Nerves of steel: Why Arrium chair Peter Smedley turned down a $1 billion bid

02 October 2012 Kath Walters

A falling share price and net profits, rising debt and the recent loss of 300 jobs was not enough to warm Peter Smedley to the prospect of a $1 billion offer from a consortium of investors to take over the steel-making company he chairs: Arrium.

Smedley called the bid “opportunistic”, and announced to the stockmarket: “Arrium has an attractive portfolio of businesses and is poised for significant growth.”

Formerly called OneSteel, Arrium changed its name on July 2 to help the company dissociate itself from its steel-making operations and origins and reposition it as a mining, mining consumables, and steel and recycling business.

But steel-making is still at the company's heart, and that division is failing. Its steel-making business lost $50 million last year and $185 million the year before.

The problem with the company opening its arms to the bid is, in part, that the bid does not contain enough detail about how the takeover would be funded, among other missing details.

Smedley said: “The consortium has indicated they believe they can add a lot of value to each of our key businesses, but this is not reflected in their proposal.”

Despite the problems facing the company he has chaired since October 2000, Smedley is not going to hand over the company easily.

Why?

Because he is “Pacman” – the nickname he earned after making 17 acquisitions in eight years to build Colonial Mutual into a company that the Commonwealth Bank of Australia paid $8 billion to buy. He knows the mind of the buyer.

More recently, as chair of the facilities management company, Spotless, Smedley dragged private equity company, PEP, through five months of negotiations to increase the Spotless purchase price by 3%, or a bit over $30 million, on behalf of shareholders.

Steelmakers Australia, the consortium that is bidding for Arrium, will have studied the tactics of the veteran negotiator, we hope. Just in case, we reveal the key Pacman tactics.

No rush to sell

Surprise is the buyer’s advantage.

In February 2000, while the CEO of Colonial Mutual, Smedley pulled off a surprise $183.2 million acquisition of a Scottish fund manager, adding $7.7 billion to funds under management. At the same time, he was in protracted discussions with several potential buyers for other parts of Colonial’s financial services business.

Not even a $2.14 billion debt is enough to worry Smedley prematurely to the negotiating table. Weaker men might have looked at the offer as a blessed relief from the long, slow decline of Arrium.

But Smedley will never be rushed to sell. The negotiations for Spotless Group lasted months until Private Equity Partners had showed they were serious by increasing their bid twice from the first offer.

Wait till the shareholders are ready to sell

Spotless shareholders were so anxious for Smedley to agree to the sale price that they almost tipped him out of the chair through an extraordinary general meeting. They were furious that he had named a price of $2.80 a share, giving away the price, and that he was demanding the price to give the buyer access to the books to conduct due diligence.

By the time Smedley agreed to the sale, shortly after surviving the challenge, Spotless shareholders were in a lather to conclude the sale.

Sort out the tyre-kickers

As a buyer, Smedley knows the risk of a buyer weakening a company during negotiations to force a deal or a cheaper price.

He was CEO of Mayne Group after Colonial Mutual, where he again used acquisitions to grow. Although the strategy was unsuccessful for Mayne, and Smedley lost the leadership, his bid for a Queensland pathology company showed his no-holds-barred approach.

When the partners who owned the company resisted the sale, Smedley started poaching several of the group’s executives, who did not have equity, to force the partners to the negotiating table.

Billabong was in negotiations with a private equity company, TPG, when another, Bain Capital, started sniffing around. When Bain walked away, it hurt Billabong’s chances of any deal, let alone a favourable one.

Smedley makes buyers prove their bona fides. He tried to make PEP increase its offer before he would let them have full access to the group’s records to conduct due diligence, a move that shareholders opposed. However, his strategies ensured both parties were fully committed to the deal and keen to quickly seal it.

Know your value

Smedley infuriated Spotless shareholders by naming a price – $2.80 a share – that he expected before giving PEP access to the books.

The idea of giving away the sale price to the bidder goes against every traditional rule of corporate deal-making. What if PEP had been willing to pay more? In the end, however, Smedley was right about the value of the company. The shareholders in fact agreed to sell below the price he had named, accepting $2.68 a share plus a four-cent dividend. This made the sale price $723 million, up from the original $690 million bid.

Buyer beware

Smedley gets the best price. In the case of Colonial Mutual, CBA paid $8 billion.

All hell broke loose when the bank later realised it had to pay out $33 million to the group’s CEO, Chris Cuffe, when he walked away from the job.

The enormous payout created horrible headlines for David Murray, the then chief of CBA, who grumbled that the bank had been able to do very little due diligence before doing the deal.

Smedley would have none of it.

He defended the remuneration of the Cuffe and other Colonial executives, and said that CBA should have been aware of the details of the remuneration deals.

Keep it in perspective

The day after PEP confirmed its first bid for Spotless, Smedley took time out to attend a golf gala dinner at Crown Casino. The event attracted 1000 or so business and political golf enthusiasts and began a week of festivities associated with the Presidents Cup golf event that starts at Royal Melbourne Golf Club.

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