May 25, 2007
Trading Baseball Card Companies
The Topps Company, Inc. yesterday announced that it had received a $416 million offer from The Upper Deck Company, to acquire Topps for a price of $10.75 per share. Both Topps and Upper Deck are in the trading card business; Topps also makes Bazooka bubble gum. Topps currently has an agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash. The Tornante Company is headed by former Disney CEO Michael Eisner.
The Tornante led bid was opposed by three of the 10 members of Topps's board and hedge fund Crescendo Partners II, which says the offer undervalues the company. Topps initial agreement had a 40-day go-shop provision, and Topps disclosed in its press release that it had rejected an indication of interest previously made by Upper Deck during that time period. Topps had previously identified Upper Deck in its proxy statement for the transaction only as a competitor. The disclosure of Topps on this point is actually a bit funny:
On April 12, 2007, prior to the expiration of the go-shop period, one of the potential go-shop bidders, who is the principal competitor of our entertainment business, submitted a non-binding indication of interest to acquire Topps for $10.75 per share, in cash. Lehman Brothers called this interested party on the first day of the go-shop period, and numerous times during this period, for the purpose of soliciting and/or assisting them with the development of their bid for Topps. Lehman Brothers’ calls were infrequently returned . . . . .
One hopes it wasn't because of this that a deal was not reached. Topps response to yesterday's offer was similarly tepid:
[Topps's] Board of Directors noted that there are material outstanding issues associated with Upper Deck's latest indication of interest, including, but not limited to, the availability of committed financing for the transaction, the completion of a due diligence review of the Company by Upper Deck, Upper Deck's continued unwillingness to sufficiently assume the risk associated with a failure to obtain the requisite antitrust approval and Upper Deck's continued insistence on limiting its liability under any definitive agreement. Upper Deck's present indication of interest was accompanied by a highly conditional "highly confident" letter from a commercial bank.
I'm usually skeptical of private equity buy-outs and target attempts to put the fix in on a chosen acquirer. This is particularly true here where both board members and shareholders have complained of the offer price. Still, Topps may be justified in its own skepticism. A deal between Topps and Upper Deck apparently has substantial antitrust risk. Upper Deck's bid may therefore not be a "true" bid but rather an attempt for Upper Deck to gain access to its main rival's confidential information. In addition, a deal for Topps by Upper Deck would apparently require approval by Major League Baseball. Moreover, the financing for this deal does appear to be uncertain. In this day of cheap and easy credit the best Upper Deck could obtain from its lenders was a "highly" confident letter. This is a 1980's invention of Michael Milken; bankers issue these letters for deals that are riskier and financing uncertain. Instead of a firm commitment letter, they therefore state they are "highly" confident that financing can be arranged. So, if Topps has a firm deal on the table the extra money being offered here by Upper Deck might not be worth it given the deal completion risks and possible harm to Topps if it permits a competitor to review its confidential information. Still, Upper Deck's offer is a nice negotiating tool with the current buy-out group even if a deal is not possible. Topps shares rose 48 cents, and closed at $10.26 yesterday, so the market presumably agrees.
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