Sunday, September 16, 2007
I previously celebrated the Reddy Ice deal and the joys of M&A by proclaiming Reddy Ice's slogan "Good Times are in the Bag", the day the company announced that it would be acquired by GSO Capital Partners for $681.5 million in a deal valued at $1.1 billion including debt. I should have known better -- it now appears that the celebration might have been a bit too soon. Last week Reddy Ice filed its definitive proxy statement for the transaction. The transaction history discloses a deal in crisis with Reddy Ice being hit by shareholder protests against the deal by Noonday Asset Management, L.P. and Shamrock Activist Value Fund L.P., the company's results for July coming below budget and recent guidance for 2007, and GSO proclaiming that it needed more time to finance the deal given the state of the debt markets and Reddy Ice.
In light of these problems, the parties ultimately agreed to amend the merger agreement to cap the future dividends Reddy Ice could pay while the transaction was pending, extend GSO's marketing period for the debt financing, move up the date of the Reddy Ice shareholder meeting to October 15, 2007, and reduce the maximum fee payable to GSO if Reddy Ice's shareholders rejected the transaction from $7 million to $3.5 million. Notably, Reddy Ice backed away from its initial position vis-a-vis GSO that it required an extension of the go-shop period and a postponement of the shareholder meeting in exchange for these amendments. For those who don't believe that private equity reverse termination provisions will be a factor in this Fall's deal renegotiations, I suggest you read this transaction history very carefully. The Reddy Ice board specifically cites its fears that GSO would simply walk from the transaction by paying the reverse termination fee of $21 million as a factor in its renegotiation. Note that this amendment still preserves this option.
Now Morgan Stanley is objecting to the amendment. MS has agreed to provide GCO with debt financing for this transaction, and MS is claiming that the merger amendment was entered into without its consent thereby disabling its obligations under the commitment letter, a fact MS is reserving its rights with respect thereto. MS agreed to a $485 million term loan facility, an $80 million revolving credit facility, and a $290 million senior secured second-lien term loan facility. GSO and RI are disputing MS's claim and the transaction is not contingent on financing, i.e., unless it claims a MAC GSO has no other choice but to take this position. The MS debt commitment letter is not publicly available but they are likely relying on the following relatively standard clause:
[Bank] shall have reviewed, and be satisfied with, the final structure of the Acquisition and the terms and conditions of the Acquisition Agreement (it being understood that [Bank] is satisfied with the execution version of the Acquisition Agreement received by [Bank] and the structure of the Acquisition reflected therein and the disclosure schedules to the Acquisition Agreement received by [Bank]). The Acquisition and the other Transactions shall be consummated concurrently with the initial funding of the Facilities in accordance with the Acquisition Agreement without giving effect to any waivers or amendments thereof that is material and adverse to the interests of the Lenders, unless consented to by [Bank] in its reasonable discretion. Immediately following the Transactions, none of Borrower, the Acquired Business nor any of their subsidiaries shall have any indebtedness or preferred equity other than as set forth in the Commitment Letter.
I am not involved in the bank finance industry these days, but still, it is hard to see how this amendment is adverse to the position of MS (assuming that the clause in their debt commitment letter is similar to the one above). If anything, the extension of the marketing period is beneficial to MS. The remainder of the amendment does not appear to effect MS except perhaps the dividend provision, but GSO can always fund that if necessary. But, Marty Lipton -- a man much smarter than me -- was recently on the wrong side of this debate when he made a similar argument in the context of the Home Depot supply deal, though that deal was more substantially renegotiated. Ultimately, MS's position is likely similar to one taken by banks in the recent Home Depot and Genesco deals -- they are using ostensible contractual claims to attempt to renegotiate deals that no longer are attractive and they are likely to lose money on. Here, based on a number of big assumptions, MS's claims seem a bit over-stated, though it may be enough to engender a further renegotiation of the deal premised upon MS's implicit threat to walk. Good Times are NOT in the Bag.
Final Note: In a developing market with a number of situationa like this, MS is taking a shot at this strategy with a lower priority client first. I doubt they would take the same position with KKR.