Canon-Axis deal done despite hedge-fund holdout

Canon now owns 84 percent of shares, Elliott Management increases stake
Wednesday, April 29, 2015

TOKYO—In a bid that industry analysts told Security Systems News is intended to get Canon to increase its $2.8 billion offer for Axis Communications, Elliott Management, a New York hedge fund, increased its stake in Axis to 10.91 percent and has not yet sold those shares to Canon.

Canon now owns 84 percent of Axis shares. On April 24, Canon extended the offer period a second time, from the original April 15 to May 5. Canon said it would neither extend the offer period again nor raise its offer price.

So, how does the hedge-fund holdout affect the deal? The deal is essentially done, Canon Global spokesman Richard Berger told SSN.

“With the settlement on April 15 for the 75.46 percent of the shares that had been acquired following the initial acceptance period, which concluded on April 1, Axis has already become a Canon subsidiary,” he said.

Berger echoed Canon Global CFO Toshizo Tanaka who recently said that Canon would like to own all Axis shares, but that there’s no rush.

“While it would have been preferable to obtain 100 percent of the shares, having a minority of the shares owned by other parties does not pose an obstacle to our strategy going forward,” Berger said.

He added that the “synergies are not affected by costs but rather lie in the opportunities going forward, we are confident that we will be able to realize the synergies of the deal. Furthermore, our plan has always been for Axis to remain an independent entity within the Canon Group. As such, we have no plans to integrate Axis.”

Elliott Management did not return a call from Security Systems News inquiring about its reason for increasing its stake in Axis.

Elliott Management has not publicly stated its intentions for increasing its stake, but an industry analyst contacted by SSN said it is an attempt to “get the price raised on all the shares.”

So why, if the deal is done and Canon is OK with waiting to obtain all shares, is Elliott Management’s 10.91 percent stake notable?

The industry analyst said that Canon cannot “squeeze out” or forcibly take over the remaining Axis shares if there is more than 10 percent outstanding.

Canon also is “not allowed to pay more for just the remaining stake in the company because that would represent a different share price and be unfair to shareholders that already submitted their shares,” the analyst said.

The company could pay more for those shares, but that would be down the road after a designated waiting period defined under Swedish law, reports said.  

The bottom line, this analyst said, is that “Canon can own and control Axis, but Elliott would have a 12 percent minority stake and essentially the Elliott stake is marooned.”

Asked about the development, Axis GM Americas Fredrik Nilsson said he could not comment beyond saying: “Canon now owns the majority of the shares in Axis and will control Axis. Axis will be run as a separate legal entity reporting to Canon CEO in Tokyo. Additionally, Axis and Milestone will be run as separate legal entities.”

Increasing shares to more than 10 percent and holding out for a higher price is a common tactic for “activist investors” like Elliott Management.

Canon has taken its time acquiring full ownership of acquisitions previously, Reuters reported, citing a 2009 deal to acquire Oce, a Dutch print machine maker. Canon met “a challenge from Orbis Portfolio Management and [the deal] was only completed in 2012 after a squeeze out.”

What about the $2.8 billion price tag?  

Imperial Capital’s Jeff Kessler reiterated earlier statements to SSN that Canon’s is a fair offer.

“The transaction is 29.7x enterprise value to EBITDA and also 43.5x earnings,” Kessler said. “There’s not another video company out there [valued like this],” he said.

Chinese camera manufacturers Hikvision and Dahua are valued at 18.8x EBITDA and 27x EBITDA, respectively. “And these are companies that are growing at 30 percent internally,” he added.

Kessler said, “Axis is facing headwinds with regard to the small- and medium-business market from Asian manufacturers [like Hikvision and Dahua].”

He called Axis “a great company with a great product and some of the best people in the industry … [but] its projected growth rate over the next several years is mid single digits in local currency.”

“We feel the price that Canon is offering for Axis is a fair price,” Kessler said.