Electra Rejects 3i Bid, But Will Its Shareholders? –

3i last month responded to Electra Investment Trust’s (EIT) defensive GBP544 million ($881.3 million) buyback plan with a hostile cash and share bid that valued the target at GBP1.25 billion ($2,025 billion). The new offer, which is final and will not be increased unless a rival bidder emerges, valued each EIT share at 725p, compared with the 705p per share price of 3i’s January informal indicative offer.

The new bid represented a premium of 28.7% to EIT’s share price immediately prior to 3i’s initial announcement that it was in discussions with Electra.

EIT’s board immediately rejected the new bid, describing it as “plainly inadequate” and reiterated that it would only recommend a bid “at an appropriate premium to net asset value.”

Last month, EIT had announced plans to buy back 40% of its shares for cancellation via a tender offer based on an end-February net asset value of 786p per share and which would wind itself up within five years. The buy-back valued the trust at GBP1.37 billion, 11% more than the initial 3i offer.

At the trust’s September year end, EIT’s net asset value was only 676p per share; notwithstanding the strong recovery in public markets during the intervening period, the discrepancy between the two figures suggested the valuation basis for the portfolio has changed. Market observers have suggested the new net assets figure contains an element of future value. In its offering document, 3i noted, “it appears that the uplift over book value achieved on sales of [EIT’s] unquoted investments [from Sept. 30, 1998, to Feb. 28, 1999,] was only GBP8 million.”

The 3i offer, which is conditional on EIT shareholders rejecting the buy-back proposals, comprised 44.2% cash and 55.8% new shares in 3i and thus would return slightly more cash to shareholders than the Electra tender offer would.

3i has arranged GBP800 million of bank debt led by Den Danske bank and WestLB to fund the cash component of the offer.

3i’s board said it believes the offer, which is pitched at a small premium to 3i’s estimate of EIT’s net asset value after stripping out the transaction costs, provides fair value and gives EIT shareholders the opportunity to participate in the potential growth in value of 3i’s business, including the Electra portfolio.

Buying to Buttress Market Position?

From the outset, many have interpreted 3i’s move on EIT as a means of ensuring the group’s continued presence in the FTSE-100, a suggestion that 3i has consistently rejected. 3i maintains that the acquisition of Electra would be a significant addition to its portfolio, increasing the size and scale of its activities and giving the group a more efficient financial structure, while enhancing its market position.

3i said its bid delivers substantial advantages to EIT shareholders, including the opportunity to benefit from realizing EIT’s portfolio when optimum value can be achieved and to receive a future dividend stream.

However, because it is unlikely that the whole Electra Fleming team will wish to transfer to 3i, some observers have suggested that the chances of obtaining optimal value from the EIT portfolio could be prejudiced.