COMMENT:
The trouble with bold, high-minded vision statements in the corporate world is they can be so damn difficult to live up to.
So it is for EQT, the Swedish private equity firm that says on its website its vision is "to be the most reputable investor and owner."
Having had a $3.3 billion crack at Australasian telco Vocus last year and withdrawn, EQT is now trying to wriggle out of a $1.49b takeover of Auckland-headquartered Metlifecare, citing the impact of Covid-19 as a 'material adverse change' to the retirement village operator's valuation and profitability over the next three years.
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EQT trumpets its connection to one of Sweden's wealthiest banking families, the Wallenbergs, whose benign and responsible influence is talked up throughout EQT's published materials.
Yet when all's said and done, EQT wants out of its Metlifecare deal for one simple reason: It doesn't want to pay $7 a share anymore.
Now it's combing the small print for an excuse to exit what Metlifecare regards as a rock-solid deal.
Accordingly, both sides are lawyering up, with Alan Galbraith, QC, understood to be retained by EQT and the Metlifecare board auditioning its own silks this week. Some of the more expensive PR talent on both sides of the Tasman is in the frame too: EQT has retained David Lewis, a former adviser to then prime minister Helen Clark, while Metlifecare has Sydney-based Clive Mathieson, former Australian prime minister Malcolm Turnbull's chief of staff and editor of The Australian.
Metlifecare's fightback is calling in part on parochial New Zealand sentiment to inflict brand damage on a Swedish company that swaggered into town late last year, talking up its family values, and is now behaving just like any private equity investor scrambling out from the wrong side of the deal.
For its part, EQT has analysed the future of retirement village stocks and concluded Metlifecare will take a hammering after Covid-19 – but suggesting that likelihood is hardly controversial. Companies everywhere are facing broken business models and unexpected recapitalisation needs as a direct result of the pandemic. Why would Metlifecare be any different?
It's certainly true in the retirement village sector all operators are drawing breath, pausing new developments, and expecting potential customers to be less able to afford their more up-market offerings in the near future. Elderly people tend to sell their existing homes to afford the move to a retirement village. If house prices fall, as they are likely to do, their ability to make that move will inevitably be constrained.
EQT needs only to prove it is "reasonably likely" either that Metlifecare's net tangible assets will fall by $100 million or that its underlying profit will fall by more than 10 per cent in any one financial year. By the time this argument gets to court, today's reasonable likelihood could well have become fact.
However, it's not yet clear that the long-term view of the retirement operator's value has changed materially. Shares in Metlifecare and its peers, Summerset and Ryman, are barely changed from where they were a year ago, having ridden last year's bull market up, slumped in synch with the NZX50 post-Covid to a nadir on March 23, and recovered somewhat since.
Unsurprisingly, Metlifecare did take another hit on April 8, falling 17.7 per cent in a day to $3.50 on the announcement that Asia Pacific Village Group, the EQT subsidiary transacting the deal, was pulling out. Metlifecare is now drifting near the $4.25 mark.
Given the gap between the share price today and EQT's $7 offer, there would appear to be little room for a civil renegotiation.
For one thing, the NZ Super Fund and ACC own about 26 per cent of Metlifecare between them. The Super Fund, with just under 20 per cent, is even bound by a lock-up agreement that requires it to support EQT on the original deal. Awkward!
As two of this country's most patient, long-term investors, the Super Fund and ACC are not going to take a low-ball deal.
For them, and for the Metlifecare board, it's a far better punt to let a judge, a lot of legal fees and maybe a year to pass to get an outcome in court. Even if the deal ends up being at $6.50 a share, it's worth the wait if they're confident EQT's claim for relief is shaky.
Less clear, however, is the likely attitude of 'hot money' hedge funds that piled into Metlifecare after the EQT deal was announced and are now sitting on substantial paper losses if the deal doesn't proceed. If they were to claim they were tipped into the deal by Metlifecare or their advisers at Jarden, there might yet be opportunities for separate legal action and an opportunity for another set of lawyers.
At the heart of EQT's attempted departure is the so-called MAC (material adverse change) clause in the scheme of arrangement.
The fine print in that clause prevents withdrawal on the grounds of "changes in general economic conditions, the publicly traded securities market in general, or law."
To get around this, EQT is arguing the material adverse change is Covid-19 itself, and government responses to it, rather than the resulting change in general economic conditions.
Arguing the toss on this key point is where the assembled QCs will make their money.
At face value, EQT has a point. Private equity firms all around the globe are trying to exit deals and citing Covid-19.
Bloomberg reported just this week that "lawyers involved in arranging Nordic deals say clients are trying to walk away from transactions they've already entered into as Covid-19 upends their forecasts for the future," including EQT in at least two separate US deals.
Meanwhile, Metlifecare still intends to dispatch documents to shareholders before the end of the month ahead of a vote on the scheme of arrangement, even though EQT will formally withdraw the deal on Friday this week.
EQT is keen to have its actions compared with the failure of a similar scheme involving the Abano dentistry group, on March 30. However, the circumstances are not identical. Abano's directors informed the bidder of developments that caused the bidder to scrap a $149.8m scheme of arrangement. Abano has closed all its dental practices in Australia and New Zealand, other than a handful of practices providing emergency treatment only, citing the impact of Covid-19.
Metlifecare is arguing that Abano is irrelevant for three reasons. First, while Abano's deal was ended by the bidder, the company agreed the bidder had that right.
Secondly, dentistry is mostly not an essential service, which retirement homes are, and Metlifecare continued operating much as usual under the current lockdown.
And thirdly, Metlifecare claims it hasn't seen any material hit to earnings or valuation, and that if it had, it would have had to announce that to the NZX under continuous disclosure rules.
By contrast, Abano's revenue fell to near zero after its practices were closed.
There's a fourth factor: Close observers reckon EQT has signed up to an unusually loose MAC clause. The Abano MAC arrangements were far tighter, they argue.
Metlifecare's shoot-from-the-lip chair, Kim Ellis, has issued aggressive public commentary, telling Radio New Zealand he believes EQT is "panicking."
"They don't even understand the business, even though they've had untold data. They don't understand that this is a one-month pause in activity. The core business is in great shape."
To bolster that claim, Metlifecare this week issued earnings guidance for the first time for the current financial year, even as others in their sector have been withdrawing theirs.
Underlying profit would be between $85m and $90m, just a shade below last year's, Metlifecare said.
EQT thinks that figure has been massaged and there is no denying the underlying profit calculation excludes the impact of falling property values – a key element in the valuation of retirement operators. Metlifecare's statutory profit, including the revaluation of its property portfolio, almost halved in the six months to December 31, reflecting a softer property market.
However, that happened before Covid-19 and favours Metlifecare's position that EQT can't exit just because of changes in 'general economic conditions'.
After all, EQT must have known real estate values were softening when it made its offer on December 29.
And so the arguments will swirl.
The stakes are high in this first big corporate legal battle attributable to Covid-19.
At this great distance from head office, and from the respectable aura of the Wallenberg family, EQT may be willing to torch its high-minded principles to escape a deal that's got too rich for its blood in a part of the world it may be retreating from anyway.
Equally, Metlifecare may end up wishing it had studied the legend of King Canute more carefully when insisting its fortunes won't materially change because of Covid-19.
In the meantime, however, the locals seem committed to an unusually vigorous effort not to let the Swedes get away with it.
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