A potential €17 a share takeover bid by Warner Music for Believe has heated up a little after Believe preempted Warner’s threat to get regulators involved - by calling them in itself. The fact that Believe has issued a statement saying this - rather than just going to the regulators - could be an indication that they think there’s enough uncertainty with things as they currently stand to warrant investors being informed. Or, equally, it could be a purely pragmatic move based on the feeling that it’s better to invite the regulators in than have them come knocking.
Last week Warner Music made a low-key and quietly worded threat that if Believe didn’t play ball with its somewhat theoretical interest in buying the French indie giant then it would turn to France’s financial markets authority, the AMF, and get it to intervene. Part of Warner’s demand included Believe giving it access to confidential information about the Believe business that it says it would need to be able to carry out due diligence in order to be able to turn its theoretical offer into a genuine bid for the company.
Yesterday evening, in a one-two punch, Believe’s “ad-hoc” independent board committee tasked with overseeing potential takeover bids preempted this threat of regulatory intervention by turning directly to the AMF and asking it to give its opinion on a key matter. That was punch one. The potential knock-out blow - and something that will doubtless infuriate Warner - is that Believe will still block Warner from accessing the information that it had requested.
Warner had previously laid out its case for regulatory involvement. It said that an offer from a consortium of investors - led by Believe founder and CEO Denis Ladegaillerie - had stated that it needed approval from the Believe board for its offer, only for the consortium to waive that requirement “after having been made aware of WMG’s proposal”.
This “wavier” of the “board condition”, Warner said, was something that they believed “violates a number of rules of French securities regulations which are meant to protect shareholders including the sellers and their investors”. The punch came in a seemingly innocuous coda to the preceding legal jargon: “the validity of such waiver could be challenged”.
To anyone not familiar with spelling their way through financial and legal jargon this may seem to be nothing of consequence. “Could be challenged” doesn’t seem a particularly worrying threat. In reality, they were making it clear, albeit somewhat indirectly, that unless it got access to the information it wanted to be able to make its own offer, it would call in the regulators. That’s a pretty serious matter for listed companies, and something which can tie up a takeover bid in endless red tape and escalating legal costs for months.
By turning to the regulator before the regulator comes knocking, Believe has potentially jumped a key obstacle to the €15 a share takeover bid led by Believe CEO and founder Denis Ladegaillerie, backed by Believe’s biggest shareholder and long-term VC partner TCV, and Swedish private equity giants EQT.
There are two interesting points raised by this move. First, why would the ad-hoc committee prevent Warner accessing information that might allow it to refine its bid and put forward a formal offer that is €2 per share higher than the current €15 a share proposal? On the face of it, this could appear that the committee is favouring the lower private equity bid, which might seem inconsistent with its remit to act in the interests of Believe, its investors, and its employees.
Secondly, why might the regulator agree that the “board condition” could be waived, which would seemingly favour the €15 a share offer at the expense of Warner’s possible €17 a share?
Assessed on purely objective financial metrics, it would make sense that a €17 a share offer would be better than €15 a share. On this basis, the ad-hoc committee should give Warner the information it needs to prepare a strong competing bid, and the regulator should tell the private equity consortium that it can’t remove the requirement for board approval to push through its offer.
However, when you look more closely at what’s going on, things are not nearly so straightforward - and the actions of the ad-hoc committee may well be the best current outcome for everyone involved. Unless you are Warner.
Warner’s threat to call in the regulators
Warner’s softly worded threat came at the end of a statement to investors in which it said that it might, possibly, perhaps be considering whether it should make an offer to buy Believe at €17 a share.
The statement took pains to make it clear that although Warner had approached Believe it was still just mulling over the possibility of bidding. The fact that it had released a statement to its own investors talking about its theoretical approach should not, it said, be taken by anyone to mean that it was making a formal or binding offer for the company. It also clarified that the approach had been made based only on publicly available information.
At the same time, said Warner, it was pretty annoyed that its theoretical and non-binding offer might be frozen out by the other lower offer led by Believe CEO and founder Denis Ladegaillerie. If, as a result of that lower offer, Believe didn’t provide Warner with proper access to the information it needed to help it decide whether or not it did actually want to make an offer then it might turn to the regulator.
The Warner statement came a few weeks after the news that Believe founder and CEO Denis Ladegaillerie was making a bid to take the company private as part of a consortium backed by private equity giants EQT and venture capital firm TCV, and existing 41.14% shareholder in Believe.
What was annoying Warner related to some fairly opaque stuff about what the consortium needed to do to proceed with its bid, and in particular the need to get the approval of the Believe board for its proposal.
The consortium’s new company bidding for control of Believe would - said the original announcement of the bid - only formally acquire the shares owned by TCV, Ventech, XAnge and Ladegaillerie after that approval had been granted. Once that had happened it would make an offer to buy the remaining publicly listed shares from investors at €15 a pop.
Why is Warner talking about regulators when it’s not actually made an offer?
Ultimately what it comes down to is that the EQT/TCV/Ladegaillerie consortium has managed to do deals on a big enough percentage of the company's shares that its bid was effectively an open and shut deal. With deals in place to acquire blocks of shares from two other big institutional investors in Believe, the consortium was confident that it would have 71.92% of Believe’s shares in its grasp - with a further 3% on the table. By removing the requirement for board approval this accelerates the timeline for the consortium’s offer, and means the only remaining obstacle is regulatory approval - though its worth noting that the regulatory approval required for this is a different matter to the one the regulators have been called in to look at just now.
The shares in the consortium’s pot come primarily from three venture capital firms: TCV (41.14%) - one of the partners in the consortium - as well as Ventech (12.03%) and XAnge (6.29%), with Ladegaillerie himself adding his 11.17% of the company into the pot, and agreeing to sell the consortium another 1.29% that he owns.
These equity acquisitions, called the “Blocks Acquisitions” in the initial statement put out by Believe were - said the company - subject to regulatory approval, but also Believe’s board “giving its positive recommendation of the offer”. This board recommendation would first need an independent expert to say that the offer was financially fair, as well as board consultation with the “social and economic committee” of Believe to ensure that it was “in the interests of Believe, its shareholders and its employees”.
Once this had taken place, Believe’s board would then make a recommendation to all shareholders that they should sell to the consortium.
In many ways the board approval was a technicality, for a number of reasons. First, the price being offered was significantly higher than the recent historic share price - so by any expert assessment would seem to be financially fair.
Secondly, it would seem fairly assured that - given that price being deemed financially fair - the offer would be in the best interests of shareholders.
Thirdly, the need for board approval was somewhat theoretical as the share controlled by - or to be controlled by - the consortium represented such a huge percentage of the company’s voting rights that they could pretty much force the board to do whatever they wanted. Ultimately, if the board refused, the shareholders involved in the consortium bid would be able to hold a shareholder meeting and appoint a new board.
Fourth, the founder and CEO of the company being the same person leading the consortium would generally be a good indication that the bid was in the interests of Believe, given he started the company and has run it for the last fifteen years.
Lastly, the offer would - for the same reason - seem to be in the interests of Believe employees, many of whom have served under Ladegaillerie for many years.
This last point is a critical one when considered in the light of a potentially hostile takeover by a competitor like Warner. In any M&A deals where one company joins with or gobbles up another, there are, inevitably, going to be duplications of personnel, teams or functions.
Separately - but probably equally importantly - the consortium’s approach had presumably been under discussion for some time, and the parties involved were not only in favour of it, but were also long-time investors in Believe. One of the parties in the consortium - TCV - was also a significant shareholder in Believe, holding 41.14% of the company.
What does Warner really want - and can it really make a bid for Believe?
Underpinning Warner’s concern is that the consortium’s deal to waive those ‘fairness’ conditions is harmful to the investors of the investors: people who had put money into TCV, Ventech or XAnge funds. While venture capital funds are often held to be the preserve of the super wealthy, investing cash contributed by billionaires, in reality many venture capital funds include contributions from other institutional investors looking for long-term returns on capital, such as insurers and pension funds.
Whether or not TCV, Ventech or XAnge’s funds include significant contributions from these types of investors is information that would only be fully clear to those companies themselves. However, the threat of regulatory intervention is not to be taken lightly and could, sometimes, be enough to spook investors into pulling out a deal.
The Warner offer is seemingly contingent on the assumption that Ventech and Xange are being offered a straight forward complete buy-out at €15 a share. However, private equity deals often involve much more complex deal structures, including equity rollover or seller financing. In both of these, while the acquisition price might be €15 a share, a seller may have longer term participation in the acquisition, either by extending finance to the buyer of its shares, or by investing the proceeds of the sale back into the acquisition vehicle.
Although EQT recently raised a €22 billion fund for private equity deals, most private equity acquisitions are leveraged. This means that once the deal is concluded a company loads up with debt to fuel growth. That debt may be provided at more favourable terms by partners who know and understand the metrics of the business; they get a return via interest payments, and finance may be offered as convertible debt, where they lend money but are able to convert to equity in the company based on certain future parameters.
Even if Ventech and Xange are simply being offered a straight forward cash buyout at €15 a share, and assuming they decided to roll to WMG for a quick 13% uplift on their deal, TCV and Ladegaillerie still control 53.6% of the shares in Believe - and 58.44% of the voting rights. Given that TCV is a long term investor in Believe, you have to assume that it sees more than a 13% benefit in the company going private. As Believe’s IPO price was €19.50 and the company has minimal debt, strong revenues, consistent growth, proprietary technology and a loyal and expert team, €17 a share seems cheap.
Where do things go from here?
Whether a €17 a share WMG takeover would be in the best interests of Believe, its shareholders and its employees is far from certain. Mergers and acquisitions are costly, and often painful as two companies adjust to each other - taking several quarters or even years before the full combined value is truly realised. Would the investors’ investors - an object of Warner’s concern - benefit more from that than the €15 a share offer where the company would remain its own entity under the leadership of its founder? No one has a crystal ball.
However, individual shareholders - often referred to as ‘retail investors’ - and smaller institutional investors who have acquired shares in Believe on the stock market would not be able to benefit from anything other than a cash-for-shares buyout, so might lose out if the €15 a share offer went ahead versus a €17 a share offer. And this is the crux of things - would a €17 a share offer even be possible?
If Warner was only able to acquire the non-TCV/Ladegaillerie stake in Believe this would give it 46.4% of the shares of the company, but only 41.56% of the voting rights, meaning it would be - as long as the partnership between TCV and Ladegaillerie held - a weak minority partner in the company. Even if it got along fine with its majority partner, this would likely not offer the kind of value Warner is looking for - and, crucially, would not deliver the market-share benefits of a full acquisition of Believe. It’s highly unlikely, therefore, that this is something Warner would entertain, as it would be costly and deliver them no real value.
Paradoxically, all of this means that, right now, €15 a share - although a lower price than Warner’s theoretical €17 a share - may not actually be poorer value for shareholders when you consider the needs of all shareholders in aggregate. Even if Warner did proceed with an offer for a minority share in the company at €17 a share, the pain of that JV may mean that investors would see, at best, a stagnation in the company’s value, and at worst, an erosion in value.
There’s a final consideration in all of this. How likely is a French regulator to approve a deal to acquire a significant French company by a US-listed company that has just laid off hundreds of staff?
Believe is presumably confident that the regulator will take these considerations - and potentially other confidential information - into account and make a decision that reflects the best interests of shareholders, staff and everyone else affected. Meanwhile, Warner will be hoping that the regulator agrees with its stance, and forces Believe to open up a data room to allow it to have a proper poke through the company’s inner workings.