Closing the door on Fairfax

Livewire readers may recall two previous articles that I wrote a few weeks back covering the details of the (then current) takeover approaches made to Fairfax Media by two private equity firms that were interested intaking Fairfax private. If not, you can find them here and here.

Since my last article, the worst-case scenario has unfolded for anyone who bought the stock in expectation of the takeover proceeding, as both bidders announced earlier this week that they had chosen not to make binding offers for the company, instead choosing to walk away from any further talks with the owner of Domain and The Australian Financial Review.

As expected, the share price of FXJ has suffered a sharp fall (down a little more than 20% from its recent high) since news of the failed bids was released. Those who took the risk and entered a position on news of the initial non-binding offers after thinking that one of the deals was likely to result in a binding offer would now be showing a considerable loss.

Although there were two potential bidders seemingly competing to buy the company, I wrote at the time that the team at Harvest Lane were yet to be seriously tempted to buy FXJ shares. In essence,  the fact that the approaches were both highly conditional and also non-binding were enough to keep us on the sidelines as we simply felt that the downside risks were too great. What has transpired since has largely supported this view.

We’re certainly not perfect (far from it in fact) but experience has taught us that there are some fairly specific criteria against which takeover approaches can be assessed. Consistently applying these criteria by no means guarantee success but it certainly improves your chances. One of the biggest things we are looking for is a limited number of ‘outs’ for the bidder whereby they can walk away from the proposed transaction. Unfortunately, a non-binding, conditional approach won’t generally satisfy this criteria (irrespective of the number of parties of involved).

Generating returns consistently over a period of time requires discipline and a robust strategy with a proven edge. Our M&A strategy fits the bill but it typically means that we’ll have to let plenty of potential trades pass us by no matter the media frenzy surrounding them.