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Material disagreement

8 Dec 2014 By Chris Hughes

Saint-Gobain’s cunning deal to take over Swiss peer Sika on the cheap looks too clever by half. The French materials group is to pay 2.75 billion Swiss francs ($2.8 billion) for a minority holding which confers control over its Baar-based rival – a company recently worth 8.4 billion Swiss francs. The unhappy reaction of both groups’ shares correctly reflects the high chance that business damage will follow.

Sika is currently controlled by the Burkard family, whose 16.1 percent holding carries 52.4 percent of the voting rights. That arrangement works well enough for a quasi-passive family stake. Saint-Gobain, with sizeable potential conflicts of interest, is different. It will be hard for Sika’s board to ensure Saint-Gobain does not favour itself over other Sika shareholders.

Such are their worries about life under Saint-Gobain that Sika’s executive management team and all of its unconflicted directors have pledged to quit if the transaction completes. For them, the robust response may be both self-interested (their jobs face elimination) and honorable (they are sticking up for investors).

For Saint-Gobain, it changes everything. Sika will not help get the deal through anti-trust regulators. Post-completion, industrial relations promise to be toxic. Sika could be damaged goods. No wonder its shares fell 19 percent, wiping 1.6 billion Swiss francs off its market value. Or that Saint-Gobain’s were down 6.7 percent – a 1.4 billion euro ($1.7 billion) hit.

The price of the Burkard stake was set by auction, says a person familiar with the situation. It looks like Saint-Gobain miscalculated its winning bid.

A wiser option might have been to offer ordinary shareholders a small premium, say 10 percent, to compensate for the change of control. There is no legal requirement to do so, but there would be significant value to Saint-Gobain in buying co-operation from Sika management. However, a full offer on those terms – an overall premium of 25 percent – would turn the deal into a 10.4 billion Swiss franc transaction, with a premium of 2.1 billion Swiss francs. Saint-Gobain’s projected annual synergies of 180 million euros, due in 2019, would not cover that.

As it is, the market has rightly concluded that Saint-Gobain’s chosen approach destroys even more value – apart from for the Burkards.


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