Mothercare rejects second offer from US suitor Destination Maternity - UPDATE

2nd Jul 2014 08:30

Mothercare has turned down two takeover proposals from US-based Destination Maternity (DM), believing them to "significantly undervalue" its prospects. Nasdaq-listed DM, which claims to be the world's largest designer and retailer of maternity apparel, said its second written proposal on Tuesday was worth 300p per Mothercare share, valuing its London-listed peer at £266m ($455m).The price in the second proposal, which does not constitute an announcement of a firm intention to make an offer, represents a premium of roughly 29% to Mothercare's closing share price on July 1st and a 90% premium to the share price just before the first proposal was made on May 26th.The second offer would have seen shareholders offered 230p in cash, and 70p in shares of a new combined US-listed, UK-domiciled company.In a statement released at 11am, Mothercare said the proposal "significantly undervalued Mothercare and its attractive prospects" and that the board had "material concerns regarding the deliverability of value to Mothercare shareholders and the significant execution risk", which it has made clear to its suitor.The board's key concerns were the "highly conditional nature" of the second bid, as well as "the lack of strategic rationale for a combination, the uncertainty regarding the proposed financing arrangements, and the significant transaction execution risks given the proposed transaction structure and tax inversion".DM said Mothercare's board had refused to engage in talks, with its Chief Executive Officer Ed Krell saying: "We believe there is a compelling strategic rationale for a combination of Destination Maternity and Mothercare, which would create the undisputed global leader in maternity, baby and young children's apparel and products."Independent retail analyst Nick Bubb said the approach may very well be opportunistic, but the onus was now on Mothercare to prove why their shares were worth more than 300p. He said the price "doesn't sound bad", but acknowledged that "Mothercare may well be wary of the strength of DM's balance sheet" as the American chain has so far grown by acquisition in the US. Indeed, analysts at Liberum pointed out that DM has in recent years been through major restructuring, closing stores and paying down debt, with a 2013 year end net cash position of $24.6m."A brief look at Destination's financials suggests that its ability to execute the deal is not clear-cut," said Liberum in a note to clients. "The rationale for the business combination is also not obvious in terms of solving Mothercare's UK problems. Expect the shares to go up, and other bidders may emerge, but we can see why Mothercare has rejected Destination's proposals."It added that in light of its recent balance sheet history, the rationale for the combination was not clear-cut in terms of what the US suitor could bring to Mothercare regarding the issues it faces in the UK of too many stores, intense price competition and gross margin pressure."As a result, while we would see the crystalisation of any value in Mothercare at above our target price as positive, we can understand why the Mothercare Board has rejected Destination's proposals."By 12:50 on Wednesday, shares in Mothercare had retreated a little from their initial spike to 256.49p, an increase of 10.32%.OH