German Targets Remain Interesting For U.S. Corporations

Tuesday, June 1, 2004 - 01:00

U.S. companies acted as bidders in both the largest public takeover in Germany in 2003 and the largest public takeover so far in 2004:

• In June 2003, the U.S. consumer goods giant Procter & Gamble (P&G) completed a U.S.D 8.3 billion tender offer and acquired German hair-care group Wella AG (Wella).

• In April 2004, U.S. private equity powerhou.s.e The Blackstone Group (Blackstone) closed a U.S.D 3.9 billion tender offer for German chemical group Celanese AG (Celanese), the first tender offer since the enactment of the German Takeover Act (Takeover Act) which had to comply with both U.S. and German tender offer rules as well as the largest going private transaction and public LBO ever in Germany.

Both transactions had interesting features which will be relevant in future U.S.-German transactions and, therefore, deserve a closer look.

P&G / Wella

In 2002 Wella, one of Europe's market leaders in hair care, cosmetics and perfumes, generated sales of EUR3.39billion with approximately 18,000 employees in 56 countries. Publicly listed Wella has issued both voting shares and non-voting preference shares. Prior to P&G's tender offer, 77.6% of the voting shares were controlled by the founder's family.

Share Purchase Agreement With Family Shareholders. Wella was courted by a number of competitors before P&G was able to conclude a share purchase agreement with the founder's family (SPA) in a highly complex private deal which involved 22 selling parties and secured P&G 77.6% of the voting shares in Wella. It was, however, conditional upon antitru.s.t clearance in the EU, U.S., Canada, Japan and Mexico.

The Tender Offer. After having signed the SPA, P&G launched a voluntary public tender offer to the Wella shareholders in order to acquire the remaining voting and non-voting preference shares. With respect to the conditionality of P&G's deal with the founder's family, it was essential for P&G to introduce similar conditions, including the antitru.s.t condition, to its tender offer. However, becau.s.e antitru.s.t clearance was not expected to be obtained for months following the end of the acceptance period of the tender offer, the German capital markets regulator BaFin intended to prohibit the tender offer unless P&G was prepared to delete the antitru.s.t condition. After intensive discu.s.sions with the BaFin, a solution that allowed P&G to go forward without giving up the antitru.s.t condition was found: P&G committed itself to grant all tendering shareholders a right to withdraw their tendered shares if the tender offer was not completed within five months. A structure that was unknown to the German tender offer practice at that point in time. Today, such mechanism is common in German tender offers.

Another special feature of P&G's tender offer was that P&G committed itself to adju.s.t the offer price in the event that it would pay a higher price per share than the offer price in connection with compulsory offers to be made in connection with post-offer restructuring measures (e.g. a domination and profit and loss transfer agreement or a Squeeze out) within one year following the tender offer. The top-up guarantee was meant to create an incentive for shareholders to tender their shares and to avoid shareholders to hold out speculating on a potentially higher consideration per share paid in connection with such compulsory offer.

Different Prices For Ordinary And Preference Shares, The most distinctive feature of this tender offer was the spread of the offer prices for voting shares and preference shares. Under the Takeover Act, the tender offer price mu.s.t be adequate and is subject to certain price rules. The minimum price to be offered by P&G was the higher of (i) any price paid (or promised to be paid) for Wella shares in the three months prior to the publication of the offer document and (ii) the weighted average stock exchange price for the three months' time period prior to announcement of the decision to launch the tender offer (Average Stock Exchange Price).

Historically, Wella preference shares and Wella voting shares were traded within the same price range. Under the SPA, P&G had, however, agreed to pay EUR92.25 per voting share which equaled a control premium of almost 44% compared to the Average Stock Exchange Price for the voting shares. Consequently, the same price had to be offered to the holders of voting shares in the tender offer. The crucial question was whether this meant that the same price had to be offered for the preference shares, too. This was not the case. Under the Takeover Act the adequacy of the offer price is determined separately for each class of shares. Thu.s., different prices can be offered to holders of different classes of shares which enabled P&G to offer EUR65.00 per preference share (a premium of 14% compared to the Average Stock Exchange Price).

Hedge Funds at the Gate: Court Actions against the offer rejected. Confronted with the different offer prices for voting shares and preference shares, certain hedge funds speculated that they may be able to achieve an increase of the offer price for preference shares and initiated, for the first time in Germany, an action to prohibit the execution of a tender offer. The funds even tried to obtain injunctive relief against the BaFin, arguing that the BaFin's approval of the P&G offer document violated their rights. However, the courts ruled in favor of P&G, rejected all challenges to the tender offer and the offer was completed successfully. By the end of the offer period, P&G had acquired approximately 80% of the total shares and 98% of the voting shares in Wella.

Blackstone / Celanese

The tender offer for German chemical company CelaneseAG by Blackstone is like P&G / Wella a milestone transaction in the German M&A market for variou.s. reasons. The deal is the largest public to private offer in German history and represents the first dual German / U.S. tender offer since the enactment of the Takeover Act in January 2002. In addition, the deal is one of the largest LBOs done in Germany ever. The combination of all that created a significant amount of legal obstacles that needed to be overcome before Blackstone could announce the acquisition of a comfortable majority of 84,3% of the voting rights of Celanese AG in April 2004.

Dual offering under German and U.S. takeover rules. A tender offer for the shares of a German target company that, like CelaneseAG (as well as, amongst others, Deutsche Bank, DaimlerChrysler, Deutsche Telekom, Epcos, SAP and Siemens), maintains listings on both a German and a U.S. stock exchange requires compliance with the German and the U.S. tender offer rules. In most cases, the offeror can in such circumstances rely on certain exemptions available under U.S.securities laws that grant relief from the compliance with most of the U.S. requirements. However, in the tender offer for CelaneseAG, which maintained a broad shareholder base in the U.S. prior to the tender offer, none of these exemptions were available to Blackstone. Therefore, the tender offer had to comply in all respects with the applicable tender offer regulations in both jurisdictions. This resulted in one of the major problems that needed to be solved before a deal could be announced: How to structure the tender offer in a manner that it fully complied with the German as well as with the U.S. rules which, in some areas, are even contradictory. Before the deal was announced, some practitioners had claimed that this would ju.s.t be impossible. By providing inventive and creative solutions and in close co-operation with the BaFin as well as with the SEC, however, all obstacles were removed that would otherwise have prevented the deal.

German financial assistance rules. The fact that Blackstone is a financial investor and, therefore, wanted the acquisition structured as LBO created further challenges. Approximately two thirds of the funds required to finance the deal were eventually provided through bank loans. In that regard, German financial assistance rules made it difficult to find a financing structure that worked. If the target company is incorporated as a stock corporation (Aktiengesellschaft), German financial assistance rules generally prohibit that it grants access to its assets to secure or otherwise assists the financing of the acquisition of its own shares. After extensive discu.s.sions, a su.s.tainable solution also for this problem was found. Such solution had not only to comply with German financial assistance rules, but also needed to reflect the requirements imposed on the deal structure from a tax perspective. In addition, every solution that was presented needed to meet the banks' requirements for the syndication process and Blackstone's intention to refinance the bank loans by the issuance of high yield debt securities at a later point in time.

Going Private. The ultimate goal of Blackstone is to delist CelaneseAG in order to take it completely private. The transaction could become a precedent also in this respect. Until today, no other larger German public company has delisted in the U.S. and de-registered its shares under the U.S. securities laws.

Restructuring. In Germany, it mu.s.t be expected that certain of the restructuring measures that will be put into place in due course will attract some of the well known so-called ãpredatory shareholders" who initiate all kinds of legal proceedings against listed companies to obstruct such measures. In addition, market participants are curiou.s. to see whether certain hedge funds will, similar as they did in the P&G / Wella transaction, also try to seek their chances.

Outlook. The acquisition of Wella by P&G and of CelaneseAG by Blackstone has shown that tender offers for public companies, and if necessary in full compliance with the German and the U.S. rules, can be executed successfully and also fairly smoothly in Germany. For the market, the Blackstone/Celanese transaction furthermore provides evidence of the fact that significant LBOs of German stock corporations are possible despite existing legal restrictions. Therefore, it can be expected that other strategic as well as financial investors will follow P&G's and Blackstone's example.

This article highlights some remarkable U.S.-German Cross Border Tender offers completed over the last 12 months. For further information please contact Christian Cascante, LL.M (Univ. of Chicago) at or Jan M. Bauer at