UK private equity firm CapVest has entered into a binding agreement to acquire fertility company Virtus Health (ASX: VRT).
The agreement, announced on 14 March, followed Melbourne-based buyout firm BGH Capital making an initial bid for Virtus late last year which was quickly topped by CapVest. Virtus then provided exclusivity to the UK firm which BGH challenged.
Since then, BGH and CapVest have each made improved indicative offers. BGH lifted its bid $665 million but CapVest again topped that with a $666.9 million bid.
Explaining its decision to enter into a binding agreement with CapVest, Virtus said it had not been considering a sale of the company before receiving the initial offers from BGH and CapVest but had then at all times sought to maximise value for shareholders.
“After receipt of the first CapVest proposal, which included in it as a fundamental and necessary condition of CapVest’s willingness to proceed an exclusive due diligence period, the board granted CapVest access to a limited period of exclusive due diligence,” Virtus said. “This decision was made after careful consideration of the proposals it had received from CapVest and BGH at that time including advice from its financial and legal advisers, and the board’s determination that the first CapVest proposal was attractive for shareholders in the context of a change of control transaction and superior to the first BGH proposal …
“Although BGH tabled the second BGH proposal with a higher price on 28 February, CapVest responded with its own improved and revised second proposal before Virtus had an opportunity to engage with BGH in relation to the second BGH proposal and the basis on which the board would be prepared to facilitate due diligence access for BGH. As a result of the superior second CapVest proposal, the board decided not to facilitate due diligence at that time.
“BGH then tabled the latest BGH indicative proposal on 10 March. While Virtus was engaging with BGH in relation to the basis on which it would facilitate due diligence access, CapVest tabled an improved, certain and fully funded binding proposal which valued Virtus at 15 cents per share more …”
BGH had some initial success in trying to gain a place at the negotiating table through a complaint to the Takeovers Panel. BGH claimed that granting exclusivity to CapVest without a fiduciary out to allow for an improved offer was not in the best interest of Virtus shareholders. The panel upheld the complaint stating that any agreement between Virtus and CapVest could not exclude a better offer from BGH, but the panel declined to take action on a second complaint lodged after the parties had each made improved offers.
The Takeovers Panel said an amended process deed had made it possible for Virtus to engage with BGH in relation to BGH’s revised proposal but the Virtus board had decided not to do so on the basis that the decision was in the best interests of the company and its shareholders.
The panel concluded there was no reasonable prospect that it would make a declaration of unacceptable circumstances and declined to conduct further proceedings.
Virtus had received the initial non-binding indicative acquisition proposal from BGH on 13 December. BGH had proposed acquiring all the shares in Virtus at $7.10 per share by way of a scheme of arrangement.
Then on 20 January, Virtus announced it had entered into a process deed with CapVest in relation to a non-binding, indicative proposal to acquire all its shares by way of a scheme of arrangement at $7.60 per share, or via an alternative $7.50 a share transaction, such as an off-market takeover bid, that would require acceptance of more than 50% of shares rather than the 75% required under a scheme of arrangement.
On 2 February, BGH complained to the Takeovers Panel that Virtus’ decision to offer a 10-11-week exclusivity period to CapVest constituted unacceptable circumstances in that it failed to preserve an efficient, competitive and informed market for the acquisition of Virtus. Specially, BGH said, the process deed Virtus had entered into with CapVest did not include a fiduciary out for Virtus to respond to any competing or superior proposal until 15 business days after CapVest was given access to a virtual data room.
On 23 February, the Takeovers Panel made a declaration of unacceptable circumstances finding that certain aspects of the exclusivity arrangements had an anti-competitive effect. The panel made orders that prevented Virtus and CapVest from entering into a scheme implementation agreement for the acquisition of Virtus and preventing CapVest from making a takeover bid for Virtus for approximately ten business days and that the process deed be amended to ensure that a fiduciary out would be effective.
On 28 February, BGH increased its offer to $7.65 a share. Virtus announced the same day that its board was yet to evaluate the revised proposal.
The next day, Virtus announced that it had received a revised proposal from CapVest in which the UK firm had increased its alternative offers to $7.80 and $7.70 a share.
BGH complained to the Takeovers Panel that there had been no material communication from Virtus to BGH following the submission of its revised proposal before Virtus announced the revised CapVest proposal.
BGH said Virtus had stated “…the Virtus board has determined that it will not be engaging with [BGH] in respect of [the revised BGH proposal] given the revised CapVest proposal is superior.”
Virtus had gone on to note that CapVest expected to be in a position to enter into an implementation agreement by 11 March, the date the Takeovers Panel’s standstill order was to expire.
BGH told the Takeovers Panel that at no stage had Virtus taken any step to facilitate a genuine auction process between CapVest and BGH.
Virtus sought a trading halt for its shares on Friday 11 March and announced the agreement with CapVest on Monday 14 March.
Virtus said the $8.25 a share cash offered by CapVest via a scheme of arrangement represented a premium of 58.3% to the $5.21 closing share price on 13 December which was immediately prior to BGH making its initial offer.
Prior to the revised offers, BGH had indicated commitment to pursuing acquisition of Virtus converting pre-bid options over shares to a 19.9% voting stake which it said it would vote against an acquisition by CapVest. This would, however, be unlikely to prevent CapVest from completing acquisition of Virtus.
While CapVest would require a 75% majority of shares to be voted in its favour under a scheme of arrangement, an alternative structure, such as an off-market takeover offer that CapVest has allowed for with it is alternative proposals, would require only a simple majority.
Virtus was an investee of Quadrant Private Equity prior to June 2013 when Quadrant fully exited its large majority stake. Shares were issued in the IPO at $5.68.