Monday, December 3, 2007
One of the more interesting and distressing things about today's M&A market is the number of deals which are either dead or walking wounded.
- For example, take the pending acquisition of PHH Corp. by General Electric Capital Corp. GE's acquisition is conditioned on The Blackstone Group being "ready, willing and able" to consummate GE's on-sale of PHH's mortgage operations [Yes, the quoted language is actually in the negotiated merger agreement]. On September 14, 2007, GE notified PHH that it had received a letter from Blackstone's acquisition vehicle that it had a financing short-fall of up to $750 million in available debt financing. Since that time, PHH's shareholders have approved the deal but no word from Blackstone -- they don't seem to be ready, willing or able. The deal is on life support and GE is likely waiting for December 31, 2007, the drop-dead date on the merger agreement, to terminate the deal. PHH is clearly the walking wounded verging on dead.
- Another deal in this category is the "pending" acquisition of SLM Corp. by a consortium led by the Flowers Group. After a flurry of litigation, the merger agreement is still pending but any trial is months if not longer out, and it appears that the fight has been reduced to a dispute over the $900 million reverse termination fee. Given what I believe is SLM's weak case, expect this one to also linger for a while and then be resolved quietly -- likely in some type of settlement akin to what happened in Harman (i.e., the Flowers consortium invests an amount directly in SLM so both sides can proclaim victory and the merger agreement is terminated). SLM is another of the walking wounded -- more like walking dead.
I think this is rather unprecedented and symbolic of the state of this market. Can anyone remember when so many deals have either been renegotiated, or are otherwise wounded or troubled? And I think it is problematical in the long term. Going-forward, targets and M&A target lawyers will be much more wary, rationally over-negotiating deals in order to tighten up provisions which have come to light as ambiguous or otherwise providing too much leeway to buyers. This will create its own problems as overly-complex and heavily negotiated language inevitably creates further ambiguity (see, e.g., Section 8.2(e) of the URI/Cerberus merger agreement), and targets are less willing to rely on reputation to cover gaps. And, of course, all of this backlog must still be cleared out. Another interesting development is how wary investors have become of private equity deals with reverse termination provisions. Take the first four big private equity deals announced post August: 3Com ($2.2 billion), Radiation Therapy Services $(1.1 billion), Goodman Global ($2.65 billion), and Puget Energy ($7.4 billion). As of Nov. 30 their deal spreads were 23%, 8.8%, 4.5%, and 6.6%, respectively. These are much wider spreads than one would expect (although in fairness 3Com and Puget have regulatory issues and Goodman has an EBITDA condition perhaps explaining some of this).
In any event, for those keeping score here is the full holiday list of the Dead, Wounded and Troubled. Happy Hanukkah!
- MGIC/Radian Group -- An Aug. MAC case. The parties mutually agreed to terminate their merger agreement after MGIC asserted a MAC had occurred.
- Harman/KKR & GS Capital Partners -- The merger agreement was terminated and $400 million invested by KKR & GSCP in Harman after the buyers asserted a MAC and breach of the merger agreement by Harman. This investment was a face-saving way out for Harman as a negotiated disposition of the $200 million reverse termination fee.
- Acxiom/Silver Lake & ValueAct -- The merger agreement was terminated and $65 million paid by the buyers to Acxiom after a MAC was asserted by the buyers. This amount was $1.75 million less than the reverse termination fee in the merger agreement.
- Fremont General Corporation/Gerald J. Ford -- Investment Agreement abandoned after buyer stated he was not prepared to "proceed"; another likley MAC claim.
- H&R Block subsidiary Option One/Cerberus -- parties mutually agree to terminate deal after "certainclosing conditions" could not be met.
- PHH Corp./GE & Blackstone -- see above
- SLM Corp./Flowers et al. -- see above
- Genesco/Finish Line & UBS -- litigation in Tennessee over MAC and negligent misrepresentation claims by Finish Line and fraud claim by UBS. UBS has also sued in a New York court to terminate its financing obligations to Finish Line concerning the merger.
- URI/Cerberus -- litigation in Delaware over specific performance after Cerberus repudiated its obligations under the merger agreement. Cerberus has sued in New York claiming that its guarantee limits its damages to $100 million.
- Reddy Ice/GCO-- Morgan Stanley asserted back in Sept. that it no longer is required to finance the deal. According to the merger agreement, the deal is in a marketing period which ends on Jan 31, 2007. With a low reverse termination fee of $21 million this deal is walking wounded. To boot Reddy Ice's recent results have not been too hot (weak attempt at a pun), and their CEO resigned earlier this week for health reasons.
- 3Com/Bain Capital & Huawei (23% deal spread) -- Appears to be held up in CFIUS review under the Exon-Florio amendment -- in fact it appears that 3Com has yet to even disclose whether the deal is so conditioned upon CFIUS approval (see my post on their seemingly poor disclosure practices here). Reverse termination fee of $66/$110 million.
- CKX/Robert Sillerman (9.7% deal spread but hard to estimate) -- Proxy statement yet to be filed after five months. The financing on this deal appears yet to be firmly committed.
- Cumulus Media/Merrill Lynch (42.4% deal spread) -- $15 million reverse termination fee.
- Goodman Global/Hellman Friedman (8.8% deal spread) -- reverse termination fee of $75/$139 million and merger conditioned on $255 million in EBITDA in 2007.
- Myers Industries/Goldman Sachs (11.1% deal spread) -- marketing period ends Dec. 15 after being extended previously.
- Penn National Gaming/Fortress Investment Corp. (12.8% deal spread) -- shareholder meeting on Dec. 12 to approve deal/reverse termination fee of $200 million.
- Tribune/Sam Zell (10.6% deal spread) -- $25 million reverse termination fee.
NB. I define troubled deals as those with a greater than 10% deal spread as of Nov. 30 and which are not industry buy-outs (i.e., they are private equity and management buy-outs) or deals that otherwise have reverse termination fees and abnormal deal spreads.
Settled at Reduced Price/Closed
- Accredited Home Lenders/Lone Star -- closed after MAC asserted and price lowered.
- Home Depot Wholesale Supply/Bain Capital Partners, The Carlyle Group and Clayton, Dubilier & Rice -- closed after MAC asserted and price lowered.
Addendum: I am sure I missed a few so if anyone has more just put in a commen or email me and I will add them in throughout the day.