The companyÆs main gripe with the off-market cash offer of A$4.50 per share is that it is conditional on the company achieving an unrealistic earnings target for the first half of 2006.
Affinity has stated that the offer wonÆt stand if first half earnings before tax are lower than A$14 million, a figure that is A$4 million higher than what management and equity analysts forecast. Colorado has hit financial difficulties in recent years and reported a 19% drop in annual net profit in March.
Colorado says Affinity should be fully aware of the companyÆs profitability given that one of the private equity firmÆs own consultants, Rowan Webb, acted as managing director of the company for the last seven years.
ôWebb presided over the operations of Colorado during the period in 2005 when the company issued a succession of profit downgrades,ö says the board.
ôAffinity should immediately clarify whether it will remove or modify this condition or whether the Affinity offer is spurious and destined to fail.ö
The accusations of deviousness come two days after Affinity announced its hostile bid for the company via its Australian subsidiary ARH Investments.
The unsolicited approach is a new development in AustraliaÆs private equity arena where deals are usually friendly. This year, private equity investors have bought three other iconic retailers in Australia: Myer department stores, vacuum sellers Godfreys Group, and outdoor camping specialists Kathmandu.
Affinity says the A$4.50 offer is the most certain way for Colorado shareholders to crystallise value. ôThe offer price represents a significant premium to historical trading and is at a premium of almost 10% to the average broker valuation,ö says Weng Sun Mok, a partner at Affinity in Singapore.
Brett Sutton, who heads the firmÆs Australian operations, says: ôColorado faces significant execution risk with its current turnaround initiatives. We believe the company would be better placed to attempt a turnaround under private ownership.ö
The firm says it doesnÆt expect another bidder to come forward with a successful counter offer given that ARH Investments already owns 19.9% of ColoradoÆs shares.
Defending its move, Affinity says the hostile bid was only made after several attempts to reach a friendly buy-out failed.
But the Colorado board says each friendly approach was subject to numerous conditions on due diligence and financing that were contrary to the companyÆs commercial interests.
ôAffinityÆs approach specifically sought to restrict the boardÆs capacity to enter into substantive discussions with any other interested parties,ö says the board.
Colorado has appointed boutique advisory firm Gresham Partners to advise on the next course of action. The board has told shareholders not to respond to the Affinity offer and says that it will issue a formal response to the deal in the coming days.
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