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Hostile Takeover Defense Strategies: Poison Put

Hostile Takeover Defense Strategies: Poison Put

   2022-08-11T18:29:29+08:00


Published by BSIC on 4 April 2021

Poison Put

Poison Put is another strategy which aims to prevent a hostile takeover. Unlike the Poison Pill, it aims to do so through bond, rather than stock. issuance. Its beginnings can be traced back to the 1998 KKR’s $25bn takeover of RJR Nabisco. Due to a significant part of the deal being debt financed, the asset manager decided not to refinance Nabisco’s debt, deeming it outstanding and reducing the company’s value by $1bn. As such, the Poison Put was devised as a tool to protect the existing debt holders from unexpected ownership changes.

However, it evolved to become one of the methods protecting companies from hostile takeovers. As mentioned, the practice relies on issuing new debt with a set maturity. Unlike a usual bond, it contains a covenant which implies that in case the company is acquired, the bond will be redeemed before the initial maturity. As a result, the new owner will be obliged to instantaneously repay the outstanding debt, thus inducing a severe financial strain. Overall, the Poison Put increases the sum to be paid for acquiring the target company by the debt to be repaid in case of acquisition.

This type of defence against a hostile takeover can substantially increase the cost of potential acquisitions, effectively rendering them economically illogical, marked by an extremely high mark-up. If initial valuations set a company at $100m and $50m of bonds are issued, then the transaction automatically increases by 50%. Further, some Poison Puts exercise a premium in case the bond is redeemed early. That only further increases the debt which needs to be repaid after the target company is acquired. Nevertheless, the method may be perilous for heavily indebted firms. Although bond issuance does not dilute the ownership structure, it obliges the issuer to repay the borrowed amount, obviously. Hence, if too much debt is issued, it can actually backfire, inducing growth hampering financial troubles.

Example of a Poison Put in use is a 2010 unsuccessful takeover of Casey’s General Stores (NASDAQ: CASY) by Couche-Tard (TSE: ATD.B). In Casey’s notes there was a costly and unusual “poison put” feature in favor of the noteholders, designed to entrench Casey’s Board and management at the expense of the Casey’s shareholders. Under the “poison put” feature associated with the notes, Casey’s is required to pay the noteholders approximately $95m in penalties based on current treasury rates, in addition to the outstanding principal amount and accrued interest on the notes, if any party acquires 35% or more of the outstanding shares of Casey’s. The financing makes it almost $2 per share more expensive to acquire Casey’s – that is $2 that could have gone to the shareholders but instead were designated for noteholders in the event of any such acquisition.

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Harvey Yan

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