Buyout firm Pacific Equity Partners has hit back in the ongoing row over its attempts to buy a stake in Flight Centre, an Australian listed travel agency, with a direct appeal to shareholders over the board’s decision to withdraw its support for the transaction.
The argument centres on an “evaluation report” from accountancy firm Ernst & Young that valued Flight Centre at between A$1.9 billion (€1.2 billion; $1.6 billion) and A$2.0 billion. As a result, the board of independent directors withdrew their support for PEP’s offer to take a 30 percent stake in a leveraged joint venture vehicle that will house the company’s operational assets, which would value the whole business at A$1.6 billion.
However, PEP is arguing that the report is “inappropriate” and contains “factual inaccuracies”, not least because the valuation is based on 100 percent control. It also insisted that it had not been properly consulted by EY, and suggested that Flight Centre’s founders may have withdrawn their support because the board set aside part of their prospective payout to cover a potential capital gains tax liability.
The buyout firm has appealed directly to shareholders after allegedly failing to receive any response from the board over their concerns, which it submitted in writing last week.
The release began by questioning why the founders had suddenly withdrawn their support, suggesting it may have been due to the board’s intention: “to withhold… at least A$80 million from the proposed buyback transaction to meet a potential CGT liability.” It questioned whether the board had explored alternatives to this, including tax insurance.
It also fiercely defended its offer valuation, which it said was “significantly above the midpoint of the valuation range in the Ernst & Young evaluation report after removing the control premium”. The latest valuation was inappropriate because it was based on a buyer taking 100 percent control, rather than a minority stake, it added.
PEP also questioned why EY had been asked to prepare an evaluation report, rather than the more standard independent expert’s report, and denied the board’s claim that EY had “unfettered access” to PEP and its advisors – pointing out that the only scheduled meeting between them had taken place after the report was completed.
However, PEP did not rule itself out of the deal completely, saying it was still willing to negotiate with the board: “Despite the independent directors’ failure to respond to PEP’s concerns to date, PEP remains willing to engage with the independent directors in order to resolve its questions and ensure that the market in [Flight Centre] shares is fully informed,” the firm said.