When a ‘Sighting Shot’ is the only shot
We have been watching with some interest the attempts by the Steelmakers Australia consortium to engage with the Arrium board (not that we have ever owned shares in Arrium).
Often in an unsolicited takeover offer, the initial bid will be a “sighting shot”, which the board will quickly reject. According to the conventional storyline, the bidder then ups the offer, the target board relents, and shareholders are left with the impression that the board has managed to secure a better deal for them.
In the case of the Arrium bid, Steelmakers Australia appears to have diverted somewhat from the standard script. They have come back with some modifications to their original proposal (shorter due diligence, evidence of funding capacity), but have not lifted the price.
This is not be a good sign for the Arrium board, nor its shareholders. It indicates that Steelmakers Australia sees itself having a strong negotiating position.
The reason for this may be the $2.14b of debt on Arrium’s books. Steelmakers Australia may expect that Arrium’s directors will be reluctant to negotiate too hard lest the offer disappear, leaving the debt problem to be resolved by the board.