Gandalf Technologies Inc yesterday published its rebuttal of Case Group Plc’s defence document against Gandalf’s bid for the Watford company, and with Case’s dismal performance over the past three years, the Canadian has plenty of ammunition with which to beat Case. On the key financial argument that the combined company will end up unacceptably highly geared – Gandalf acknowledges less than 75% – it insists that it can quickly reduce gearing to acceptable levels out of cash generation, pointing out that Case itself reduced its gearing to 22% by March 1988 from 49% a year earlier and 57% in March 1986. It also succeeds in catching Case out in a disingenuity or two, notably the statement that In 1986-7…Gandalf was still smaller than Case…in the US, suggesting that on 1987-8 figures Gandalf has passed Case in the US – and is, not surprisingly given its strength in its home market, twice the size of Case in North America. Much of the rest of the defence document is a mass of technical telecommunications terms that will leave the average shareholder hopelessly befuddled, but it does suffer from the usual problem that companies run into when they get caught up in one of these fiercely-argued fights – if Case products are really so rotten as Gandalf says they are, is the company really worth even what Gandalf is prepared to pay simply for its marketing, which Gandalf doesn’t seem to rate to highly either? As we have stressed before, the crucial weakness of the Gandalf offer is that there is no all-cash alternative to the 40 pence a share plus Gandalf shares representing pro rata 37% of the enlarged equity: there are undoubtedly many Case shareholders who would like to get out, but if so, they want to get out of the sector altogether, and see being saddled with a block of Gandalf shares as no real alternative to hanging on to their Case shares. Some who feel that way are likely to sell in the market – the shares rose fivepence to 91 ex dividend on Monday ahead of the Gandalf document. But there is little on the horizon to tempt abitrageurs to amass Case shares, so a wave of holders seeking to sell in the market is likely to depress the price. Given the derisory level of acceptances at the first close of the offer, it still looks unlikely that Gandalf will come close to winning control when its present offer closes on July 22, but Case will have to come up with some pretty bright ideas to keep the shares chirpy, because if Gandalf does then walk away sitting on just under 10%, Case will face a continuing threat that Gandalf will start buying in the market again if the share price falls much below its present level. Gandalf’s problem is that it is not big enough to apply force majeure and offer a knock-out price for Case – but if its own thesis is correct, in a couple of years’ time it will be bigger than Case and able to snap the company up with ease. And the pressure to put itself out of Gandalf’s reach will mean that Case can’t afford to do nothing. It’s far from over.
