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Tuesday, November 6, 2007

MIA Watch: The CKX Deal

Remember CKX, Inc.'s $1.33 billion take private?  The company famously owns the intellectual property rights of Elvis Presley and Muhammad Ali as well as American Idol.  Way back on June 1, CKX announced an agreement to sell the company to 19X, Inc., a private company owned and controlled by Mr. Sillerman, Chairman and Chief Executive Officer of CKX, and Simon R. Fuller, you know who he is.

At the time, the deal contained a provision for 19X to obtain the necessary financing commitment letters after the transaction was signed.  Once the financing was in place, CKX would then prepare a proxy statement to go forward with the transaction.  This was unusual because, typically, a board will require financing to be committed before the transaction is effected.  The reasons are obvious -- doing it afterwards is an effective financing out for the acquirer and can strand the company in purgatory for extended periods as a leveraged buyer struggles to obtain the necessary financing.  There is no such financing out in the CKX merger agreement, but I believe (though cannot confirm) that 19X's sole asset is 1,419,817 shares of CKX (per its 13D).  If so, it would have only about $15-$20 million in assets -- so there is very little to collect for a judgement under the merger agreement if 19X breaches the agreement and refuses to close -- an effective financing out and, if true, the lowest of the low in reverse termination fees.

On Sept 28, CKX announced that the deal had been reworked to include less cash consideration and more stock (the stock being a distributed subsidiary FX Real Estate and Entertainment Inc.).  At the time, the amendment to the merger agreement provided more time to CKX to line up its financing.  Amended Section 6.4 stated:

SECTION 6.4 FINANCING (a) On or before October 30, 2007, Parent and Merger Sub shall deliver to the Company true and complete copies of (i) a fully executed commitment letter . . . . and (ii) a fully executed commitment letter . . . . The Financing Letters shall reflect debt and equity commitments from such equity investors and financial institutions, which together with any equity to be issued in connection with the Contribution and Exchange Agreements or to be issued in exchange for securities of Parent, shall be sufficient to pay the full Merger Consideration . . . .

So, it appears that the agreement was reworked due to financing problems in the deal.  In fact, the press release for the revised deal specifically noted the reduction in cash consideration would make the deal easier to finance. 

Well, Oct. 30 came and went.  And lo and behold, still no financing letters, resulting in a breach of the merger agreement by the buyer.  Instead, CKX put out the following press release:

CKX, Inc. announced today that 19X, Inc., which previously had agreed to acquire the Company in a merger transaction, had delivered financing letters in furtherance of its obligation to provide the Company with evidence of financing sufficient to complete the acquisition on the previously disclosed terms. The letters, which have not yet been signed by any parties, include firm commitments from, as well as other detailed arrangements and engagements with, three prominent Wall Street firms and expressions of intentions from management and other significant investors in CKX. The Company has a regularly scheduled Board Meeting this Friday, at which the Board of Directors will review the letters. Following completion of the Board’s review, 19X is expected to deliver fully executed letters.

Well that is odd.  Why unsigned letters?  Unsigned commitment letters have no force -- you would think, given the market conditions, CKX would want to firm up its financing as quick and possible.  And the board meeting referred to above came and went on Friday and there is still no word from the board, CKX or the buyer.  And, of course, those signed commitment letters required by the above amendment have still not appeared.  All of this is a bit odd.  I suspect that the financing referred to above is not on the terms Sillerman wants or is otherwise supplemented by an equity commitment he does not want to make.  But this is a mere guess.  I can't wait to find out the truth -- shareholders might wish that CKX was more fulsome in its disclosure on this matter.  Instead, the deal is MIA. 

Ultimately, the above delays and reworkings illustrate the perils of agreeing to a leveraged deal without the financing locked up at the beginning or otherwise without a firm.  CKX is now at the mercy of its controlling shareholder/buyer as it seemingly struggles to finance this deal with little choice but to extend the merger agreement.  Not a great place.

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