It’s common for growing and thriving companies to attract potential suitors who want to acquire their success as Best & Less Group (ASX: BST) has achieved this through an unsolicited offer from institutional investors Ray Itaoui and Brett Blundy. However, while target companies are normally acquired at a premium, Best & Less will receive less than its current share price should the takeover succeed. But why? 

Brett Blundy has been a cornerstone investor in BST since its initial public offering in 2021, under his affiliated company the BB Family International Trust (BBRC). Together, BBRC and Ray Itaoui offered to acquire a minimum 55% of the total BST shares, inclusive of 16.45% shares that BBRC already holds, at a cash offer of $1.89 per share, subject to reduction by any dividend or other distribution that might be paid after the announcement of this offer. 

The cash offer is lower than a closing price of $1.985 per BST share on 28 April 2023 and a volume weighted average price of $1.934 per share in the 3 month period ended 28 April 2023.

Commenting on how the majority shareholders responded to the takeover offer, Best & Less lead independent director Stephen Heath said, “We have received statements from both Allegro and Bignor that they each intend to accept the offer in the absence of superior proposal. Accordingly, the IBC [Independent Board Committee] has determined that the Takeover Offer should be made available to all shareholders recognising that the decision as to whether to accept the offer or not will be based on individual shareholder preferences.” 

Among Best & Less’ largest shareholders, Allegro (Allegro Fund III LP and Allegro Services III D Pty Ltd) holds approximately 32.43% of the BST shares on issue, while Bignor (Bignor Family Pty Limited), a company associated with Executive Chairman Jason Murray holds approximately 8.27% of the BST shares on issue.

While the offer does not contain a typical control premium, BST is confident that the offer will provide an ability for shareholders who wish to exit large shareholdings in BST to do so without severely plummeting the Company share price, should they instead sell their shares on-market. Meanwhile, the minimum acceptance condition also provides an opportunity for all existing shareholders to remain invested in a company controlled by Brett Blundy, an individual with a strong footprint in the retail sector, should the control pass under the takeover offer. 

There are various reasons that contribute to why a company could be taken over for lower than previous valuation, such as market forces, investor sentiment, economic conditions, or industry trends that may deplete the company’s intrinsic value in the eyes of the bidder aside from its material value. For BST, some hiccups in its H1 FY23 results might have impacted the non-premium offer that it received. Though the core non-discretionary baby category is  performing well enough to up the Group revenue by 13% to $324.8 million from $287.5 million in the previous corresponding period (pcp), its NPAT significantly decreased by 31.8% to $13.7m from $20.1m on pcp. 

Another potential factor that devalues the offer even further might be overvaluation of the company inventory value. Inventory by the end of H1 FY23 amounted to $108.8m as opposed to $95m in the previous half year (H2 FY22) due to changing inventory mix, cost price increases, and investment in non-apparel lines. BST claimed it had a successful clearance in H1 leading to very low level of winter inventory at the end of half and is confident that it will be able to clear out approximately $6m worth of inventory that is going to be carried over to H2. However, the value of inventory on hand only ever decreases. BST’s current aging inventory rate is 2.2%.

As seasoned investors in the retail space, the bidders are cognisant of the struggles across the retail industry, catalysed by higher interest rates that have led to lower consumer spending.

All in all, BST ended the first half of FY23 with $14.7m cash at bank as opposed to $36.7m on pcp, with free cash flow of $0.9m as opposed to $15.1m on pcp. 

In mid-April, BST announced that later in the year The Iconic CEO Erica Berchtold will be taking over the CEO position from Rodney Orrock, who is retiring due to health reasons. The Company advised that business will run as usual and the takeover offer will not have any impact or any material changes to the Company’s operations, personnel or strategy during this period.

While BST’s initial IPO valued them at $271.2m, its current market capitalisation sits at $248.85m, while the takeover bid values the Company at $236.94m.