Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

When <a href="https://www.smartkarma.com/entities/2495" target="_blank" data-smartkarma-citation="entities:2495:1">IPH Ltd (IPH AU)</a> gate-crashed <a href="https://www.smartkarma.com/entities/24315" target="_blank" data-smartkarma-citation="entities:24315:1">Xenith Ip (XIP AU)</a>/<a href="https://www.smartkarma.com/entities/24317" target="_blank" data-smartkarma-citation="entities:24317:1">Qantm Intellectual Property (QIP AU)</a>'s marriage of equals, submitting a scheme <a href="https://www.asx.com.au/asxpdf/20190312/pdf/443dg79r2bqhh5.pdf" target="_blank">proposal</a> comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, versus QANTM's all-cash offer (1.22 QANTM), the key risk to IPH's Offer was ACCC opposing its Offer. As announced today, ACCC will <a href="https://www.asx.com.au/asxpdf/20190328/pdf/443v3d3tn3snm0.pdf" target="_blank">not oppose</a>.
This decision was largely expected and previously discussed <a href="https://www.smartkarma.com/insights/iph-goes-hostile-on-xenith" target="_blank">here</a>. Although IPH, QANTM, and Xenith are the only three ASX-listed intellectual property companies, privately owned companies collectively hold a larger market share - and growing - compared to the three listcos. The ACCC agrees and signed off on an IPH/XIP tie-up as it did on the 21 March, by <a href="https://www.asx.com.au/asxpdf/20190328/pdf/443v3d3tn3snm0.pdf" target="_blank">not opposing</a> the merger of XIP and QANTM.
XIP acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH's offer as there still exists a number of concerns as detailed in its 19 March <a href="https://www.asx.com.au/asxpdf/20190319/pdf/443lw1v9zh3vvt.pdf" target="_blank">announcement. </a>IPH <a href="https://www.asx.com.au/asxpdf/20190320/pdf/443mqg6wxc4vht.pdf" target="_blank">responded</a> to those concerns on the 20 March. These include:
<ol>
<li>Shareholders of Xenith will hold an immaterial % of the merged IPH entity compared to QANTM.
<ul>
<li>IPH's scrip portion accounted for (then) 35% of its Offer (now ~37%), shares which have superior liquidity versus QANTM given IPH's position in the ASX200. </li>
<li>The cash portion also provides added certainty on value into the Offer compared to QANTM's all scrip offer.</li>
</ul>
</li>
<li>The control premium as at 11 March is insufficient.
<ul>
<li>Probably the most contentious concern. QANTM's all-scrip offer on the <a href="https://www.asx.com.au/asxpdf/20181127/pdf/440nl2jsl0355v.pdf" target="_blank">27 November</a> backed out an indicative offer price of $1.598/share or a 28.4% premium to last close.</li>
<li>IPH's $1.97/share indicative offer (a 60% premium to XIP's undisturbed price, and a 31% premium to the independent expert's <a href="https://www.asx.com.au/asxpdf/20190220/pdf/442s4js47sjyg7.pdf" target="_blank">mid-point fair value</a> (page 55)) compared to QANTM's indicative offer of $2.03 immediately before IPH's announcement.</li>
<li>Circumstances have changed materially since, with IPH's cash/scrip offer now worth $2.02 as I type, versus $1.67 for QANTM. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/083/414/original/Price3.PNG?1553738819" class="editor-image img-responsive" data-smartkarma-image-id="83414"></figure>
<div style="text-align: left;" class="content-caption">Source: CapIQ</div>
</li>
</ul>
</li>
<li>The increased execution risk concerning ACCC. Now a non-issue.</li>
<li>It is questionable whether employees, controlling 40% of Xenith, would support the offer.
<ul>
<li>Employees are free to decide on what they consider to be the most compelling Offer. IPH has offered to hold discussions with XIP employees. </li>
</ul>
</li>
<li>CGT rollover will likely be lower via the large cash element under IPH’s offer vs. QANTM's all scrip offer.
<ul>
<li>Maybe. Possibly. An all-scrip offer typically affords greater rollover relief. Nevertheless, Xenith is trading below its 2015 IPO price of <a href="https://www.asx.com.au/asxpdf/20151119/pdf/4333p2bd9j6b64.pdf" target="_blank">$2.72/share</a>.</li>
</ul>
</li>
</ol>
With IPH's 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH. The scheme meeting to decide on the QANTM Offer is scheduled for the 3 April.

When IPH Ltd (IPH AU) gate-crashed Xenith Ip (XIP AU)/Qantm Intellectual Property (QIP AU)'s marriage of equals, submitting a scheme proposal comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, versus QANTM's all-cash offer (1.22 QANTM), the key risk to IPH's Offer was ACCC opposing its Offer. As announced today, ACCC will not oppose.
This decision was largely expected and previously discussed here. Although IPH, QANTM, and Xenith are the only three ASX-listed intellectual property companies, privately owned companies collectively hold a larger market share - and growing - compared to the three listcos. The ACCC agrees and signed off on an IPH/XIP tie-up as it did on the 21 March, by not opposing the merger of XIP and QANTM.
XIP acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH's offer as there still exists a number of concerns as detailed in its 19 March announcement. IPH responded to those concerns on the 20 March. These include:

Shareholders of Xenith will hold an immaterial % of the merged IPH entity compared to QANTM.

IPH's scrip portion accounted for (then) 35% of its Offer (now ~37%), shares which have superior liquidity versus QANTM given IPH's position in the ASX200. 
The cash portion also provides added certainty on value into the Offer compared to QANTM's all scrip offer.


The control premium as at 11 March is insufficient.

Probably the most contentious concern. QANTM's all-scrip offer on the 27 November backed out an indicative offer price of $1.598/share or a 28.4% premium to last close.
IPH's $1.97/share indicative offer (a 60% premium to XIP's undisturbed price, and a 31% premium to the independent expert's mid-point fair value (page 55)) compared to QANTM's indicative offer of $2.03 immediately before IPH's announcement.
Circumstances have changed materially since, with IPH's cash/scrip offer now worth $2.02 as I type, versus $1.67 for QANTM. 

Source: CapIQ



The increased execution risk concerning ACCC. Now a non-issue.
It is questionable whether employees, controlling 40% of Xenith, would support the offer.

Employees are free to decide on what they consider to be the most compelling Offer. IPH has offered to hold discussions with XIP employees. 


CGT rollover will likely be lower via the large cash element under IPH’s offer vs. QANTM's all scrip offer.

Maybe. Possibly. An all-scrip offer typically affords greater rollover relief. Nevertheless, Xenith is trading below its 2015 IPO price of $2.72/share.



With IPH's 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH. The scheme meeting to decide on the QANTM Offer is scheduled for the 3 April.

<a href="https://www.smartkarma.com/entities/2495" target="_blank" data-smartkarma-citation="entities:2495:1">Iph Ltd (IPH AU)</a> has gate crashed <a href="https://www.smartkarma.com/entities/24315" target="_blank" data-smartkarma-citation="entities:24315:1">Xenith Ip (XIP AU)</a>/<a href="https://www.smartkarma.com/entities/24317" target="_blank" data-smartkarma-citation="entities:24317:1">Qantm Intellectual Property (QIP AU)</a>'s marriage of equals, submitting a <a href="https://www.asx.com.au/asxpdf/20190312/pdf/443dg79r2bqhh5.pdf" target="_blank">proposal</a> (by way of a Scheme) for Xenith comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, 23.3% above the implied QANTM merger consideration.
Last November, Xenith and QANTM , both leading providers of IP origination services in Australia, <a href="https://www.asx.com.au/asxpdf/20181127/pdf/440nl2jsl0355v.pdf" target="_blank">announced</a> a merger via an all-scrip scheme of arrangement, whereby Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group with a then pro-forma capitalisation of A$285mn. Pre-cost synergies are estimated at A$7mn/annum at the end of  year three.
Xenith's board unanimously recommended the merger to its shareholders.
IPH did not blink and on the same day as the Xenith/QANTM announcement, <a href="https://www.asx.com.au/asxpdf/20181127/pdf/440npljmz4rtnt.pdf" target="_blank">lobbed</a> an unsolicited, indicative, preliminary, conditional and non-binding cash &amp; scrip proposal to acquire QANTM at $1.80/share (including a a A$0.05 dividend) by way of a scheme, or a 42% premium to last close.
QANTM's board <a href="https://www.asx.com.au/asxpdf/20181127/pdf/440nxqykt65vqh.pdf" target="_blank">rejected</a> the proposal due to its highly conditional nature, significant execution risk, and that the offer undervalued the company. IPH <a href="https://www.asx.com.au/asxpdf/20181129/pdf/440s7m9fwj1zfq.pdf" target="_blank">countered</a> those claims, spurring QANTM to<a href="https://www.asx.com.au/asxpdf/20181129/pdf/440sqys8bwqm38.pdf" target="_blank"> counter</a> those countered claims.
On the 13 February 2019, IPH <a href="https://www.asx.com.au/asxpdf/20190213/pdf/442krx96mz0vry.pdf" target="_blank">bought a 19.9% stake</a> in Xenith at $1.85/share (or ~A$33mn) from institutional investors, and further added that is does not support the QANTM scheme and intends to vote against it. In response, both Xenith and QANTM announced that neither had received a proposal from IPH. Xenith's shares increased 20.3% to close at A$1.69/share.
The provisional date for ACCC s clearance of the <a href="https://www.accc.gov.au/public-registers/mergers-registers/public-informal-merger-reviews/qantm-intellectual-property-ltd-xenith-ip-group-ltd" target="_blank">QANTM/Xenith merger</a> is the 21 March. The provisional date for <a href="https://www.accc.gov.au/public-registers/mergers-registers/public-informal-merger-reviews/iph-limited-acquisition-of-xenith-ip-group-limited-or-qantm-intellectual-property-limited" target="_blank">IPH/Xenith</a> is the 2 May. The QANTM/Xenith Scheme meeting is scheduled for 3 April with a 24 April implementation date. IPH's proposal has an indicative implementation date of mid-July.
IPH's proposal currently offers an implied value of $1.98 (65% in cash) against $1.85 for QANTM's all-scrip offer.
The key risk to IPH's proposal is ACCC's consent. IPH, QANTM and Xenith are the only three ASX-listed intellectual property companies. IPH is the oldest, and the largest (in terms of revenue). However privately owned companies collectively hold a larger market share - and growing - compared to the three listcos. It is not apparent a merger between either of these two listcos would lessen IP service competition in Australia.
With IPH's blocking stake, the QANTM/Xenith scheme will fail. Xenith should engage with IPH.

Iph Ltd (IPH AU) has gate crashed Xenith Ip (XIP AU)/Qantm Intellectual Property (QIP AU)'s marriage of equals, submitting a proposal (by way of a Scheme) for Xenith comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, 23.3% above the implied QANTM merger consideration.
Last November, Xenith and QANTM , both leading providers of IP origination services in Australia, announced a merger via an all-scrip scheme of arrangement, whereby Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group with a then pro-forma capitalisation of A$285mn. Pre-cost synergies are estimated at A$7mn/annum at the end of  year three.
Xenith's board unanimously recommended the merger to its shareholders.
IPH did not blink and on the same day as the Xenith/QANTM announcement, lobbed an unsolicited, indicative, preliminary, conditional and non-binding cash &amp; scrip proposal to acquire QANTM at $1.80/share (including a a A$0.05 dividend) by way of a scheme, or a 42% premium to last close.
QANTM's board rejected the proposal due to its highly conditional nature, significant execution risk, and that the offer undervalued the company. IPH countered those claims, spurring QANTM to counter those countered claims.
On the 13 February 2019, IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) from institutional investors, and further added that is does not support the QANTM scheme and intends to vote against it. In response, both Xenith and QANTM announced that neither had received a proposal from IPH. Xenith's shares increased 20.3% to close at A$1.69/share.
The provisional date for ACCC s clearance of the QANTM/Xenith merger is the 21 March. The provisional date for IPH/Xenith is the 2 May. The QANTM/Xenith Scheme meeting is scheduled for 3 April with a 24 April implementation date. IPH's proposal has an indicative implementation date of mid-July.
IPH's proposal currently offers an implied value of $1.98 (65% in cash) against $1.85 for QANTM's all-scrip offer.
The key risk to IPH's proposal is ACCC's consent. IPH, QANTM and Xenith are the only three ASX-listed intellectual property companies. IPH is the oldest, and the largest (in terms of revenue). However privately owned companies collectively hold a larger market share - and growing - compared to the three listcos. It is not apparent a merger between either of these two listcos would lessen IP service competition in Australia.
With IPH's blocking stake, the QANTM/Xenith scheme will fail. Xenith should engage with IPH.

Australia

QANTM Intellectual Property Limited operates in the commercial services industry. The Company offers services for patent, design, trademark procurement, and other related intellectual properties throughout Australia.

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