Diageo warns investors over discounted TRC Capital offer

Diageo has advised shareholders to reject an unsolicited offer by TRC Capital to buy American Depositary Shares below market value. The company warns that such offers lack investor protections and may expose holders to unnecessary risk. Diageo has advised investors to reject a “mini tender” offer to purchase up to 1m American Depositary Shares (ADS) in the company for US$105.50 in cash. American Depositary Shares are a form of equity ownership in a foreign company's stock held by a US depositary bank. They are designed to facilitate the trading of foreign company shares in US markets and are typically traded on US stock exchanges. The offer does not cover any shares in the company other than ADS and relates to just 0.2% of Diageo’s equity.

Offer pitched below market value

The company says that the unsolicited offer is pitched at a price 4.6% below the closing level on The New York Stock Exchange on April 14, the last trading day before the offer was made. That is more than 5% below the closing price of US$111.92 on Wall Street yesterday. In London today Diageo’s ordinary shares rose by 0.33% to £21. In November 2021 they topped £40.

TRC Capital known for low-profile tactics

The mini tender was made by TRC Capital Investment Corporation, a private investment group which seeks to keep its activities below the horizon. It does not have a publicly accessible website. If it reaches acceptance for the 1m ADS it is seeking, TRC is under no obligation to buy any more, even if more holders accept its price. At no stage is it obliged to make an offer to Diageo’s ordinary shareholders.

Motives behind mini-tender offers

Mini tenders are usually made for one of three reasons or a combination of them. The first, and most likely, is that TRC calculates that Diageo is undervalued and therefore, if its value rises, it will make a profit for its backers. The second is to take a stake in a company as an activist shareholder, urging the target company to move rapidly to improve its performance. This happened to Pernod Ricard in 2018 when US group Elliott Management took a 2.5% stake in the French group for just over US$1 billion. The third reason is to test the waters for a possible takeover or to act as a stalking horse for a break-up group.

Diageo and SEC highlight investor risks

Diageo points out that TRC Capital has made similar unsolicited mini-tender offers and that the tactic of acquiring less than 5% of a company’s outstanding shares enables it to avoid many of the disclosure and procedural requirements that the US Securities and Exchange Commission requires for tender offers. Consequently mini-tender offers do not give investors with the same level of protections as provided by larger tender offers under US federal securities laws. “Similar to TRC Capital’s mini-tender offers targeted at other companies, this offer may put individual investors at risk because they may not realise they are selling their ADSs at a discount,” Diageo says in its advice to holders. It also guides them to the SEC’s website advising that mini-tender offers are frequently used to catch investors “off guard” and that investors may end up selling securities at below-market prices.