Reuters-By Aimee Donnellan and George Hay
A player checks his cards during the finals of the Russian Masters Poker Cup in the casino at the Azov-City gambling zone, some 90 km (56 miles) south of Russia’s southern city of Rostov-on-Don, September 23, 2010. Russian Masters Poker Cup is the first poker tournament since July 2009, when the government allowed gambling only in the four dedicated zone in the country. REUTERS/Vladimir Konstantinov
LONDON, Nov 7 (Reuters Breakingviews) – Jacek Olczak and Jakob Stausholm should probably play more poker. The respective chief executives of $139 billion Philip Morris International (PM.N) and $95 billion Rio Tinto (RIO.L) are attempting takeovers that are central to their strategies. They may eventually get what they want, but only after investors have called their bluff.
Olczak wants Swedish Match (SWMA.ST), which sells Zyn nicotine pouches and has a presence in the U.S. market. Stausholm is trying to buy the 49% he doesn’t own of Toronto-listed Turquoise Hill Resources (TRQ.TO), which controls a huge Mongolian copper mine called Oyu Tolgoi. Both assets are strategically key. Swedish Match would help PMI pivot away from cigarettes. Full ownership of Turquoise Hill would make it much easier for Rio to control a project involving a metal that’s key to the energy transition, and therefore its growth.
Perhaps unsurprisingly, pushy hedge funds have noticed. Stausholm needs a simple majority of non-Rio Turquoise Hill investors to support his $3 billion buyout. But dissenters Pentwater Capital Management and SailingStone Capital have a third of the shares not owned by Rio. Olczak, who needs 90% of shareholders to accept in order to automatically de-list the company, initially faced opposition to his $16 billion offer.
That opposition has forced the bidders to be flexible. PMI upped its offer to 116 Swedish crowns per share from 106 crowns. Rio initially offered minorities C$34 a share, but subsequently hiked to C$40 and then C$43. Each raise arguably emboldened the malcontents.
The end is in sight, but it’s looking messy. On Monday, PMI said it would go ahead with the deal despite only securing 83% of Swedish Match’s shares. That means Olczak’s smoke-free strategy is still intact. But he’ll either have to hope that the remaining investors tender their shares at the last minute, or mop them up slowly over time.
Rio has effectively removed the two dissenting hedgies from the acceptance vote by allowing a Canadian arbitration process to decide what they get paid. But it has now deferred the vote, and has arguably only deferred the pain, since the arbitration process could take years and end up costing the company even more.
If there’s a lesson, it’s that raising an offer even once proves that hedge funds have the whip hand, encouraging them to hold out for more. Trying to get a low price can therefore be counterproductive, since it attracts hedgies’ attention. Of course, launching a knockout bid straight away would risk overpaying. But as Olczak and Stausholm are finding out, the alternative is no better. It’s hard to wear a convincing poker face when everyone knows you need a deal.
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(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)
CONTEXT NEWS
Marlboro maker Philip Morris International on Nov. 7 said it was going ahead with its $16 billion takeover of Swedish Match despite securing less than the 90% stake it wanted.
Investors holding just under 83% of the shares have accepted PMI’s offer. By Swedish law, a bidder can only launch a compulsory buyout of the remaining shares if it hits 90%. PMI had previously said it could walk away if it did not hit this key threshold.
PMI said it believed Swedish Match’s 10 largest shareholders had accepted its bid. It will extend its offer to buy shares until Nov. 25 in the hope of further raising its stake.
Canadian miner Turquoise Hill said on Nov. 6 it had postponed by one week a shareholder meeting to vote on Rio Tinto’s takeover offer. The mining giant asked for the postponement at the request of Quebec’s financial regulator, Turquoise Hill said.
Rio is trying to buy the 49% of Turquoise Hill that it does not own for $3.3 billion. Its latest offer values the company at C$43 per share. Two key investors in Turquoise Hill have agreed to withhold their votes on the bid, with their final deal dependent on Canadian arbitration.
Shares in Swedish Match were trading at 115.8 Swedish crowns at 1050 GMT on Nov. 7, up 0.6%. Turquoise Hill shares closed at C$41.6 on Nov. 4.
Editing by Liam Proud and Pranav Kiran
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