Thursday, July 12, 2007
The Securities and Exchange Commission yesterday voted unanimously to adopt a new antifraud rule under the Investment Advisers Act. The new rule makes it a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser to a pooled investment vehicle to make false or misleading statements to, or otherwise to defraud, investors or prospective investors in that pool. The rule will apply to all investment advisers to pooled investment vehicles, regardless of whether the adviser is registered under the Advisers Act.
The rule comes on the heels of the D.C. Circuit's decision in Goldstein v. Securities and Exchange Commission, striking down the SEC's attempt to make all hedge fund advisers register under the Investment Advisers Act. But, this new rule is much less ambitious. It is more of a clarification of enforcement powers that the SEC likely previously had than anything else. The SEC has yet to post the final rules release on its website, but the proposing release can be accessed here. And more importantly, the SEC has yet to act on the more ambitious and controversial other rule proposed in that proposing release which would revise the definition of accredited investor under Regulation D to raise the required net worth thresholds for private investors to invest in private equity and hedge funds.
The House of Representatives yesterday passed on a 370-45 vote legislation to revise the national security takeover review process overseen by the Committee on Foreign Investments in the United States (CFIUS). The House voted to adopt the Senate bill. Accordingly, The National Security Foreign Investment Reform and Strengthened Transparency Act will now be sent to the President for almost certain signature. For a summary of the final legislative provisions, see this client memo by Wiley Rein here.
The legislation is Congress's response to the uproar 18 months ago over the acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and heavy congressional protest which led to Dubai Ports terminating the U.S. component of its acquisition. The dispute was always puzzling: Dubai Ports was acquiring an English company with port operations in the United States and Dubai Ports is headquartered in the United Arab Emirates, one of our strongest allies in the Mid-East. Nonetheless, the controversy has now spawned a change in the CFIUS review process. And on the whole, the measure is fairly benign, endorsed by most business organizations and will not bring any significant change to the national security process.
However, the bill does come on the heels of a significant upswing of CFIUS scrutiny of foreign transactions. According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year. CFIUS conducted seven second-stage investigations in 2006, equaling the number of the previous five years combined. And while increased national security review can be a very good thing, one hopes that this heightened scrutiny is not just form over substance -- a development which would likely deter foreign investment in the United States. For more on this see my post The Politics of National Security.
Rio Tinto and Alcan today announced an offer by Rio Tintio to acquire all of Alcan’s outstanding common shares for US$101 per common share in a recommended, all cash transaction. The offer values Alcan's equity at approximately US$38.1 billion, and represents a 32.8% premium to the value of Alcoa’s current offer of U.S.$76.03, based on Alcoa’s closing share price on 11 July 2007. Some commentators still expect Alcoa to continue bidding for Alcan as it has few other viable options for acquisitions in this industry. This is particularly true since Alcoa itself is a rumoured acquisition target and a failed bid for Alcan makes it more vulnerable, although given that Alcoa is organized in Pennsylvania it is still about as bullet-proof against a hostile takeover as you can get.
Rio Tinto and Alcan have entered into a support agreement in connection with the transaction which provides for a break fee of U.S.$1.049 billion payable to Rio Tinto in certain circumstances. The minimum condition on the offer will be tenders of 66 2/3 percent of the outstanding shares and there is no financing condition on the bid. Rio Tinto is also going to some lengths to assuage the cultural concerns of Alcan (always an important and underlooked feature of M&A). In addition to headquartering the combined aluminium product group in Montréal, Rio Tinto will relocate its aluminium smelting technology research and development headquarters to Québec.
And for those who follow such things, Rio Tinto is being advised by Linklaters LLP and McCarthy Tétrault LLP. Legal counsel for Alcan was Ogilvy Renault LLP and Sullivan & Cromwell LLP. Interestingly, it appears that Linklaters is providing U.S. legal advice for Rio Tinto, a bit of a coup for the U.S. lawyers at this English firm, many of whom are refugees from Shearman & Sterling.
Tuesday, July 10, 2007
Lear Corporation, the automotive seating, electronics and electrical distribution systems manufacturer, yesterday announced that it had agreed to amend its merger agreement with Carl Icahn's American Real Estate Partners, L.P. to increase AREP's offer price for shares of Lear common stock from $36 to $37.25 per share. The $100 million increase in aggregate consideration paid values Lear at approximately $2.9 billion.
The Lear management is participating in the Icahn bid, and have entered into new employment agreements to continue their positions with the post-transaction entity. And the transaction had a go-shop provision which did not result in any other bidders, perhaps due to bidder wariness at this management participation. Nonetheless, shareholders in Lear have been actively opposed to the Icahn bid claiming it significantly undervalues the company. The leader of this charge has been Pzena investment management which yesterday again asserted its opposition to the bid according to Reuters. Pzena maintains that Lear is worth $55-$60 per share. The California State Teachers Retirement System and Institutional Shareholder Services were also opposed to Icahn's $36 offer.
The interesting twist here is that, in connection with the increase, Lear agreed to pay AREP $12.5 million in cash as well as 335,570 shares of Lear common stock (valued at about $12.35 million) if Lear's stockholders do not approve the merger by July 16, 2007. The provision is unusual; bidders are usually lucky to get their expenses in a deal that is not approved by shareholders. And coming on the heels of shareholder opposition and the Delaware court's recent intervention in Lear's sale process in In re Lear Corporation Shareholders Litigation, 2007 WL 1732588 (Del. Ch., June 15, 2007), the move is a bit cheeky (to use the English expression). Still, in a world where the Lear board had conducted the sale process above board this fee would be a legitimate one. It would be justifiable to secure an increase in the consideration paid for a deal that the board reasonably believed would now be approved by its shareholders. The only problem is that these considerations appear absent here.
The tender offer is starting to make a come-back. According to MergerMetrics.com, in the first five months of 2007, 15.5 percent of negotiated transactions were accomplished through tender offers. While that is a low figure, it is more than three times higher than in the same period last year.
The tender offer is likely reemerging due to the SEC's amendments to the best price rules which took effect on December 8, 2006. These amendments clarified that the best-price rule does not cover employee compensation, severance or other employee benefit arrangements. Previously, there was a circuit-split on this issue, and many bidders preferred merger transactions in order to avoid litigation and potential liability over the issue.
But the 15% figure is still a low one. Perhaps one reason why is the increasing use of go-shops in private equity deals. In cash deals, tender offers have a timing advantage over mergers. Tender offers can be consummated in 20 business days from the date of commencement compared to 2-3 months for a merger. However, if a go-shop is utilized the timing advantage of a tender offer is lost due to the need for the 45-60 day go-shop period. Accordingly, in this case a merger is likely a preferable option because it assures that minority shareholders can be entirely squeezed out in the merger provided the necessary number of shareholders (typically 50%) approve the merger. This compares to a tender offer, where if 90% of shareholders do not tender the squeeze-out threshold is not reached, and a back-end merger must still take place making the process longer than a single-step merger.
To address this last issue, transaction participants are adding top-up provisions to tender offers. A top-up provision provides that so long as x% of shareholders tender in the offer, the target will issue the remaining shares to put the acquirer over the 90% threshold. The minimum number of shares triggering the top-up varies but the target share issuance can be no more than 19.9% of the target's outstanding shares due to stock exchange rules. And according to MergerMetrics.com, in 2007 more than two-thirds of negotiated tender offers included a top-up agreement, up from 55.6 percent in 2006 and more than double the number in 2005 and 2004.
Expect the number of cash tender offers to increase as practitioners again become re accustomed to the structure. Also expect exchange offers to reappear. The SEC took steps in the 1999 M&A Release to put stock and cash tender offers on parity by permitting pre-effective commencement of exchange offers. But despite expectations of its widespread use, the exchange offer never caught on in friendly transactions. This was likely due to the same reasons for the decline in cash tender offers (exchange offers are also a terrible amount of work in a very compressed time for M&A lawyers). But with the new SEC rules, this transaction structure is one worth exploring for acquirers who want to quickly consummate friendly stock transactions.
Groupe Danone S.A. yesterday announced its intentions to make a € 55.00 in cash per ordinary share bid for all of the outstanding shares of Royal Numico N.V., a Dutch company listed on Euronext Amsterdam. The Supervisory Board and Executive Board of Numico also announced that it would unanimously recommend that Numico shareholders accept the offer. The price values baby-food maker Numico at $16.8 billion dollars, and is a 44% premium to Numico's average closing price over the last three months.
Analysts were highly critical of the price being paid by Danone. “This is the most expensive large-cap deal in the global consumer space ever,” stated Andrew Wood, an analyst at Sanford C. Bernstein in New York. And many are speculating that the price and large acquisition are an anti-takeover maneuver by Danone to discourage takeover bids. “This is a defensive operation for Danone,” said Chicuong Dang, an analyst at Richelieu Finance. “They are making themselves bigger and less attractive to bidders such as PepsiCo or Coca-Cola.” (quotes as reported by Bloomberg).
Danone and Numico have yet to reach a definitive agreement on the making of the offer. But the parties announced that the offer is expected to commence in August 2007 and would be subject to at least 66 2/3% minimum condition. Interestingly, Numico has agreed to restrictions on its ability to initiate or encourage discussions with third parties in respect of any proposal that may form an alternative to the Offer. And Danone is entitled to a break fee of EUR 50 million in the event (i) the Numico Boards withdraw their recommendation; or (ii) an unsolicited offer is declared unconditional. Though the break-fee is small, these are American style transaction defense provisions that you do not normally see in Dutch deals. But the Dutch government has opted out of the 13th EU Company Law Directive on public takeovers to permit Dutch companies to utilize lock-ups of this nature. As takeover activity increases in the Netherlands, expect Dutch companies to further utilize American-style transaction defenses.
Monday, July 9, 2007
The Topps Company, Inc. today announced that its Board of Directors had unanimously recommended that its stockholders reject the pending, unsolicited Upper Deck tender offer. Upper Deck is offering $10.75 a share or $416 million. In connection with their rejection, the Topps board asserted that the terms of the Upper Deck tender offer are substantially similar to the acquisition proposals submitted by Upper Deck to Topps on April 12, 2007 and May 21, 2007. However, Topps stated that it will continue discussions with Upper Deck to see if a consensual transaction is possible. Topps has currently agreed to be acquired by The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 a share in cash, or about $385 million. Topps' board has not changed its recommendation for that transaction.
On July 2, Upper Deck, Topps main competitor in the trading card market, filed with the Federal Trade Commission and the Department of Justice the documentation necessary to commence the initial 15-day antitrust regulatory review period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to the tender offer. The review period is 15 days and not the normal 30 days because it is a tender offer, and the period is scheduled to expire on July 17, 2007. However, there is a strong chance the FTC or DOJ will issue a second request for this proposed transaction, delaying the process. Until this review is completed, Upper Deck will not be able to close its tender offer.
And the antitrust risk is clearly in both parties minds, as Topps 14D/9 filed today details that the substance of the parties' negotiations have concerned antitrust issues. Topps is requesting that Upper Deck agree to a $56.5 million reverse termination fee and a modified hell or high water provision (a provision in which Upper Deck would agree to sell or hold separate assets to satisfy governmental antitrust concerns). Upper Deck has resisted these provision, and the parties have agreed to suspend negotiations on the matter until the antitrust risk is clarified through the HSR process.
Topps was scheduled to hold a shareholders meeting to vote on the Tornante acquisition on June 28. But, the Delaware Court of Chancery enjoined the holding of the meeting to permit Upper Deck to commence its tender offer. Topps has yet to announce the new date for the meeting but has set the record date for the close of business on July 3.
For the time being, the deal is in the hands of the antitrust authorities. If and when they clear the transaction, expect the bidding for Topps to continue. In the case of a second request, Topps may try and push forward with the Tornante bid, perhaps with a sweetener from that consortium to hasten the process. At the very least the market agrees with a higher offer, Topps is trading today at $10.42 as I write, above Tornante's current offer price.
The Financial Times is reporting that Moody's will today issue a report taking "issue with the argument that private ownership frees companies from the short-term pressures of the equity markets, enabling them to invest and plan for the long term." The report states that:
The current environment does not suggest that private equity firms are investing over a longer-term horizon than do public companies despite not being driven by the pressure to publicly report quarterly earnings.
The report also asserts that private equity's "tendency to increase a portfolio group’s indebtedness to pay themselves large dividends runs counter to their claim of being long-term investors." And it takes issue with private equity's "claim that improvements in companies’ performance are driven by more focused management teams" rather than due to leverage and other financial engineering.
One of the keystone benefits often cited by supporters of private equity is their longer term horizon and ability to limit management agency costs to produce superior returns. Some have argued that these benefits combined with the rapid rise of private equity will result in an eclipse of the public corporation. While this report will give these supporters pause, the jury is still out and more study is needed in this area to truly understand whether the private equity model is indeed superior to the public one, as well as its benefits.
And on a related note, the FT also publishes today the results of a White & Case survey of finance professionals which found that 60 percent of respondents believe that "[t]he European leveraged finance market is an unsustainable bubble."
Google Inc. announced today that it had agreed to acquire Postini. Postini describes itself as "a global leader in on-demand communications security and compliance solutions serving more than 35,000 businesses and 10 million users worldwide." Under the terms of the agreement, Google will acquire Postini for $625 million in cash, subject to working capital and other adjustments. The transaction is Google's third large one in the past year. It agreed to buy DoubleClick Inc. in April for $3.1 billion and in November closed a $1.65 billion purchase of YouTube Inc. Google still has a lot of cash to burn, so expect more acquisitions.
For those who want more, Postini will host two conference calls and webcasts today to discuss the acquisition. The first conference call will be held at 6:30 a.m. Pacific Time (9:30 a.m. Eastern Time). The second conference call will be held at 9:00 a.m. Pacific Time (12:00 p.m. Eastern Time). To access either conference call, dial 800-289-0544 domestic and 913-981-5533 internationally.
Both the Chicago Board of Trade and Chicago Mercantile Exchange put their business combination to a shareholder vote today. The vote comes on the heels of Friday's announced increase in the merger exchange ratio from 0.350 to 0.375 shares of CME Holdings common stock for each share of CBOT Holdings common stock valuing CBOT at $11.9 billion up from an initial October valuation by the parties of $8 billion. All other terms of the merger remain the same. In connection with the increase, Caledonia Investments PYT. Ltd, CBOT's largest shareholder with 7% of the company, announced that it will support the transaction. Over the weekend, rival bidder IntercontinentalExchange Inc. decided that it would not raise its mostly stock offer for CBOT, which is now valued at a roughly equivalent amount as CME's.
The transaction looks likely to now go to CME and CBOT. It also highlights the quirks in Delaware law: how Delaware law permits transaction participants to characterize their stock-for-stock merger as a business combination rather than an acquisition to avoid "Revlon duties" and favor one bidder over another. Here, because the CBOT/CME transaction was mostly stock it was likely not considered to be a change of control transaction under Revlon (which would require the board to obtain the highest price reasonably available), but rather a simple business combination along the lines of Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1990). There and here, post-transaction control was fluid and there was no change in control that would trigger "Revlon duties". Accordingly, Revlon was not applicable and the CBOT board's decision to combine with CME (and arguably favor it over ICE in the process) reviewable under the business judgment rule. Moreover, while shareholder pressure here did work to increase the consideration, CME's final raise likely knocked ICE out even if ICE had been willing to measurably increase the bid. The arbitrageurs who own CBOT stock earned a significant return with the CME raise and are therefore likely to favor its certainty over a higher ICE bid despite the will of many longer-term shareholders. A similar happening to that in the recent OSI Restaurant Partners going-private. And, it is also likely to win approval of the CME-CBOT transaction today.
For shareholder who wish to attend the meetings today (and get some free food, etc.) here are the addresses: The CME Holdings special meeting is at 3:00 p.m. on July 9, 2007 at UBS Tower—The Conference Center, One North Wacker Drive. The CBOT Holdings special meeting is at 3:00 p.m. on July 9, 2007 and the CBOT special meeting of members will be held at 2:30 p.m. on July 9, 2007, each at Union League Club of Chicago, 65 West Jackson Boulevard.
Sunday, July 8, 2007
I read my first news story on the foreign private issuer delisting wave last Friday in the International Business Times (you can access it here). According to the report, since the SEC's new deregistration rules took effect on June 5, 2007, 35 foreign private issuers have taken steps to dereigster their securities and delist from a U.S. stock market (though some are choosing to remain traded on the Pink Sheets). These include such well-known companies as British Airways, Danone and Imperial Chemical. According to the news report and not surprisingly, many are claiming that they are delisting to escape burdensome U.S. regulation in the form of Sarbanes-Oxley and to escape the spectre of U.S. shareholder litigation. The report also quotes Harvard Law School Professor Hal Scott to support these assertions, he states that "[t]he benefit of coming here has decreased, and the costs have increased with litigation and regulation, so they're making a trade-off to get out of here."
Professor Scott is undoubtedly right that some of these companies are delisting because they no longer perceive a U.S. listing as worth the effort. However, this may not be attributable entirely to current, more stringent SEC regulation. Prior to the SEC rules taking effect, listing in the United States had been analogized to the Hotel California. Once you listed here you could never leave (get it?). But now, under the SEC's new rules if the average daily U.S. trading volume of a foreign issuer is 5 percent or less of its worldwide trading volume it can freely deregister and terminate its Exchange Act reporting requirements. To do so, however, the foreign issuer must also delist its securities from the U.S. stock market (i.e., Nasdaq or NYSE). And, as I predicted in a post on May 30:
[T]he new rules will release pent-up demand of foreign issuers who previously desired to deregister their securities and now do so. Most if not all of these issuers will cite Sarbanes-Oxley to justify the termination of their listing. But don't always believe it. These issuers originally listed in the United States for a variety of reasons, and for many a delisting will simply mean the reasons no longer exist (and probably haven't for a long time). For example, many a foreign high-tech company listed on the Nasdaq during the tech bubble seeking the extraordinary high equity premium accorded Nasdaq-listed tech stocks. Post-crash, many of these foreign companies still exist but are much smaller or have remained locally-based and a foreign listing is no longer appropriate for them.
For those delisting, it may also be short-sighted. True, some studies have found statistically significant declines in equity premiums for cross-listed firms at the time immediately before and after passage of Sarbanes-Oxley. But these declines now appear to be short term at best, according to a new study by Craig Doidge et al., Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices over Time (June 2007). Doidge and his colleagues have found in a recently published study that the equity premium for cross-listing on a U.S. market "has not fallen significantly in recent years. . . . In contrast, there is no premium for London listings for any year. Cross-listing in the U.S. leads firms to increase their capital-raising activity at home and abroad while a London listing has no such impact. Our evidence is consistent with the theory that an exchange listing in New York has unique governance benefits for foreign firms."
I was quoted in yesterday's San Francisco Chronicle in the article IPO Talk Raises New Questions. The piece is a good primer on those who would like an overview of the issues associated with the rash of private equity and hedge fund adviser initial public offerings. In it I am quoted as stating that I "would avoid these firms 'for a lot of reasons. As a corporate-law professor, I'm offended that you don't have a vote. Second, these are risky investments and people may not be appreciating the risks involved . . . .' Finally, the private equity boom 'is not going to last.'" True enough.
Friday, July 6, 2007
According to a forecast issued by PwC, new issuers on the mainland Chinese markets are set to raise over $52 billion in capital this year. If the figure proves correct this would make mainland China the world’s leading place for equity capital raising in 2007 beating out Hong Kong, London and New York. For comparison, last year ipos raised $41 billion, $39 billion and $29 billion in each of these jurisdiction respectively.
The figures are interesting for at least two reasons. First, share issuances on the mainland are largely A-share listings on the Shanghai Stock Exchange and Shenzhen Stock Exchange. A-shares are traded in renminbi and can be purchased only by Chinese citizens and a few well-connected foreign financial institutions. The FT is reporting today that these share issuances are actually part of the Chinese government strategy to slowly deflate the market. In recent weeks, a series of state-owned companies have come forward with plans to launch large, new share offers in the Shanghai market including Shenhua Energy, a coal miner, planning a $6.3 billion ipo and PetroChina a $6 billion listing. The Chinese government is hoping that the share issuances will provide more supply and liquidity dampening fervid demand (e.g., in May 300,000 new share trading accounts were being opened each day in China, dropping to the still torrid pace of 100,000 per week in reaction to the Chinese government's tripling of the tax on share trading to 0.3 per cent per trade). Thus, these large capital raisings will mainly effect the local Chinese market and It remains to be seen whether they will only feed the bubble the Chinese government is struggling to control.
The figures are also bad news for Hong Kong in the competition for listings. Hong Kong is almost exclusively dependent upon mainland China for its growth. Mainland Chinese companies accounted for half of the market capitalization of the Hong Kong Stock Exchange in 2006 compared to only 16% in 1997 (see the data here). And as the Chinese mandarins push out their state companies, Hong Kong is at their mercy for deal flow. For this year, it appears that the flow is being partially diverted. Luckily for the United States the local flows of Chinese capital and listings do not impact it. The U.S markets like London are the primary competitors for global capital raisings and listings, and here the United States is having a relatively good year. In the year to June 5, there were 11 listings of China and Hong Kong-listed companies in the United States. This is a marked increase over last year. And all signs are that this will be a good year for the U.S. generally in the global listings market -- approximately 20% of the NYSE's new listings so far this year are from other countries.
Breakingviews yesterday had an interesting post on Wachtell's Mary Lipton and his legacy. The post questions the validity of his recent corporate governance advice to Home Depot, Morgan Stanley and Walt Disney among others. In each instance, Lipton recommended a "just say no" approach against corporate shareholder activism. In each case, the CEO was subsequently ousted. Breakingviews which is affiliated with the Wall Street Journal also criticizes his takeover advise to the Bancrofts, stating that "the family's tactics don't appear to have left the Dow Jones board in a strong position." The post closes with taking a swipe at Lipton by asserting that even the poison pill is in decline and that S&P 500 companies with the defense have decline from a majority to less than a third in only a few years.
Lipton is one of the leading proponents of the board as the center of corporate power as opposed to those like Lucian Bebchuk who advocate greater corporate control. And while shareholder activism is certainly on the increase, Breakingviews may be relying on wishful thinking when decrying his demise. Lipton is almost 80 and still is the go-to M&A attorney. And his firm has produced a host of other deal-makers and remains at the top of the league tables. Still, his no-holds barred defensive advice looks to be increasingly ill-considered as shareholder activism increases and certain in academia increasingly advocate increased shareholder power in corporations. Those advising corporate boards have not helped with some tone-deaf advice -- Nardelli's infamous Home Depot meeting where the board did not attend and Nardelli himself refused to take question being a prime example, and one attributable to Lipton himself.
Advanced Medical Optics, Inc., the eye care products supplier, confirmed yesterday it had proposed to acquire Bausch & Lomb for $75 per share in cash and AMO stock. $45 of the consideration will be in cash and the remainder in stock (no details on whether the stock collar was fixed or floating). The proposal values Bausch & Lomb at $4.3 billion and is not contingent upon financing. The bid comes on the heels of a $65 all-cash transaction agreed to earlier in the year by private-equity firm Warburg Pincus LLC which valued Bausch & Lomb at $3.7 billion.
The Bausch & Lomb press release actually contains more details of AMO's bid than AMO's release itself. According to Bausch & Lomb, the AMO proposal includes (1) a proposed $130 million reverse termination fee payable by AMO to Bausch & Lomb in the event the transaction does not close due to the failure to obtain requisite antitrust clearance and (2) proposed reimbursement by AMO of Bausch & Lomb’s expenses up to $35 million if AMO fails to obtain the approval of its shareholders. In addition, AMO will have up to 12 months to close the transaction and interest would be paid in cash with respect to the purchase price by AMO at the rate of 7.2% per annum beginning six months after an agreement is reached.
AMO's proposal came before the end of Bausch & Lomb's 50 day go-shop. And the Bausch & Lomb board has determined that the AMO Proposal is bona fide and is reasonably likely to result in a superior proposal, as defined under the Warburg merger agreement. AMO is therefore an excluded party under the agreement and Bausch & Lomb is permitted to continue negotiating with AMO with respect to the AMO Proposal despite the end of the “go shop” period. Because AMO's bid was made before termination of the go-shop Warburg Pincus will be entitled to a $40 million termination fee from Bausch & Lomb if an agreement is signed with AMO.
Bausch & Lomb is the second go-shop deal in a week to attract another bidder (Everlast was the other one). A heartening change from previous times when go-shops were seen as mainly illusory cover for private equity bids made with management complicity. It still remains to be seen, though, whether the increasingly competitive M&A market will see more "go-shop" bids. And if it does so, targets and initial bidders react by simply failing to include these provisions.
Friday culture for this week is Capital Ideas Evolving by Peter Bernstein. In his seminal 1992 book, Capital Ideas, Peter Bernstein gave a thoughtful and thorough history of the academic history of finance. In it he detailed the struggles of the founders of modern finance, Harry Markowitz, Bill Sharp, Myron Scholes, et al., to persuade Wall Street to adopt their newly-discovered capital market theories. In this new book, Bernstein is back defending these theories against recent attacks by behaviorists and others who have decried their functionality. Markowitz particularly focuses on the widespread adoption of his heroes' ideas, particualrly the rise of portfolio theory and the evidence for efficient markets. In the words of the Economist, "Mr Bernstein has yet again produced a book that is insightful and thought-provoking." Enjoy your weekend!
Thursday, July 5, 2007
The day before Independence Day, KKR & Co. LP filed its registration statement to go public in a $1.5 billion offering. Another day another fund adviser ipo. Anyway, out of curiosity, I've prepared a chart comparing the two ipos on key shareholder measures:
Amount of Offering
Amount Sold by Current Partners in Offerng
$4.57 billion with greenshoe exercise (it is more than the offering amount due to the concurrent sale of $3 billion in Blackstone non-voting units to the Chinese government)
Only limited voting rights relating to certain matters affecting the units. No right to elect or remove the Managing Partner or its directors.
In addition, KKR’s current partners generally will have sufficient voting power to determine the outcome of any matter that may be submitted to a unitholder vote.
Quarterly cash distributions to unitholders in amounts that in the aggregate are expected to constitute substantially all of our adjusted cash flow from operations each year in excess of amounts determined by the Managing Partner.
Priority of Cash Distributions
First, so that unitholders receive $______ per common unit on an annualized basis for such year;
Second, to the other holders of Group Partnership units until an equivalent amount on a per unit basis has been distributed to such other holders for such year; and
Thereafter, pro rata to all partners.
After ______, priority allocation ends and all partners receive pro rata distributions.
First, so that common unitholders receive $1.20 per common unit on an annualized basis for such year;
Second, to the other partners of the Blackstone Holdings partnerships until an equivalent amount of income on a partnership interest basis has been allocated to such other partners for such year; and
Thereafter, pro rata to all partners.
After December 31, 2009, priority allocation ends and all partners receive pro rata distributions.
Pre-ipo Partner Distributions
Distributions of $______ million.
Distributions estimated at $610.4 million.
Highlighted Return of Selected Underlying Funds
(Blanks in the KKR column are figures KKR will fill in in subsequent registration statement amendments)
So, there is not much difference between the two in terms of shareholder voting and distribution rights. Both equally disenfranchise investors and both have the same distribution policies giving priorty distribution to investors through a set period of time. KKR has yet to disclose this period but it will likely be similar to Blackstone's and end on December 31, 2009. If I were aninvestor I'd be a little worried about the quantity of distributions thereafter as it will likely be well past the current private equity boom and the funds' new partners will likely be chomping for market-rate compensation by then. Ultimately, the only significant difference on the above chart is that the KKR partners are not selling in the ipo which is a good sign, but they may be effectively making a sale through a significantly large pre-ipo cash distribution -- the KKR registration statement has yet to disclose the exact amount of the distribution.
So, ultimately, in terms of shareholder and distribution rights they both appear to be equally troublesome. Also, for those who are wondering, the Fortress and Och-Ziff ipos are a bit different in terms than KKR and Blackstone but effectively accomplish the same shareholder disenfranchisement and distribution policies.
The Financial Times published an interview yesterday with Chancellor of the Exchequer Alistair Darling. In the interview, Darling ruled out an imminent change to the taxation rate of private equity in the United Kingdom. He stated
I think we should be very, very wary indeed of a knee-jerk reaction or a reaction to a day’s headlines into making a tax change that could result in unintended consequences and undesirable consequences . . . .
In the United Kingdom, the carried interest earned by private equity partners on their investments is treated as capital gains and entitled to taper relief. This often reduces the rate to 10 percent compared with the U.K.'s 40 percent rate on income. The system has come under heated criticism in recent months, with one private equity boss decrying the system, stating that private equity "enjoy a lower tax rate than that paid by a janitor." Note that there is a similar, less-public debate about similar tax treatment enjoyed by U.S. private equity firms (for more on this read Victor Fleischer's Two and Twenty: Taxing Partnership Profits in Private Equity Funds).
Interestingly, Darling drew an analogy to Sarbanes-Oxley to support his position:
I am reminded of Sarbanes-Oxley in the US....and they’re now looking at how they can get out of it. There is no doubt it has damaged the US market, [he said.] When or if we make any changes they must be made at the proper time in the context of the Budget or the pre-Budget report and in the context of making tax reform which is beneficial to the country.
Darling, who is not trained as an economist would likely have been on firmer grounds focusing on the micro effects of such a tax and how it would effect the current incentive structure for private equity managers. And of course there are the redistributive justice aspects. Still, Sarbanes-Oxley still has such a bad name in Europe it was easier for Darling to make this analogy. But, whatever Darling's assertions on the subject, the jury is still out on Sarbanes-Oxley's effects, particularly in light of the numerous foreign ipos in the U.S. market this year.
On Tuesday afternoon Hilton Hotels Corporation announced that it had agreed to be acquired by the The Blackstone Group's real estate and corporate private equity funds in an all-cash transaction valued at approximately $26 billion. The announcement date for the transaction was likely moved up due a potential leak of the deal and frenzied stock and call option trading on that day. As White Collar Crime Prof notes "[a]nother deal, another SEC insider trading investigation, in all likelihood."
The transaction is not contingent on the receipt of financing. Financing commitments have been provided by Bear Stearns, Bank of America, Deutsche Bank, Morgan Stanley and Goldman Sachs. Unlike many private equity deals today, the transaction does not contain a "go-shop". Rather, according to the merger agreement, Hilton can terminate the deal any time prior to a shareholder vote approving the offer to accept a superior proposal. If it does so, Hilton must pay a termination fee of $560 million and up to $7.5 million in Blackstone's expenses. This provision is not terribly unusual though in a private equity deal context may bring some protest over the lack of a go-shop and a full solicitation of buyers by the company. But, maybe this did happen. We will have to wait until the full history of transaction negotiations are described in the merger proxy before any definitive assessment.
According to Hilton's latest proxy statement, Barron Hilton currently owns 5.3% of the company through various trusts and is Co-Chairman of the board of directors. Mr. Hilton is grandfather to the infamous heiress Paris Hilton: there is no disclosure of the break-down of the trusts or what her cut is (NB. Blogging Stocks speculates it is $60 million). But proponents of inheritance taxes on redistributive justice and equality grounds take note. Her likely inheritance increased richly over the July 4th weekend.
Tuesday, July 3, 2007
One of the great things about being an M&A lawyer is the diversity of companies you interact with and have the opportunity to learn about. And you are often surprised at some of the niches and their value. In this regard, I still remember when I participated in the auction for Golden State Foods Corporation in 1998. Golden State was the largest liquid food processor for McDonalds (its only customer) at the time, and eventually sold for over $400 million to an investment consortium headed by Ron Burkle's The Yucaipa Cos. I still remember due diligence at the company's plant in City of Industry California where we saw and smelled the gigantic vats of ketchup and other sauce and, yes, McDonald's was served for lunch. And being surprised how a company supplying liquid sauce and other sundries to a single customer could be worth so much.
So, it was with similar feelings that I saw yesterday that New York Stock Exchange-listed Reddy Ice Holdings, the largest maker of packaged ice in the United States, announced it will be acquired by GSO Capital Partners for $681.5 million in a deal valued at $1.1 billion including debt. Reddy Ice stockholders will receive $31.25 per share in cash for each common share of the company's stock they hold. Debt financing for the transaction has been committed by Morgan Stanley. For interested buyers and according to the merger agreement, the deal has a 45-day go-shop and a $7 million dollar break fee during the go-shop period,rising to $21 million thereafter. And for such potential bidders or simply product buyers for tomorrow's July 4th holiday, note Reddy's apropos slogan: "Good Times are in The Bag".