Touchstone outlines reasons for rejecting IP merger proposal

David Newlands, chairman of the board at Touchstone Innovations, wrote to shareholders on Thursday outlining a number of concerns over a recent approach from IP Group to combine the two businesses.

The AIM-traded firm had rejected the approach from IP Group, with Newlands’ letter on Thursday intended to provide clarity and reassure shareholders over that decision.

Newlands said he received a letter from IP Group on 4 April setting out the indicative non-binding terms, which implied an at-market combination with no premium to prior day close, which the board considered before unanimously deciding to reject the proposal on 7 April.

“However, in the days that followed, it was made clear to the board that three of our largest shareholders - Invesco, Woodford and Lansdowne - wanted Touchstone to engage with IP Group to see if a merger could be agreed,” Newlands explained.

“For this reason, and because the proposal had certain merits, the board agreed to engage.”

Meetings were held, he claimed, but “no real progress” was made on two very important issues - the valuation of Touchstone, and the need to retain and build on the best of both companies and to establish a clear understanding of joint strategy, corporate governance and management.

“As a consequence, I had a telephone call on 19 May with Mike Humphrey, chairman of IP Group.

“Amongst other things he told me the term 'merger' had been used, but that this was in fact a 'takeover'.”

Newlands said Humphrey indicated he had no mandate from his board or the large shareholders to negotiate on either the ratio of the resulting ownership of IP Group between IP Group shareholders and Touchstone shareholders following the possible offer - approximately 62% IP Group, 38% Touchstone - or on people - management and directors.

“There have been no further discussions between the two companies since this call.”

On the reasons for rejecting the Touchstone offer, Newlands said the Touchstone board believed that the terms of the possible offer “fundamentally undervalued” Touchstone on a stand-alone basis.

The board reportedly believed that the terms did not fully reflect the value in Touchstone which had been built up over 10 years, the breadth and diversity of its portfolio, or its therapeutics assets which were attracting interest from leading pharmaceutical companies.

Newlands added that the terms also did not reflect Touchstone’s “unique access” to opportunities arising from Imperial College London and UCL, as well as close relationships across the 'Golden Triangle'; its close relationships with major pharmaceutical companies, as evidenced by the Apollo Therapeutics joint venture; and its relationships with co-investors and numerous other industry partners.

“The board has full confidence in Touchstone's future as a stand-alone business,” he commented.

“We believe that Touchstone has the platform and portfolio to drive overall returns and generate cash over the next five years to deliver self-sustainability.

“We strongly believe that the opportunities available to Touchstone shareholders are highly compelling in the stand-alone vehicle, and that dilution of your position on the terms of the possible offer would not be in your best interests.”