WPP rejects Bain Capital’s tender offer as it is ‘significantly undervalued’

WPP has rejected private equity firm Bain Capital’s tender offer launched on 2 October 2017 as the network believes that Bain Capital has “significantly undervalued” Asatsu-DK Inc (ADK), its assets and future opportunities, as stated previously.

The network holds 10,331,100 ADK shares, representing 24.96% of the issued share capital of the Japanese creative agency. According to the press statement, WPP has been approached by shareowners and ADK management, to clarify its commitment to the agency if the tender offer fails.

According to the press statement, WPP has been approached by shareowners and ADK management, to clarify its commitment to the agency, if the tender offer which was “supported by the ADK Board as the only future for their company”, fails.

“WPP would welcome the opportunity to engage constructively with the Board of ADK if the Tender Offer fails, to help ensure ADK has the talent and focus on digital and animation capability needed to increase the value of ADK for the benefit of all long-term stakeholders,” the statement read. WPP is also prepared to increase its shareholding in ADK to 33%, subjected to approval of the board and other shareowners.

News of Bain Capital’s interest to acquire ADK from WPP broke in October 2017. According to a report by Financial Times (FT), ADK has been in talks with Bain for three years, having rejected previous acquisition offers from other companies. In a statement issued to FT, an ADK explained that distinctions over mid and long term business strategies had appeared with WPP. This resulted in a circumstance saw difficulties in making “swift and flexible” decisions able to adapt to changing business landscapes.

WPP and ADK entered into a war of words last month, as ADK responded to statements made regarding the tender offer Bain Capital made for ADK shares in early October. Countering undervaluation claims, ADK said that Bain Capital’s offer price was “heavily scrutinised”.

It explained that it had obtained a valuation report and fairness opinion from two independent advisors. ADK’s independent directors were also actively involved in examining the price and participating in a number of rounds of negotiations between ADK and Bain Capital. This resulted in a “meaningful price increase”.

“Furthermore, ADK has not agreed to any deal protection mechanism in favour of Bain Capital,” the ADK statement read. It added that ADK’s independent directors had evaluated this transaction process and unanimously determined that it has been fair and rigorous. ADK’s board voted in favour of the tender offer on 2 October 2017, with only one dissenting vote by a director nominated by WPP.

Another point made by WPP was whether or not it considered or discussed “any alternative bona fide offers or proposals for the company” which may be of greater benefit to the stakeholders in the business including its clients and its people. The statement issued last month further questioned if ADK’s consideration has been “management’s concern about their own position in the future?”

“Has Bain Capital ever given ADK’s management reassurance about their own position as part of this transaction and, if so, should not those terms be disclosed?” the WPP statement added.

Thirdly, WPP said ADK’s management has consistently “resisted opportunities” to improve the performance of its overseas operations and exploration of significant digital opportunities. Instead, the agency preferred to invest in “disastrous acquisitions and consolidations” such as Gonzo and Bungeisha. The network added that the costs of which “have not been fully exposed”.

This is “along with the disposal of DAC in 2011 at a lower price than WPP’s indication and the reduction of ADK’s stake in Video Research Interactive,” the statement read.

In ADK’s statement, the agency said it approached multiple potential financial and strategic partners to find the best outcome for the company and its shareholders. Through this process, the agency added that it was determined that Bain Capital presented the most credible proposal, and one that would offer the most price maximisation for shareholders.

“None of ADK’s directors and management team has any agreement with Bain Capital, including any agreement regarding continuing appointment, employment or remuneration,” ADK said in response.

Read also: ADK versus WPP: A breakdown of the statements exchanged so far

Another point made by WPP was that ADK had “improperly attempted to terminate” its co-operation and business alliance agreement with the network. According to WPP, ADK knew “full well” that it cannot do so, as on previous occasions it had abided with this instruction.

“ADK’s effective sale of its holding in WPP has attempted to circumvent the stock purchase agreement and contradicts explicit advice from key shareholders that doing so would trigger damaging and ill-advised tax charges. Others have also noted the cancellation of dividends promised on 17 August 2017,” the WPP statement read.

To this, ADK responded that its agreements with WPP regarding the capital and business alliance are “governed by Japanese law”. This provides a specific mechanism for termination by either party at any time by giving not less than 12 months’ written notice.

“This right of termination has been scrutinised by the attorney involved in negotiating the agreements, as well by multiple major Japanese law firms, all of whom confirm its validity,” the ADK statement read, it added:

ADK has confidence that the termination right will stand.

“ADK will require WPP to fulfill its contractual obligations to sell its shares in ADK. It should also be noted that the tender offer by Bain Capital will move forward for the benefit of all shareholders regardless of any objections by WPP to the termination or termination rights of the alliance,” the ADK statement added.

ADK’s statement also added that the WPP shares held by ADK have resulted in “low return on equity and a problematic capital structure that is disproportionate to ADK’s core operations”. It said that the continuation in holding WPP shares would cause ADK to “continue to face significant financial uncertainties in the future”.

“The fact that this asset makes up a large portion of ADK’s market value means that the company is unnecessarily exposed to WPP’s share performance and currency exchange rates,” the ADK statement read.

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