June 09, 2008
Insurance Brokerage Buyouts
On Monday, No. 3 global brokerage Willis Group agreed to buy Hilb Rogal & Hobbs for $2.1B. In 1998, leveraged-buyout giant KKR had bought out then-troubled Willis for about $3 a share and took it private.
Industry leaders Aon Corp., and Marsh & McLennan Co., along with Willis, have been prohibited from buying smaller brokerages by agreements forced upon them by state attorneys general to shun certain revenues, called "contingent commissions." These commissions are paid by insurers to the brokerages as rewards for placing business with them. The brokers last week reached an agreement with the current NY Attorney General that will permit them to acquire such target companies and then phase out such commissions over three years.
The attorneys general, particularly former New Yorker, Eliot Spitzer, deemed the payments as "secret kickbacks" that "taint" a broker's objectivity in obtaining the best insurance coverage for clients. Spitzer forced a settlement on the big brokers amounting to hundreds of millions of dollars, annually, in lost commissions for their stakeholders.
The New York Attorney General is an odd regulator of mergers in the nation's insurance brokerage industry.
June 04, 2008
P&G sells Foldgers to Smuckers
On Tuesday, J.M. Smucker Co. stated its intent to purchase the Folgers brand from Proctor and Gamble in an all-stock deal. Given Folger's annual sales in excess of $1.6B, the price for the business could be upwards of $2B. The acquisition of Folgers nearly doubles the size of Smucker and would give it the top-selling ground coffee brand in the United States.
May 30, 2008
Shareholders Approve Bear Stearns Deal
On Thursday, Bear Stearns Company shareholders approved JPMorgan Chase & Co.'s $2.2 billion buyout of the investment bank. The Bank is buying Bear Stearns for approximately $10 per share. the meeting was short and lightly attended.
Commenting on the ten minute meeting at Bear Stearns' Manhattan office, shareholder Hannah Horgan noted,
"They were up there drinking coffee paid with my money ... and we lost our money overnight. I have nothing left, and they were so calm."
So ends with a whimper one of the more dramatic episodes in American financial history. The Fed injects $29 million tax dollars into a deal brokering the sale of an investment bank to keep the bank from defaulting on its short term paper. It is at the outer limit of Fed power and the theory behind what the Fed should do. We are no doubt leaning towards a belief in a "managed economy." The belief empowers fed officials who, whenever faced with claim of "chaos will come if....", will now act to broker solutions with taxpayer dollars.
May 29, 2008
US Air and United will not merge. We should not weep. Airline mergers have a terrible recent history. Most are prompted by airline desires to restructure. A merger ought not be needed to restructure a poorly performing airline; CEOs find the restructuring business after a merger is more expected and therefore easier or some such gibberish.
May 28, 2008
Germany Backs VW Anti-Takeover Law
For some time I have watched the dispute over the a special German law that protects VW from takeovers. The law also gives a government sub-unit, Lower Saxony, effective veto power of all significant strategic decisions. It also capped voting of large shareholders at 20 percent and put representatives of the federal government and Lower Saxony on the company supervisory board (a rough equivalent to our board of directors). Recently the European Court of Justice ruled that the law was protectionist in violation of the directives of the European Union. Germany amended the law, dropping the capped voting and government board delegates, but left intact the veto for Lower Saxony. At issue is whether the European Commission will seek to contest the veto. The changes in the law were pushed by another German company, Porsche, which owns 30 percent of VW's stock and is seeking to purchase a controlling stake. Note carefully here that the European Court of Justice has taken a tack directly opposite to that of the Supreme Court of the United States in attempting to cut back local anti-takeover laws. Europe will be healthier for it and we will be poorer.
May 23, 2008
Canadian Courts and the Bell Canada Buyout
As mentioned yesterday on this site, a Canadian appeals court permitted Bell Canada debt holders to complain about the effects of a negotiated leveraged buyout on the value of the debt securities. The effect? The deal is in danger and the Bell Canada stock has dropped like a rock. Stock prices were down 12 percent and selling volume was so heavy that computer systems at Canadian exchanges could not keep up with it. The banks financing the buyout have wanted out anyway and the court handed them a convenient excuse to bail on the deal. Don't you love it when courts act in "our best interest."
May 14, 2008
Icahn and Yahoo
Carl Icahn is threatening a proxy fight for some seats on the Yahoo board in an effort to restart the deal with Microsoft. The sad part is that he ought not to have to use the proxy fight avenue. He ought to be able to mount a takeover. But the country's state legislatures and state courts have effectively stopped hostile takeovers and we continue to pay for it.
May 10, 2008
Wireless Deal Forms a New Blockbuster Company
On Wednesday, Sprint Nextel and Clearwire agreed to combine their wireless broadband businesses in a $14.5 billion deal to form a new communications company. The new company, which will be named Clearwire, will deploy the first nationwide mobile WiMax network. This is a major move in the wireless market.
May 07, 2008
Yahoo's Deal with Google: A Takeover Defense?
Yahoo negotiated a strategic partnership with Google contingent on Yahoo staying independent (i.e. not selling to Microsoft). The deal lead Yang to demand a higher price, too high a price for Microsoft to pay. Shareholders of Yahoo can bring a derivative action on the deal. The argument: The deal is an anti-takeover device and subject to the "enhanced scrutiny" of the Unocal test. Evidence in support would be that the deal was with Google after the Microsoft bid and that Google was intent on blocking the bid. The problem: A target board can often meet the Unocal test requirements if it met and carefully considered the bid and had good arguments (that were not personal or quirky) for refusing to sell. Relief: The board would be personally liable for damages (which are huge and would test their D&O policy exclusions and limits). I doubt the court would order to Yahoo board to accept a lower price ($34) unaffected by the Google deal if Microsoft chooses to pay. The Court has the power to do so however.
May 06, 2008
Google used a carrot and a stick to meddle in the Microsoft bid for Yahoo. It state that it would fight the deal on anti-trust grounds and then cut a contingent deal with Yahoo to share valuable technology if Yahoo did not sell to Google. The technology deal emboldened Yang, the CEO of Yahoo, to ask Microsoft for $37 a share -- a price Ballmer would not pay. Now the press is all over the failed deal -- did Ballmer or Yang look more foolish??? Google looked smart.
May 05, 2008
Yahoo Successfully Blocks Microsoft Offer
Microsoft has withdrawn its offer for Yahoo. The Yahoo board demanded $37 a share and Microsoft only offered in the low 30s. The Yahoo board demand is cheeky considering that the Microsoft offer came on the heels of a four year low stock price of $20 a share. Look for Yahoo stock to drift down and for Yahoo shareholders to be left wondering whether or not they have missed the boat.
April 28, 2008
Mars to Acquire Wrigley
Today, Mars, Inc., and Berkshire Hathaway, Inc., agreed to acquire Wrigley Jr. Company for about $23 billion. Mars will spend $11 billion, with Goldman Sachs providing a $5.7 billion credit facility, and Berkshire will provide provide $4.4 billion of subordinated debt. At closing Berkshire will also purchase a $2.1 billion stake in Wrigley at a discount relative to the $80 per-share price. It agains looks like Buffett has once again negotiated a special price for himself; he shows once again his bargaining savy.
Clear Channel Will Win or Lose in Texas
The New York Court has refused to block the Texas suit by Clear Channel against the lenders of the buyout group for tortuous interference with the Clear Channel buyout. The lenders have refused to lend. So we are back to a Texas jury with a Texas plaintiff against New York financial companies. Anybody remember the Pennzoil v Texaco debacle?? Are we in for a replay?
April 27, 2008
Questions About National City's Outside Directors and Executives
There is a very telling note to the recent $7 billion infusion of money into National City Bank by a hedge fund club. The leader of the hedge fund group, Corsair Capital Vice Charmian Richard Thornburgh, is joining the board of directors and will be the only outside director with banking experience. Whatttt??? By the way, the CEO of National City, Peter Raskind, who presided over the lose of $15 billion because the bank invested in high risk securities and used mortgage brokers that participated in questionable mortgage brokerage practices made $3.4 million last year. The fellow at the bank, Jeffry D. Kelly, who designed the mortgage loan practices made $4 million last year. The bank has cleaned house in the lower mortgage divisions but the top folks, and those who monitor the top folks, have survived and continue to prosper.
April 25, 2008
Wendy's Bought by Peltz
Thursday, Wendy's International, Inc. agreed to be acquired by Arby's parent Triarc in a stock deal valued at about $2.3 billion excluding debt. The deal will create the third-largest fast-food company, with approximately 10,000 restaurants and annual sales of more than $12.5 billion. The daughters of the founder, Dave Thomas (one of whom was the real Wendy) are distaught, as they should be. Their father was a true business legend in this country -- someone to set up as an example for young people going into business. After the death of Dave Thomas the company got fancy and forgot how to build and advertise a good, inexpensive hamburger sold in a clean facility. "Our burgers are square because we do not cut corners." How great is that.
April 23, 2008
Zell to Sell Newsday to Murdoch?
Tribune CEO Sam Zell indicated in a conference call last week that he may sell Newsday and other Tribune assets, a reversal of his plan to keep Tribune's paper businesses in place. Rupert Murdoch indicated interest in buying Newsday from Tribune Co., for about $580 million. News of a deal was reported Monday by The Wall Street Journal, which Murdoch bought last December, and on Tuesday, by Newsday and The Chicago Tribune. The deal is interesting from several angles. First, Zell is reversing course on holding the Tribune's papers. Second, Murdock must seek an exemption from the FCC to buy Newsday because he will hold too many New York City major newspapers. The exemption will depend on the politics of current FCC commissioners. Third, it is another indication that the newspaper business in is serious decline and in a state of total disarray -- the vultures are in charge and what they do may not be pretty.
April 21, 2008
Blockbuster's "Hostile Bid"
There is no such thing as a hostile takeover anymore. A hostile takeover is a takeover that occurs without the support of the incumbent board of directors of the target. Anti-takeover statutes and firm specific defenses make this impossible. A bidder must, at some point, get the assent of the target board, either the incumbents (payoffs work) or replacements (through a proxy fight). A "hostile bid" is a bid for the company that starts without target board approval and is a harsh bargaining tactic designed to get target board approval by using target shareholder pressure on their board as a lever. It does not lead to a hostile takeover. A hostile bid is designed to end in a friendly deal.
National City Corporation's Deal
The board of directors of National City Corporation is going to sell 50 percent of the company's stock to a club group of hedge funds. The price? Five Dollars a share. The trading price of the shares when the deal was announced was $8 a share and this represents an 80 percent drop in share price over the past year. Shareholders of National City cannot be happy. At issue is whether the many other potential bidders for the bank would have paid the shareholders more and whether the board declined to protect 1) incumbent managers and 2) local employees. The corporation is incorporated in Delaware, a state which does not follow the Ohio constituency statute that permits such decisions. Smells like litigation is in the air.
April 18, 2008
The Zell Deal for Control of Tribune
I am still somewhat flummoxed about the details of Sam Zell's successful deal for operating control of the Tribune Corporation. In the first step of the transaction, the Zell Entity invests $250 million in Tribune for (1) 1,470,588 shares and (2) a promissory note of the company equaling $200 million, exchangeable at Tribune's option into 5,882,353 shares of common stock (equivalent $34/share). Zell's entire first stage investment is cashed out in the second stage and replaced by another. Presumably, the first stage was a combination stock lock up to discourage other bidders and an immediate cash infusion in the company that did not have to wait for the closing. Also in the first stage is an ESOP's purchase of 9 million plus shares at $28 a share, which is a toe-hold purchase at $4 less a share than the closing price.
The guts of the deal for Zell is in the second part of the transaction. Tribune borrows a bucket of cash ($2.105B incremental term loan & $2.1B senior unsecured bridge and the remainder long-term loans), and lends it to the ESOP to buy up the (126,000,000 outstanding) shares of Tribune at $34/share. The new ESOP-owned Tribune would have roughly $13.4 billion in debt after the deal, up from about $5 billion before it. Zell provides subordinated financing ($325 million) to Tribune to help make this happen, and receives a warrant to purchase 40.3% of the company (43,378,261 shares) for $500 million (plus he pays the $90 million to purchase the warrant). Zell also gets the benefit of an Investors Rights Contract that gives him two seats on the board and veto power over major corporate decisions.
The return for Zell is in the warrant. It is deep in the money. If the true value of the company is $8.2 billion (at $34/share) and Zell exercises the warrant for a $3.2 billion interest in Tribune he will pay around $615 million. If the value of the company falls to $13 a share, less than half, he still makes a small amount money on the option. How does he get such a great deal??? Who takes the hit??? The employees. If the company does well and is worth more than $34 a share, the employees get the benefit. If the company does not do well and is worth only $13 a share, the employees lose dollar for dollar while Zell stills brakes even. What are the company's prospects? Miserable. The newspapers are showing dramatic declines in revenue. The employees have, in essence, bet that the Cubs and the company's real estate is undervalued and can be sold for a huge gain over carried values. Why did the employees go for this? They put their pension plan on the line, not their wage package.
To make matters worse for the employees, the company's creditors can force bankruptcy even if the company continues to have positive earnings. The creditors have demanded debt coverage conditions (nine times revenue) that, if triggered, would accelerate principle repayments and would trigger bankruptcy. So even if the company continues to stagger along making smaller and smaller profits, the new creditors can pull the plug on the deal and the employees could be the big losers.
April 16, 2008
Another Large Airline Merger
On Monday, Delta Air Lines reached an agreement to take over Northwest Airlines. Delta said the combined airline will have an enterprise value of $17.7 billion and over $30 billion in revenue placing it ahead of Fort Worth, Texas-based American Airlines for the top spot in the U.S. Headquarters will be in Atlanta, and Delta CEO Richard Anderson will lead the combined company. The parties will have to convince the Justice Department that the merger, creating one of the world's largest airlines, is not ant-competitive. Arguments may include a dual "failing company" defense -- each of us would fail if left alone. How two struggling companies can combine to make a healthy one is always a question. I suppose two drunken sailors could lean against each other and hold each other up.