Swiss operator Sunrise has rejected shareholder Freenet's opposition to its planned takeover of UPC Switzerland and said it will exclude Freenet's board representatives from further discussion of the deal, amid concerns they may have breached their fiduciary duties. This follows Freenet's announcement that it plans to vote against the proposed rights issue to finance the takeover.
The Swiss operator said Freenet's board members have a "conflict of interest", as Freenet appears "guided by its own short-term financial constraints and self-serving objectives which it seeks to solve at the expense of Sunrise and its shareholders".
The Sunrise board reiterated its support for the acquisition of UPC Switzerland, backed by its increase in the expected synergies from the merger. These estimates were "carefully arrived at after six months of detailed integration planning and the better than expected performance of UPC Switzerland" since the acquisition was first announced in February, Sunrise said, adding that both these elements "increase the value delivered to Sunrise shareholders" from the proposed takeover.
One of Freenet's main objections to the merger is the high price paid to Liberty Global, the owner of UPC, which takes into account the expected synergies. Freenet has said Liberty Global is not assuming enough of the risk associated with achieving the synergies and turning around the performance of UPC, while Sunrise's shareholders bear all the costs.
The Sunrise board rejected Freenet's concerns about the deal in a detailed statement, noting the price is in line with similar transactions in Europe and it is confident in achieving the synergies. The decision for an all-cash purchase was reached after over a year of talks with Liberty Global, in which they could not reach agreement on various issues related to Liberty Global retaining an equity stake in the Swiss operator.
Increased debt financing
Sunrise said it tried to adjust the capital structure of the takeover in order to accommodate Freenet’s desire to reduce the size of the rights issue, by proposing around CHF 1 billion of the price be financed with a convertible bond. The company said it was open to increasing its leverage target from the proposed 3.0x in order to limit the size of the rights issue. However, Freenet rejected this proposal, despite support from the rest of the board, Sunrise said.
Furthermore, Freenet made "inappropriate requests at the expense of minority shareholders", Sunrise said. In the final negotiations with Liberty Global, the company attempted to secure a premium for its Sunrise shares in order to grant its approval for the deal, Sunrise claims. The Sunrise board declined, saying this would be "inappropriate and illegal".
Fiduciary breach
Sunrise also suspects Freenet's board members may have breached their fiduciary duties, including their duty of confidentiality. The board plans to conduct an internal investigation into this matter, and in the mean time, has excluded Freenet's board members from participating in any discussions on the takeover. "This decision has not been made lightly but is unavoidable given Freenet's conduct," Sunrise said, adding that it considers Freenet "has been evasive, opportunistic and inconclusive" in the talks to date. The German company's most recent statement, saying it will vote against the rights issue, was issued after it was already informed of the increased synergies and had said it would come with a new proposal to Sunrise's board, the Swiss company said.
Sunrise said it wants to maintain an open dialogue with all shareholders. However, it advised investors "to treat any Freenet commentary regarding the transaction with appropriate scepticism and to not condone Freenet's self-serving behaviour by supporting its attempt to vote down a strategically compelling and value-accretive transaction".
