U.S. Philip Morris Wants To Buy Canada’s Rothmans

by Mr. Cheap

It was recently announced that Philip Morris put in a generous offer to buy Rothmans (of which Mr. Cheap is a little less than a majority owner).  On news of the offer, Rothmans stock shot up above $30 / share then sank back to a bit below it (to $29.71 as of the holiday weekend).  We received a reader’s question (from Mike’s sister!) asking what’s going to happen to Rothmans stock.  I’ll write up what I’ve read and my understanding of the process, please feel free to correct me if I get anything wrong and I’ll update the post (I’m certain many of our readers understand the process better than I do).

To start with, a share of stock is partial ownership of a company.  When an offer is made on an entire company, the person putting up the offer is sayings “I’ll give you $X for the whole thing”.  If the company rejects the offer, then its business as usual.  If the company accepts the offer, its ownership is transfered to whoever purchases it.  This can be another company (as in this case with Philip Morris), some legal entity (as in the case of the BCE buyout by the Ontario Teachers Pension Plan, or an individual (I don’t have an example of this, can anyone suggest when this has happened recently?).

When the offer is made, shareholders get to vote on whether to accept it or not.  More than 50%A certain number (usually 2/3rds – thanks MoneyGrubbingLawyer!) of the shareholders by VALUE (remember, you get one vote PER SHARE, not per person) must agree to the offer for it to go through.  Since there wouldn’t be much reason for the average shareholder to accept less than the current stock price (if they wanted to sell, they could sell it at the current price on the open market), the person trying to acquire the company usually needs to offer a premium (higher price) above the current price of the stock.

If the offer is approved (I’ve never actually gone through this personally), my understanding is at some point every share of the company is bought at the agreed upon price, the cash is transfered to the previous owners, and 100% ownership in the company is acquired by the purchaser.

If you’re in the minority that doesn’t want to sell, its tough luck.  Usually part of a corporation’s articles of incorporation will allow majority rules in situations like this.

This is the opposite of when a holding company sells another company that it owns (as Philip Morris did with Kraft and as GE wants to do with its appliance business).  In this case they package it up as a separate company, sell it to someone else who wants it, and it now exists as a separate entity (and the selling company now has a bunch more cash).  They can even do any IPO and sell the newly created company directly to the public.

There are all sorts of business, legal and tax reasons why a company would want to purchase another company (or sell part of itself).

After the purchase goes through, and the cash has been received, for the previous shareholder its as if they had chosen to sell the stock.  They are liable for capital gains if the price its acquired at is higher than their purchase price (which is likely if they bought it years ago).  This is why BCE shareholders were squawking so much about the acquisition, they knew it was going to lead to a hefty tax bill for them.

Currently the board of directors at Rothmans has recommended that shareholders accept the offer, which is a good sign.  The price went ABOVE $30 briefly, because there was a feeling that a higher price may be forthcoming if enough shareholders didn’t bite at $30.  The famous Canadian investor Stephen Jarislowsky (author of “The Investment Zoo“)’s company owns 13% of Rothmans, and he’s known for holding out for high prices before approving sales.  Conversely, the price will sometimes be lower than the buyout price, which reflects both that the payment will be in the future, and investors’ concern that the deal won’t go through (thanks Preet!).

If shareholders push for a juicier offer, and its not forthcoming, the stock may sink back to its previous level and we can continue as before.

As I said in the introduction, please highlight anything I’ve got wrong, as I’m not 100% sure about this information.

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