Ann: IDX: Replacement Bidder's Statement, page-33

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Capitol Health's revised bidder's statement raises questions

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Top Integral Diagnostics shareholders Perennial Value, Investors Mutual and Viburnum Funds account for 23 per cent of shares, and are all concerned about the Capitol Health bid. Jessica Shapiro

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by Carrie LaFrenz
Capitol Health has raised more hurdles in its quest to take over bigger rival Integral Diagnostics after revealing in a revised bidder's statement major changes to its financial accounts, the loss of pre-bid commitment from a fund manager and that several of its team worked for failed vocation training company, Acquire Learning.
In late November Capitol lobbed a $356 million hostile bid for Integral, offering 6.9 Capitol shares and 36¢ cash for each Integral share. According to the new bidder's statement the offer values each Integral share at $2.22, a lower premium of 18 per cent (compared with a 21.3 per cent premium) to Integral's closing price prior to the bid being made public. The offer values Integral's equity at about $322 million compared with $340 million previously.
Top shareholders Perennial Value, Investors Mutual and Viburnum Funds account for 23 per cent of shares and are all concerned about the bid. Another 30 per cent of the stock is owned by doctors.
However, a number of Integral shareholders have thrown their weight behind the deal, including Microequities Asset Management, Regal Funds Management and Wilson Asset Management. But Adam Smith Asset Management has pulled its 3 per cent pre-acceptance, according to Capitol.

"We had expected Integral to make progress under its new management team and that has accelerated above expectations," said Adam Smith, director and portfolio manager Stephen Atkinson.

"We see merit in the merged group but we also see value in the standalone business. We think it's important with people-based businesses such as these, that transactions are done harmoniously."
Mr Atkinson pointed out Capitol has been very active on the deal front but has had mixed success with the integration of businesses.
Investors Mutual was not impressed by the offer and Capitol's track record on deals. Senior fund manager Simon Conn said this deal brings nothing to the table for Integral shareholders.
"The Capitol board has a questionable background, and it's a lower quality business," he said. "I think you also have to question the quality of the accounts given the significant restatement."

The new bidder's statement showed several revisions including an overstatement of its previous earnings, as well as adjustment of cash spent in the business. Capitol also failed to disclose the franchise nature of some of its operations, and accounting adjustments were made over three years to remove material expenditure from the profit and loss.
It was also revealed that Capitol chairman Andrew Demetriou, head of finance Ken Birchall and non-executive director Nicole Sheffield – were all formerly involved with failed Acquire Learning, raising eyebrows for several shareholders.
A Capitol spokeswoman said the company's accounting revisions were "not a material factor" in the construction and pursuit of the offer. She added that Radiology Tasmania and I-rad businesses were subject to extensive due diligence and were "fully confident" of their accounts, despite the bidder's statement saying historical financial information provided for recently acquired Radiology Tasmania and I-rad was "not prepared in accordance with Australian Accounting Standards".
Capitol aimed to highlight why the deal makes sense, saying a combined group would have greater financial strength to capitalise on growth opportunities, a larger referral network and greater geographic reach. Integral's board said it will respond in due course and advised shareholders to take no action.


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