Tuesday, June 12, 2007
The latest news on Dow Jones is that the Bancroft family has submitted to News Corp. revised proposals for the post-acquisition editorial independence of the Wall Street Journal. And the street is starting to bet on a deal: Dealbreaker's "Murdoch Meter" measuring chances of a News Corp. takeover of Dow Jones is at 85%. So, in this day of rampant M&A rumor, people are starting to wonder if this puts greater pressure on The N.Y. Times for its own sale.
At first glance they appear to be in similar situations. They both have families who exercise a controlling interest in their company through a dual class voting structure. And that voting interest is much less than their economic interest. Moreover, both companies have come under shareholder pressure to initiate a sale or other significant structural transaction. But there are significant differences.
First, let's look at Dow Jones. The Bancroft family has a controlling voting stake in Dow Jones through Class B shares but own only 25% of the economic interests. More particularly, per Dow Jones' certificate of incorporation, the family's Class B shares are entitled to ten votes each. The family exercises these votes on all shareholder matters, but the Class A shareholders (i.e., the public shareholders), voting separately as a class, elect seven of the directors. Importantly, the Bancroft family own their interests separately through a number of trusts and personally and they have no shareholder agreement among them to govern the voting or sale of their Class B shares.
Next, the New York Times. The Ochs-Sulzberger family own approximately 19% of the Company's equity mostly in the form of Class B shares. Per The New York Times certificate of incorporation, holders of Class A shares (i.e., the public shareholders) are entitled to elect 30% of the N.Y. Times board and to vote, with Class B shareholders (i.e., the Ochs-Sulzberger family), on the reservation of shares for equity grants, certain material acquisitions and the ratification of the selection of auditors. Holders of Class B shares are entitled to elect the remainder of the board and to vote on all other matters.
Accordingly, the Ochs-Sulzbergers and the Bancrofts effectively have the same negative vote on a sale of their family company, though the Ochs-Sulzbergers have a tighter effective control on The N.Y. Times. But here is the big difference; according to the N.Y. Times 2007 proxy statement, the Ochs-Sulzberger family shares are largely held in a single family trust. It holds 88% of the outstanding Class B shares. As a result, the trust has the ability to elect 70% of The N.Y. Times board and to direct the outcome of any matter that does not require a vote of the Class A shares. Under the terms of the trust agreement, trustees are directed to retain the Class B shares held in trust and to vote such stock against any merger, sale of assets or other transaction pursuant to which control of The Times passes from the trustees, unless they determine that the primary objective of the trust can be achieved better by the implementation of such transaction. Moreover, the trust is party to a stockholders agreement which restricts the transfer of Class B stock that is held by the trust by requiring, prior to any sale or transfer, the offering of those shares among the other family stockholders and then to The N.Y. Times itself at the Class A stock market price then prevailing and the conversion into Class A shares upon a sale. Similar conversion provisions apply if the N.Y. Times is acquired via a merger.
The Ochs-Sulzbergers therefore, unlike the Bancrofts, operate as a single unit. Moreover, per the Ochs-Sulzberger family trust instrument, a sale cannot be effected unless it is pursuant to the primary purpose of the trust (I couldn't find disclosure on this but assume it likely has something to do with maintaining the editorial integrity of The N.Y. Times). Finally, the Bancroft's can extract a premium for their sale of control -- something that they can legally do but politically might be hard, while the Ochs-Sulzbergers must always sell their shares at the same price as the Class A shares.
The end result is that the N.Y. Times' destiny is determined by those eight trustees of the Ochs-Sulzberger family trust and they have adamantly stated that they do not want to sell; and even if they did they would still have to determine if the acquiring entity (e.g., News Corp.) was a buyer within the parameters of the trust instrument. Compare this to Dow Jones which is controlled by a fragmented family who are not required to vote or act uniformly and have no requirements in a sale to preserve the editorial integrity of the Wall Street Journal. This is the big difference; The N.Y. Times is more bulletproof, and a sale impossible unless those Ochs-Sulzberger family trustees decide to change their minds. Unfortunately, things are not so certain for the Wall Street Journal.
The U.K. Financial Services Authority today published feedback to its discussion paper on private equity (download the feedback here, and the discussion paper here). In the feedback, the FSA stated that it will continue to focus on what it perceives to be the "significant risks" of private equity market abuse (insider trading) and conflicts of interest. In order to strengthen its oversight of the market, the FSA also announced increased data collection requirements. This will encompass:
- Conducting a bi-annual survey on banks' exposures to leveraged buyouts; and
- Enhancing regulatory reporting requirements for private equity firms to incorporate information on committed capital in addition to the existing requirement to report drawn down capital.
These initiatives appear to be moderate and prudent ones designed to ensure that creditors do not over-commit capital to private equity fostering a collapse similar to the one which occurred at the end of the 1980s.
Also yesterday, Treasury Assistant Secretary for Financial Markets, Anthony W. Ryan, made yet another speech warning of the systematic risks posed by hedge funds. To illustrate the problems of fat tails and outlier risk he cites the paper Thomas J. Miceli, Minimum Quality Standards in Baseball and the Paradoxical Disappearance of the .400 Hitter, Economics Working Papers, University of Connecticut (May 2005). Ryan cites the paper gor statistical information, but otherwise it is a solid paper about the problems of minimum quality standards in markets with imperfect information. Enjoy.
Monday, June 11, 2007
Vice Chancellor Noble has issued an opinion in Metcap Securities LLC v. Pearl Senior Care Inc., 2007 WL 1498989 (Del. Ch., May 2007). The case concerns the perils of serving as deal counsel and highlights the potential problems with the common practice of having clients sign signature pages so that the deal can be completed in their absence.
The facts of the dispute are complicated and the opinion should be read in full to completely grasp the situation but sum into this: an entity with no assets of its own, named North American Senior Care, Inc. or NASC, was formed specifically to acquire a nursing home chain. It then retained an investment bank, Metcap Securities, and agreed to pay it a standard success fee upon completion of a transaction. NASC, along with two other acquiring entities, eventually entered into a merger agreement with a target company. Three months later, the parties agreed that the three acquiring entities would be exchanged for three other acquiring entities, who would assume the obligations of the original group of acquirers. The agreement initially required that the new group also assume Metcap's success fee. But according to the facts of the complaint, as summarized by Vice Chancellor Noble, this would soon change:
Late into the final evening of negotiation of the last set of amendments to the merger agreement, the two principals representing the original acquiring entities, who had previously delivered their signature pages to a fellow law partner, left the negotiations and went home. They gave him no instructions, limitations, or conditions on which to proceed during the negotiations. A few hours later, another partner, still negotiating the terms of the amendment, would agree to delete the merger agreement’s one reference to the financial advisor’s fee. The practical effect of this amendment was that the obligation to pay the success fee was neither assigned to nor assumed by the second group of acquirers.
Both Metcap and NASC brought suit for reformation. Metcap also brought several other claims related to its lost fee. In the part of relevance here, the Chancery Court denied a motion to dismiss NASC's cause of action to reform the contract. The Court stated:
The Complaint carefully and somewhat flimsily—but sufficiently—alleges facts that would support an inference—one that must be given in the “plaintiff-friendly” confines of Court of Chancery Rule 12(b)(6)—that, during the evening of November 20, Dickerson [deal-counsel] was somehow conflicted because of his role as “deal counsel” and the payment of his fees by Pearl (or its related entities) [Ed. Note: Pearl was the second acquirer and a defendant in the action].
Of particular note, the Court in footnote 71 continued:
The Complaint was carefully drafted with respect to Dickerson’s role. It alleges that he did not have the authority to bind NASC. It alleges that he was paid for some of his work by Pearl or its related entities. It alleges that he was “deal counsel,” but it provides no basis for gaining a full understanding of Dickerson’s role. Without an understanding of Dickerson’s actual role, it is difficult for the Court, within the confines imposed by Court of Chancery Rule 12(b)(6), to determine whether or not Dickerson had the authority to do what he did or, more importantly, whether Dickerson’s knowledge may be imputed to NASC. Because the Court must give NASC the benefit of any reasonable inference that can be drawn from the allegations of the Complaint, the Complaint must be read to suggest that Dickerson was somehow conflicted and that his conflicted status would make it improper or inequitable to attribute his conduct or his knowledge to NASC, even though the Complaint scrupulously avoids any such express allegation and that inference is far from the one most likely to be drawn from the allegations of the Complaint. Ultimately, Dickerson’s role will be a factual matter, one informed by an understanding of the ethics of the practice of law, and, if NASC has no more to offer than what has been set forth in its Complaint, its claim for reformation might fail not only because it is fairly charged with Dickerson’s knowledge, but also because it is bound by Dickerson’s conduct. NASC’s position must be something more than a whine that it did not like what its lawyer did during the final hours of negotiation of the Third Amendment. Parties to a transaction and their counsel must be able to rely—and to act accordingly—on the negotiating authority generally accorded transactional attorneys. This is especially true when the negotiations are ongoing and the principals have abandoned the negotiation field after leaving signature pages. Nothing in this Memorandum Opinion should be viewed as undercutting that dynamic. The result here is more the product of Court of Chancery Rule 12(b)(6) than it is of substantive law.
While the Court's language is comforting it still means that the case will proceed. And while the case is likely to be limited to its very complicated set of facts which I have only provided a flavor of here, it is a clear warning to lawyers of the general hazards of serving as deal counsel and the particular complications which can arise with having clients pre-sign agreements.
Today's DealBook has a funny/interesting post about the special purpose acquisition company (SPAC) Endeavor Acquisition, which has agreed to buy American Apparel for $385 million. Endeavor today filed the preliminary proxy for the deal and in the history of the transaction, Endeavor details its fruitless attempts to buy almost any other company. According to the preliminary proxy, Endeavor looked at the following entities before agreeing to acquire American Apparel (Endeavor presumably omitted the names to protect the innocent and as required by confidentiality agreements):
1. A branded restaurant chain with franchising operations that was headquartered in Los Angeles, California and owned by a private equity firm.
2. A well-known national chain of weight loss centers headquartered in California also owned by a private equity firm.
3. A restaurant chain headquartered in California that had strong regional brand recognition on the West Coast.
4. A regional ethanol producer headquartered in the Midwestern United States
Endeavors first three buy-out attempts were trumped by other buyers; it withdrew from bidding on the fourth potential acquisition over price. Then, according to the proxy, things got better:
In July 2006, Mr. Ledecky [CEO of Endeavor] met with Endeavor consultant Mr. Martin Dolfi to discuss deal flow. He discussed with Mr. Dolfi the philosophy espoused by Mr. Peter Lynch to “invest in what you know.” Mr. Ledecky then asked for examples of products that Mr. Dolfi used and enjoyed. Mr. Dolfi indicated that he enjoyed the clothing sold at American Apparel. As a way to reinforce the discussion, Mr. Ledecky instructed Mr. Dolfi to research the American Apparel company. Mr. Dolfi returned in August 2006 with a research book presentation on American Apparel.
And the rest is history.
SPACs have been on the rise of late as the public shareholder's substitute for private equity. But they are a poor one. As I've written before:
The rise of SPACs has been a discussion point and concern among M&A practitioners for almost three years now . . . . SPACs were big in the 1970s but fell into disfavor due to a number of high-profile implosions and complaints over the quality of their acquisitions. But like Frankenstein arisen from the dead, the Times reports that SPACs represented 26 percent of the 73 initial public offerings this year, and 15 percent of the money raised.
The rise of SPACs is a derivative effect of the private equity bubble. The Investment Company Act of 1940 effectively makes impossible the public listing of a private equity fund. And Investors shut off from private equity are turning to SPACs as a substitute. Given the past troubles with SPACs this is a dubious effect at best. There is also no real reason to permit SPACs yet shut-off private equity funds from the public markets. It is yet another reason why the SEC should take steps to fully revise the Investment Company Act to bring it into the modern era.
Today's filing by Endeavor supports my previous thoughts.
Blackstone filed its fourth amendment to its registration statement today. Blackstone intends to sell approximately 133.33 million common units at between $29 and $31 per unit giving Blackstone a market cap of over $33 billion if it prices at $31 per unit. The amendment also finally discloses the size of the payday for Blackstone's founders, Stephen Schwarzman and Peter Peterson. Schwarzman, Blackstone’s chief executive officer, will receive $449 million and up to $677 million if the greenshow is exercised. Based on an offering price of $30 per unit, Schwarzman's post-ipo stake will be worth $7.7 billion and constitute a 24 percent stake in the company.
Peterson, who has announced his retirement for next year, is expected to receive $1.88 billion (no greenshoe option here -- he is going out full in the initial offering). He will retain a four percent holding. All told, the total haul for Blackstone's founders will be about $2.33 billion assuming the exercise of the greenshoe.
For those who wonder whether the Blackstone founders are cashing out at the top, the filing also disclosed that in 2006 cash distributions for the two were $398.3 million for Schwarzman and $213 million for Peterson. As for the offering itself and leaving aside whether there is indeed a private equity bubble, I wonder who would want to buy these non-voting interests in Blackstone at a time when one of the founders is leaving and cashing in and the other is pocketing a significant stake and monetizing the remainder. At least with internet ipos, the founders had to wait 180 days to sell and offered their shareholders a vote in the operation of the company. Caveat Emptor.
Friday, June 8, 2007
The use of a tender offer also removes from the equation proxy advisory firms such as Institutional Shareholders Services, which criticized the earlier offer. The recommendations of such firms hold great sway over institutional investors. An I.S.S. spokeswoman told DealBook that the firm generally did not issue recommendations in tender offers, though it would provide an analysis for its clients.
Private equity buyers making controversially low offers take note.
The New York Times also makes the point that tenders offers are now a more palatable structure for private equity buyers since the SEC adopted a safe-harbor for employee compensation from the all-holders best price rule. Tender offers permit quicker deal consummation; a tender offer can be completed in twenty business days as opposed to two-three months for a merger. The Times is right, but you haven't seen, and likely won't see, more tender offers in private equity deals because of the pervasive use of go-shops in these transactions and the extra time they require anyway, making a merger a preferred option.
Also, Biomet has filed its revised agreement for the transaction. In the agreement, the minimum condition for the offer is set at 75% of the outstanding shares or that:
number of Shares that is not less than the number of such Shares . . . . that, when added to the number of Shares beneficially owned . . . . by Parent, any of its equity owners or any of their respective Affiliates, and any Person that is party to a voting agreement with Parent or Purchaser obligating such Person to vote in favor of Merger . . . . represents at least 75% of the total number of Shares outstanding immediately prior to the expiration of the Offer.
So, it appears that Biomet did not effectively lower the minimum condition to approve the transaction by changing its structure. Good for them.
J. Darius Bikoff: He formed glaceau 11 years ago after a New York City water contamination scare had him searching for an alternative to tap water. He stated in the deal announcement conference call, "I can't tell you how proud I am to be part of the Coke family and what a dream this is for me to fulfill." His share of the sale proceeds is undisclosed but almost certainly quite large.
Tata Group: The Indian company Tata Tea acquired a 30 percent stake in Energy Brands for $677 million in August of 2006. It will earn a handsome return on the transaction, doubling its money in about a year.
Donovan McNabb, Shaquille O’Neal, David Ortiz, and 50 cent: All of them and 16 other celebrities were reported to have previously been given equity stakes in Energy Brands for their endorsements. The exact amount of their windfalls has not been disclosed.
King & Spalding: Coke passed over long-time counsel King & Spalding and chose Skadden Arps to represent it on the transaction. According to Coke spokesman Dan A. Schafer the company uses King & Spalding for many important projects and "[n]othing more should be read into our choice of legal counsel for the Energy Brands acquisition." Yeah right -- K&S may want to reconsider those nifty Coke fountain soda machines they have in their offices.
TSG Consumer Partners: TSG sold its 30% stake in Energy Brands last year to Tata Tea cashing out at the time for a hefty profit. Still, they lost out on even more quick money. They say that pigs get slaughtered; this may be true but sometimes the alternative hurts even more.
There have been some spectacular failures with big firm acquisitions of independent drink brands (think Quaker Oats/Snapple). Hopefully, Coke will do it better. They've gotten off to a good start by committing to keep the division separate and obtaining commitments from Energy Brand's top three executives (J. Darius Bikoff, Mike Repole, and Mike Venuti) to lead the business for a minimum of three years. Each of the three are now quite rich -- for Coke's sake I hope they won't decide to leave early and spend that money.
Glaceau's endurance vitaminwater bottle once proudly declared glaceau's aversion to commercialism, with the caveat "[u]nless of course there's a lot of cash. Then we'll talk." I'm happy to state that Energy Brands has remained true to its brand principles through to its last independent words.
The Wall Street Journal has a nice article today on the rising number of private equity buy-outs which are getting into trouble. The Journal cites the $1.3 billion purchase of retailer Linens 'n Things Inc.; $530 million buyout of the Star Tribune Minneapolis's newspaper; and $17.6 billion deal for Freescale Semiconductor Holdings. Each of these companies is struggling to generate the cash flow to service its newly-imposed debt burden. Still, of late, things have been unbelievably good for the credit market. According to Standard & Poor’s Leveraged Commentary & Data, there was not a single default in the leveraged-loan market in the past six months,and in the 12 months ended in May there were only two defaults on $490 million of debt. This is a twelve month default rate of 0.29%, the lowest ever; compare this with the average historical rate of 4%-5%.
But I wouldn't expect these low rates to last, and the problems the Journal cites may be a harbinger. According to the Journal:
Companies that have gone private in buyouts are generating cash that exceeds their debt interest payments by just 1.7 times, versus 2.4 times last year and 3.4 times in 2004, according to Standard & Poor's Leveraged Commentary & Data. The ratio is at a 10-year low and shows how the margin for error for companies is shrinking as their profit growth is slowing.
Moreover, there is no perfection in private equity. The massive number of new transactions means that there will inevitably be companies who cannot service their debt burden; expect a few to reach the point of insolvency. But, whether this will become a problem significant enough to adversly effect the economy or the private equity industry is still very unclear. Interest rates are nudging up this week and the economy is slowing -- so at the very least if these trends continue expect fewer private equity deals and more companies experience problems generating the necessary cash to service their debt.
But many private equity deals have taken advantage of the credit bubble to get extraordinary deals on this debt. Freescale, for example, one of the problem children cited above, has negotiated the ability with its creditors to turn off and on cash interest payments on approximately $1.5 billion of its debt through an option to pay with payment-in-kind notes. Still other recent leveraged buy-out deals are covenant-lite; they do not contain the multitude of restrictions on operations that creditors typically require. This leaves more leeway for the company to avoid a default. The end-result is that the problems the Journal cites and inevitable private equity failures may be significantly fewer than in the 1980s when the last private equity bubble deflated.
This week's Friday culture is The Last Tycoons: The Secret History of Lazard Frères & Co. by William D. Cohan. This tome details the history of Lazard Frères & Co. from its founding in New Orleans in 1948 as dry goods retailer through to its current-day status as a publicly-traded, independent M&A shop run by Bruce Wasserstein. Along the way, Cohan dishes gossip on such notables as Felix Rohatyn, Steve Rattner, Michel David-Weill, and, of course, Bruce Wasserstein. The book is at its best when it is detailing the travails of Felix Rohatyn in the 1970s as he struggles to save the financial basket-case that was New York City. All-in-all, a good beach read for M&A types. Enjoy the weekend!
Thursday, June 7, 2007
We live in times of a private equity fueled M&A boom, and with it deals are increasingly rumored. Today's reports are that Brian Tierney head of Philadelphia Media Group, which last year acquired the Philadelphia Inquirer and the Philadelphia Daily News last year for $515 million, is interested in a possible offer for Dow Jones. This would be a counter to Rupert Murdoch's News Corp.'s $5 billion offer. This comes a few days after it was announced that billionaire Ron Burkle has joined forces with Dow Jones' union to explore an alternative transactions. Burkle has previously made an unsuccessful attempt to buy The Los Angeles Times. His bid would presumably employ an ESOP structure (and tax-dodge) similar to that being used by Sam Zell in the take-private of the Tribune Cos.
These reports are a bit unusual in that they are confirmed. But am I the only one who has noticed that the rumor mill is flying these days? Take this Marketwatch article on prospective white knights for Alcoa's $33 billion unsolicited offer for Alcan. According to Marketwatch, Norsk Hydro, BHP Billiton, and Rio Tinto are all said to be rumored bidders. The article continues that other potential suitors for Alcan also include "Brazil's Co. Vale do Rio Doce, the U.K.'s Anglo American, Xstrata Plc of Switzerland and Russia's Rusal." To be complete, the Article concludes by stating that Chinese companies and private-equity groups could emerge as potential bidders. Well, there. So far, no other bidders have emerged for Alcan.
And other rumors in the past twenty-four hours alone include that Time Warner may buy Scripps, Monster Worldwide is in play due to its CFO's resignation, Nissan-Renault is looking for a new partner, and TD Ameritrade Holding Corp. is being pushed by hedge fund shareholders to acquire a rival. While some of these reports are undoubtedly true, others smack of "throw it up on the wall and see if it sticks" journalism. Moreover, some of this reporting (as in the case of the Dow Jones reports above) appear to be merely preliminary reports of what would ordinarily be merely indications of interest.
As with all booms/bubbles it may be time for all of us to take a step back.
Texas Pacific Group's $560 million offer for a controlling interest in JVC, the Japanese consumer electronics company, is struggling to obtain the necessary debt financing from banks. But don't take this as a sign that the credit/private equity bubble is deflating yet. TPG's problems appear to be related to the specifics of JVC. According to Reuters:
[B]anks have resisted funding the acquisition of JVC, whose official name is Victor Co. of Japan Ltd., because they are unconvinced that TPG could turn around a company heading for its fourth straight annual loss. "The business plan was not outlandish for a profitable company, but for a company that is losing money like JVC, it seemed too ambitious," a banking source said.
Matsushita, owner of 52.4% of JVC, chose TPG as its preferred bidder back in March, over a rival bid from private equity firms Cerberus and Permira. But TPG and Matsushita have yet to agree on a final price and amount of equity infusion by TPG. U.S. private equity firms have struggled to gain entry-way into the Japanese market; this transaction may yet be another failed attempt. Or perhaps Cerberus and Permira may now use this stumble as a way step-up again and put their own investors' equity into this struggling venture.
Biomet, Inc., the orthopedic company, announced today that it had agreed to an increased offer from a private equity consortium to acquire Biomet for $46.00 per share in cash, for an equity value of $11.4 billion. The increase comes on the heels of a recommendation by Institutional Shareholder Services that Biomet shareholders vote against the transaction. ISS based this recommendation on that fact that "[a]lthough the deal terms appear fair as of the time of the deal's announcement in December, the rally of the peer group" and Biomet's main joint reconstruction business "imply that there is little takeover premium in the [previous] $44 offer price." (For more on this recommendation, see my previous blog post ISS Recommends Against Biomet Deal)
In connection with the increase, Biomet also revised the structure of the acquisition from a merger to a tender offer. The amended merger agreement now requires the consortium – which includes affiliates of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co. and TPG – to commence a tender offer on or before June 14, 2007, to acquire all of the outstanding shares of Biomet’s common stock. Biomet previously planned to have a shareholders meeting to vote on the merger agreement on June 8, 2007. That meeting is now canceled.
Per the Biomet Certificate of Incorporation, a merger must be approved by at least 75% of Biomet’s common shares. Since the vote is based on the number of common shares outstanding rather than the number of votes cast, this would have meant that any failure to vote and broker non-votes would effectively have been votes against the transaction.
In converting to a tender offer structure Biomet has fiddled with the minimum condition. According to Biomet:
Completion of the tender offer is subject to the condition that at least 75% of the Biomet common shares have been tendered in the offer – the same percentage approval requirement as with the previous merger structure. The amended merger agreement permits the investor group to revise the condition regarding minimum acceptance of the tender offer to decrease the minimum acceptance threshold to a number that, together with shares whose holders have agreed to vote to approve the second-step merger, represents at least 75% of the Biomet common shares.
The second sentence is a bit unclear to me and Biomet has yet to file the amended agreement. But it likely means that the private equity group and Biomet agreed to the provision in order to obtain agreements to vote from management in connection with the tender offer. If this is the intention, I'm still not sure why there was a need to convert to a tender offer -- the transaction could have closed quicker had Biomet simply postponed or adjourned the shareholder meeting and management could have also voted for the transaction then. But my hunch is that in this language there is an effective lowering of the required shareholder approvals. I'll have more once the amended agreement is actually filed.
Note to Biomet shareholders: there are no dissenter's rights available under Indiana law for this transaction (a different result than in Delaware; Biomet is organized under the laws of Indiana).
Mark A. Morton has posted to the Harvard Law School Corporate Governance blog his latest practitioner-oriented article, Buyer Beware: The Fiduciary Duties of a Buyer’s Board. The article concerns the recent Delaware Chancery Court decision, Energy Partners, Ltd. v. Stone Energy Corp. According to Mark:
The article discusses the fiduciary duties of buyer boards and posits that buyer boards may, in the appropriate circumstances, need to bargain for contractual flexibility to deal with jumping bids for the buyer. The article was published in the Spring 2007 issue of Deal Points, the official publication of the Negotiated Acquisition Committee of the American Bar Association.
There hasn't been much written on this subject (fiduciary duties of buyer's board), so this will be a helpful contribution to the area.
Tuesday, June 5, 2007
The Federal Trade Commission on a 5-0 vote yesterday authorized its staff to challenge and seek a temporary restraining order and preliminary injunction in federal district court to halt the Whole Foods Market, Inc.’s approximately $670 million acquisition of Wild Oats Markets, Inc. The Commission's action is based on its view that the deal would violate federal antitrust laws, a position itself premised on a narrow view of the market for natural and organic foods. According to the Commission:
In defining the relevant markets, the Commission found that premium natural and organic supermarkets, such as Whole Foods and Wild Oats, are differentiated from conventional retail supermarkets in several critical respects. These include the breadth and quality of their perishables – produce, meats, fish, bakery items, and prepared foods – and the wide array of natural and organic products and services and amenities they offer. In addition, premium natural and organic supermarkets seek a different customer than do traditional grocery stores. Whole Foods’ and Wild Oats’ customers are buying something more than just the food product – they are seeking a shopping “experience,” where environment can matter as much as price.
The Commission's position here is similar to the one it took when it successfully blocked the merger of Staples and Office Depot. I am no antitrust expert but I am bit skeptical of the Commission's view of this market as an "experience" rather than a simple opportunity to buy higher quality natural or organic food which can otherwise be available elsewhere. This is particularly true since it would appear that barriers to entry are low and there are many other prospective and real competitors even in a narrowly defined organic and natural foods market. According to a piece in the Wall Street Journal yesterday:
J.P. Morgan Securities Inc. estimates the size of the natural-foods market last year was $46 billion and Whole Foods had about 12% of that, with sales of $5.61 billion for the fiscal year ended Sept. 24, 2006. It doesn't hold a significant share of food sales in any of the major U.S. food markets measured; its largest share last year was 5.5% of overall food sales in San Francisco. In contrast, Wal-Mart accounts for at least 10% of supermarket sales in 81 of the top 100 markets in the U.S., J.P. Morgan said.
Between them, Whole Foods and Wild Oats own a bit more than 300 stores in the U.S., Canada and the United Kingdom. By comparison, Kroger, the second-largest supermarket chain behind Wal-Mart, owns about 2,500 grocery stores in 31 states. Wal-Mart, with about 3,000 stores in the U.S. that sell groceries, held a 19% share of overall U.S. retail-food sales last year, according to J.P. Morgan Securities. The world's largest retailer doesn't disclose its natural-foods sales.
At first blush this would appear to establish the foundations of a competitive market -- though maybe not an "experience". And Whole Foods chairman John Mackey echoed my observation in Whole Foods' response to the Commission action:
The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic and fresh products, renovate their stores and open stores with new banners and formats resembling Whole Foods Market.
Thus, although I have little sympathy for Whole Paycheck -- as my friends refer to it -- the Commission action here may be a bit agressive. Moreover, It also appears that the Commission action caught the parties by surprise. Whole Food's acquisition of Wild Oats is structured as a tender offer which likely means that the attorneys thought that they could complete the acquisition in the twenty business day minimum period for a tender offer. If they parties had thought that antitrust review was likely, they would almost certainly have used a merger structure to accommodate the extended time period for such a review. Moreover, a quick scan of the merger agreement shows no unusual provisions dealing with antitrust concerns although the parties do agree therein that Whole Foods will not be required to make any dispositions in connection with using its reasonable best efforts to obtain antitrust clearance. This is a fairly boilerplate provision when no antitrust scrutiny is expected.
Whole Foods announced today that it would challenge the Commission action and its definition of the relevant market, so expect more in the next few days as the federal court considers the Commission's application for a temporary restraining order and preliminary injunction.
The shareholders of OSI Restaurant Partners yesterday approved the amended merger agreement for the company to be acquired by an investor group consisting of Bain Capital Partners, LLC, Catterton Management Company, LLC, OSI's founders and its executive management. OSI did not disclose the exact vote in its press release announcing the results, but it has been reported that the merger agreement would not have been approved had OSI not acted to lower the threshold required vote a few weeks ago. OSI now expects the transaction to now close on June 19, 2007. Presumably, the extra time is to rearrange the financing for the transaction.
I've written a lot on this deal (see posts Bloomin' Onion, Bloomin' Onion (Redux), Bloomin' Onion Part III, Free Food! OSI Restaurant Partners Shareholder Meeting Today, and Games People Play). I was also quoted yesterday in a piece in the St. Petersburg Times (OSI is headquartered there) where I stated that this deal is "an interesting case study in management buyouts with private equity and how the process can be, for lack of a better word, manipulated . . . ." More specifically, I believe that management's undue influence on the OSI sale process left the OSI shareholders with a Hobson's choice -- giving shareholders no other option than to accept this bid. The St. Petersburg article chronicles management's impropriety here, and its effect is also illustrated by Institutional Shareholder Services statement recommending the transaction:
We recognize the shortcomings in the process and the conflicts of interest of management and founders . . . . but given the downside of a failed transaction resulting in a loss of premium and likely continued deterioration of fundamentals, support for the transaction is warranted.
Hopefully, OSI was at least nice enough to serve their soon to be former shareholders some tasty, free food at the meeting yesterday. They deserve that at least.
I had a long plane ride yesterday and took the opportunity to again flip through the latest Blackstone S-1 filing. It is now perfect plane reading -- bound to put you quickly to sleep at approximately 300 pages excluding exhibits and financial statements. But I did stay awake long enough to note this interesting development:
Previously in its initial S-1 filing, Blackstone had stated that it would adopt SFAS No. 159 (The Fair Value Option for Financial Assets and Financial Liabilities). Adoption of SFAS 159 would have permitted Blackstone to treat its carry (i.e., its 20% share of profits) as though it was an option allowing Blackstone to record its value as income immediately. This was highly controversial because it would allow Blackstone to book fees up-front based on its estimate of its future profits on a transaction -- a practice associated with the implosion of Enron (for more on this controversy see the WSJ article here).
In its May 21, 2007 second S-1 amendment, however, Blackstone revised its position, deciding not to early adopt SFAS 159. Instead, with respect to carry Blackstone will record as revenue the amount that would be due to it at each period end as if the fund agreements were terminated at that date. This is similar to Fortress Investment Group's accounting practices. According to Blackstone, had it adopted SFAS 159 it would have increased its 2006 pro-forma net income by $595 million, or 22 percent.
The AFL-CIO had previously written the SEC arguing that private equity group Blackstone's planned initial public offering should be halted because it violated the Investment Company Act (a copy of the letter can be downloaded here). The AFL-CIO based its argument on Blackstone's intended use of SFAS 159 arguing that it turned carry into a form of call option. Since call options are securities, and more than 40% of Blackstone's assets are in carry, the AFL-CIO argued that Blackstone should fall under the regulatory schematic of the Investment Company Act.
I wrote previously as to my doubtfulness as to the validity of the AFL-CIO's argument. And it is unclear whether Blackstone revised its S-1 filing at the SEC's behest or otherwise decided that use of this accounting was too problematical and controversial. Nonetheless, given the high publicity surrounding this ipo and its landmark nature, Blackstone's decision appears to be the right one. The first private equity adviser public listing should be one that establishes a good reputation for private equity with public investors; not one raising warning flags due to problematical accounting practices.
Avaya yesterday filed the merger agreement with respect to its acquisition by Silver Lake and TPG Capital for approximately $8.2 billion or $17.50 per common share. The deal terms appear rather standard for a private equity buy-out. Avaya had previously announced that the agreement contained a fifty day go-shop; in what is becoming the norm, the agreement also sets a staggered break fee of $80 million during the go-shop period and $250 million thereafter. For more on the transaction, see the Marketwatch article here.
The deal is a nice Illustration of the dynamic nature of our capital market and the effect of a thick M&A market. Avaya was spun-off from Lucent. Lucent has subsequently merged with Alcatel to form Alcatel Lucent. And Lucent was itself was spun off by AT&T -- AT&T has itself been acquired by SBC which took on AT&T's name.
Monday, June 4, 2007
Blackstone filed its third amendment to its S-1 yesterday. Blackstone expects to offer 133,333,334 million limited partnership units in an initial range of $29.00 to $31.00 per unit. Its units will trade under the ticker "BX"on the New York Stock Exchange. Blackstone is offering units here and not shares because of its limited partnership structure.
The S-1 now weighs in at 267 pages before exhibits and financial statements; those Simpson lawyers, counsel for Blackstone, are clearly earning their money. There is not much new in this amendment. The form of partnership agreement for the offering entity, The Blackstone Group, L.P., was filed as was the agreement with the Chinese government for its $3 billion investment and their registration rights. In a fit of hopefulness, the name of the Chinese investment agency is Beijing Wonderful Investments Ltd.
Blackstone also disclosed that Brian Mulroney former Prime Minister of Canada, William G. Parrett, former Chief Executive Officer of Deloitte Touche Tohmatsu, and Nathaniel Rothschild will join the board of directors of the the general partner of the offering entity in connection with the offering. They will be paid $100,000 a year and receive an equity award of 10,000 deferred restricted common units at the time they are appointed director.
According to PEHUB, the Blackstone partners have begun their roadshow, presumably flying around the world in a fully-stocked G-IV; expect the offering to price in the near future. The amended filing notes that Blackstone’s current fund has $19.6 billion in capital commitments. PEHUB expects Blackstone will complete fund-raising for this fund at the end of July, raising over over $22 billion and making it the largest private equity fund ever raised.
Palm, Inc., today announced a PIPEs (private investment in public equity) transaction with the private-equity firm Elevation Partners. Under the planned recapitalization, shareholders will receive a $9 per share cash distribution, Elevation will invest $325 million in Palm, and the company will utilize these proceeds along with existing cash and $400 million of new debt to finance the cash distribution. Post-transaction, Elevation will own preferred stock representing approximately 25 percent of Palm's outstanding common stock. The transaction is subject to shareholder approval (required under NASD rules if a company issues more than 20% of its common stock), and is expected to close in the third quarter of 2007.
Elevation is the private equity group with U2's Bono as a partner ('nuff said). And this is only Elevation's fourth deal since it opened for business in 2004 with a $1.8 billion fund -- it has been criticized by some for being slow to put its equity capital to work. The transaction is also notable for the Apple talent it will bring to Palm. Jon Rubinstein, former senior vice president of hardware engineering and head of the iPod division at Apple, will join Palm as executive chairman of the board. And one of Elevation's five partners along with Bono is former Apple Inc. Chief Financial Officer Fred Anderson.
Palm also disclosed that Morgan Stanley is serving as financial advisor to Palm, but Houlihan Lokey Howard & Zukin Advisory Services, Inc. has provided a fairness opinion to Palm. Morgan didn't give the fairness opinion here because it is also providing the financing for the deal (question for conflicts mavens: is it appropriate for Morgan to advise Palm with respect to proceeding with this recapitalization when Morgan will stand to substantially gain if this recapitalization occurs?). Houlihan was hired to clean-up the conflict through an independent fairness opinion. But as we all know, fairness opinions are sometimes of questionable value and the determination can be subject to manipulation (see my article on this here).
The other advisors were: JPMorgan as financial advisor to Elevation; Wilson Sonsini Goodrich & Rosati, as attorneys for Palm; and Simpson Thacher & Bartlett LLP as attorneys for Elevation.
OSI Restaurant Partners, Inc., owner of the Outback Steakhouse and Cheeseburger in Paradise restaurant chains, will tomorrow hold its shareholder vote with respect to the $3.2 billion offer to be acquired by a consortium led by Bain Capital Partners, LLC and Catterton Management Company, LLC.
This buy-out has been problematical from the start. OSI's founders, CEO, CFO, COO and Chief Legal Officer are all involved in the buy-out and at times have acted to influence the process. In addition, the buy-out has been criticized for its low premium and OSI has postponed its meeting three times in order to round up enough shareholder support. With the last post-ponement, OSI announced that the buy-out group had agreed to increase the consideration offered to $41.15 up from $40.00 per share.
In connection with the announcement, OSI also agreed with the buy-out group to lower the threshold vote required to approve the merger. The original vote per the proxy statement required approval by:
a majority of the outstanding shares of our common stock entitled to vote at the special meeting vote for the adoption of the Merger Agreement without consideration as to the vote of any shares held by the OSI Investors.
The revised vote per the merger agreement amendment now requires approval by a majority of the outstanding shares, the required threshold under Delaware law and:
the affirmative vote of the holders, as of the record date, of a majority of the number of shares of Company Common Stock held by holders that are not Participating Holders, voting together as a single class, to adopt the Agreement and the Merger.
OSI Investors and Participating Holders in the above two clauses are the same group: the executive officers and founders of OSI who are participating in the buy-out. Careful readers here will note that the change in language above reduces the required vote for approval of non-participating shareholders from a majority of all outstanding shares to a majority of the minority shares. The St. Petersburg Times reports that this change has the effect of lowering the number of required votes to approve the transaction by 4.4 million (from 37.8-million of the 66.8-million shares not owned by OSI participants to 33.4-million votes plus one).
As noted, Delaware only requires an absolute majority, so the required vote in either case is higher. OSI is requiring this higher vote due to the requisites of Delaware law which require a majority of the minority of OSI shareholders to insulate the OSI participants and the Board from liability by waiving management's conflict. So, both votes still preserve this majority of the minority aspect (a smart move given managements conflicted metaling in the buy-out process). But, the special committee's agreement to lower the vote is a dubious one at best, and though probably acceptable under Delaware law, is further evidence of the problems which can arise with management buy-outs generally and the board process here in particular.