatory uncertainty and business environment in which Osem operates." Nestle is offering to buy all the minority holdings in Osem at NIS 82.50 a share, reflecting a company value of NIS 9.13 billion.
The deal, planned as a reverse triangular merger, will be brought up for discussion and a vote at the company shareholders' meeting on March 17. In this context, Entropy stated this week that it opposed the reverse triangular merger mechanism, preferring the acquisition of full ownership of public companies through an offer to purchase. Emda stated, "From our perspective, this is not a parties at interest transaction; it is an offer to purchase from the public through a reverse triangular merger."
Emda added that each of the methods has advantages and disadvantages, but a reverse triangular merger had two key advantages for shareholders from the public. The first is that the organs of the acquired company conduct negotiations, monitor the fairness of the deal, and are eventually required to approve it, while in a vote on a full offer to purchase, the organs of the acquired company are not a party in the deal. Emda believes that the second advantage is that in a reverse triangular merger, the investors receive substantial disclosure from the acquired company, including a valuation and assessment of fairness, which makes it easier for shareholders to make an educated decision about the deal. Since the Emda analysts believe that the deal is for all intents and purposes an offer to purchase, shareholders from the public should "consider the economic worthwhileness of the deal for them on this point."
Emda points out that the payment in the merger reflects a 25.2% premium on the Osem share's closing price on the day before approval of the deal by the company institutions, and that it is higher than the NIS 72.50-75.90 share price range in the valuation for Osem. The price in the merger reflects a multiple of 13.4 on expected earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2015, while similar companies are traded at multiples ranging from 7 to 20 on EBITDA. In Emda's opinion, however, "Referring to the profit multiples of other companies is questionable. The business and the markets involved are not similar, and we accordingly believe that these multiples should not be given significant weight in making a decision."
As an example, Emda cites the Tnuva acquisition by Chinese company Bright Food, which "to the best of our understanding is similar to the current deal," and notes that it was conducted at a multiple of 11.4 on EBITDA." In this context, Emda goes on to say, "Strauss Group Ltd. (TASE:STRS) is traded at a 9.2 multiple on EBITDA." The Israeli consultant firm holds that Osem's market value and the high trading volume in its share indicate that the market price constitutes an indication of the fairness of the price for the deal.
Emda analysts say that an examination of the graph for the Osem and Strauss shares show trading in them has been quite similar over the past year (a decline of over 10%), and the only difference between them recently has been Nestle's offer to purchase. Emda also says that the price in the merger also took into account the substantial challenges facing Osem at this time, which are liable to have a negative impact on its business and share price in the future. These challenges include the food bill, the strengthening of private brands in the retail chains, and the expected increase in food imports. Emda notes that in view of the special extensive relationship between Osem and Nestle, the regulatory requirements concerning the processes of approval and reporting between public company Osem and its controlling shareholder, whether or not these involve material deals, are hampering cooperation between the parties. Advocates David Hodak and Rona Bergman Naveh from the Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co. law firm, represented the Osem independent directors committee in the deal.
Court petitioned for restraining order against the merger
Shlomo Ben Hamou, who lives in Akko, today petitioned the Central District Court for a temporary restraining order against the merger. He is asking for postponement of the shareholders' meeting summoned to approve the deal until the documents and information are obtained required for consideration of the question of a conflict of interest between Nestle and Osem involving the prevention of competition between the two companies in overseas markets in which Nestle sells products corresponding to the ones Osem can also apparently sell. Through Advocates Benjamin Kiryati and Noam Zuchman, Ben Ham is alternatively asking the Court to order Osem to report to the shareholders that a petition had been filed against it for disclosure of documents as part of a preliminary process for a derivative claim. In this petition, Ben Hamo states that recent media reports give the impression that despite Osem's limited ability to continue expanding its business in Israel, its overseas business is less than what is usual for comparable companies, amounting to only 15% of its total activity.
Ben Hamou asserts that the impression is that expansion of Osem's overseas business in effect depends on Nestle, its parent company, while Osem's overseas activity has hitherto focused solely on areas that are not part of Nestle's core business. "In this case, the fateful question arises of whether this policy by Osem is a result of a well-informed process considered independently by Osem, or has been dictated Nestle - the controlling shareholder," the petition declares.
Documents attached to the petition indicate that Ben Hamou owns two Osem shares, which he bought at NIS 198 (while paying Bank Hapoalim (TASE: POLI) a NIS 26 commission). A court hearing on his petition is expected next week.
Published by Globes [online], Israel business news - www.globes-online.com - on March 10, 2016
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