For months, investment bankers have quietly complained that the gap between what corporate buyers are willing to pay and what sellers demand is standing in the way of deal-making.
Convenience store chain Couche-Tard gave proof Friday of that oft-expressed view.
Couche-Tard went public on Friday with a hostile, all-cash $1.9-billion offer for U.S. rival Casey's General Stores. The proposed deal, pitched at a 17 per cent premium to where Casey's stock traded over the past 90 days, is text-book takeover, as Couche-Tard, with 5,900 stores, can wring all sorts of cost synergies by rolling Casey's 1,500 outlets into its operations.
However, Casey's has consistently refused to engage in friendly merger talks that started last October. Clearly frustrated, Couche-Tard took its case directly to shareholders - historically, a risky strategy - after dropping two formal letters on the Casey's board of directors last month.
Credit Suisse is Couche-Tard's financial adviser, along with law firm Dewey & LeBoeuf.
While Casey's has yet to be heard from, it's obvious why the board would be reluctant to sell. Prior to Couche-Tard's bid, which sent the shares soaring on Friday, Casey's stock was changing hands at the same price seen in 2007. Any operational improvements over the past three years failed to make an impression on the stock price, as Casey's dipped sharply during the market meltdown of 2008.
There are plenty of companies with stock charts that look just like Casey's - valuations are only creeping back to levels seen three years ago.
Rightly or wrongly, many boards believe that recession and credit crisis - factors outside their control - still weigh heavy on their shares, and once clouds clear, the value of the company will take wing. Many directors take the view that they would be doing a disservice selling under such circumstances. Bidders such as Couche-Tard are seen as opportunistic. Investment bankers say this sort of attitude is now a major impediment to takeovers, as financing is available for deals in the wake of rebounds in debt and equity markets.
Just how one judges these bids is very much dictated by where one is sitting. Couche-Trad, obviously, sees this as a great time to expand.
Given this backdrop, Couche-Tard's bid for its smaller rival holds larger implications for the merger and acquisition market. If Casey's shareholders endorse the hostile offer, that signals the boards of target companies should engage with potential buyers.
If, on the other hand, Couche-Tard falls flat on its face, directors will know that company owners are reluctant sellers, and willing to wait patiently for better days.