Monday, May 14, 2007
Chrysler was all the news yesterday and the blogs were quite busy posting. My favorite one was by the Wall Street Journal Blog which contained an interview with Robert Bruner, dean of the Darden School of Business at the University of Virginia and the author of a book of case studies of failed takeovers, titled Deals From Hell: M&A Lessons That Rise Above the Ashes. In the interview, Dean Bruner sentences Daimler to purgatory for the failed deal, concluding that:
It’s a terrible deal for value destruction and for loss of strategic position and impairment of brand name, but it’s not clear that any other buyer of Chrysler would have achieved a different outcome given the same operating environment since 1998.
The Wall Street Journal then proceeds to list five other "deals from hell" as taken from Bruner's book and stacks them against the Chrysler deal. They are:
1) Merger of Pennsylvania Railroad and New York Central Railroad, February 1968.
2) The leveraged buyout of Revco Drug Stores, December 1986.
3) AT&T’s acquisition of NCR, September 1991.
4) Quaker Oats’s purchase Snapple Beverage Corp., December 1994.
5) Merger of AOL Inc. and Time Warner, January 2001.
In all seriousness, though, I assign Bruner's book to my law school mergers & acquisitions class. I view it as an important teaching tool for future lawyers, helping them to understand the strategic reasons for takeovers and why they succeed or fail. This will hopefully lead them to better advise their M&A clients. For this reason, it is worth a read by practicing M&A lawyers too.
OSI Restaurant Group, owner of the Outback Steakhouse and Cheeseburger in Paradise restaurant chains, yesterday announced that it had once again delayed its special meeting of stockholders, originally scheduled for May 8 and previously postponed until May 15, 2007, until May 22nd. The purpose of the delay is to permit OSI even more time to continue to solicit votes to approve its proposed $3.2 billion acquisition by an investor group consisting of Bain Capital Partners, LLC, Catterton Management Company, LLC, OSI's founders and its executive management. The acquisition is in jeopardy due to shareholder opposition to the price being offered (for more on the shareholder opposition, see the Wall Street Journal blog-post here).
The OSI management/private equity buy-out has always been a problematical one due to the widespread involvement of its management and the troublesome way in which they inserted themselves into the sale process. OSI's CEO, COO, CFO and Chief Legal Officer are all involved and stand to profit from the deal going being approved. Given these conflicts and deep management involvement, the failure of a competing bid to emerge despite the presence of a 50-day "go-shop" provision is not surprising. OSI's repeated delay of the shareholder meeting to round up support and management's now active involvement in the solicitation, while legally permissible under Delaware law, is yet more evdence of a raw deal.
Mediaset, the broadcaster controlled by former Italian Premier Silvio Berlusconi, GS Capital Partners and John de Mol agreed yesterday to acquire a controlling stake in Endemol, Europe's second largest television producer and the creator of the reality television series Big Brother and Deal or No Deal, from Telefónica, the Spanish telecommunications company. The consortium will pay $3.5 billion to buy Telefonica's 75 percent stake and will also offer to buy Endemol's remaining publicly traded shares. Endemol is headquartered and organized in the Netherlands and listed on Euronext Amsterdam; accordingly the bid will be made under Dutch law. John de Mol founded Endemol and sold it to Telefonica in 2000 at the height of the technology bubble for EUR 5.5 billion.
Bloomberg is reporting that the Ford family is discussing a sale of their controlling interest in Ford Motor Co. According to the report, Bill Ford, chairman of Ford, briefed directors on the family's intentions before last week's annual shareholder meeting. The family had previously met and received a presentation from Joseph Perella's new investment bank Perella Weinberg Partners on a share sale or alternative strategies.
Dealbreaker is scornful of the report and Dealscape has some background on Ford's troubles. But, in any event, a sale has a significant problem. The Ford family controls Ford through Class B shares which currently provide them 40% of the voting power over Ford itself. But, per the Ford Certificate of Incorporation, the shares cannot be sold to members outside the Ford family without converting into regular vote stock. According to one report, the Ford's only have a 4% economic interest in the company. The value of their shares therefore lies mainly in their super-voting potential and consequent ability to control Ford. But, as stated, they can't sell these votes to an outsider. Because of this, the Ford family is unlikely to initiate a transaction which does not capture the value of these super-voting shares. This likely rules out an outright sale of the stake itself, but leaves the door open for a partnership to acquire all of Ford. Perhaps one of those private equity funds might be willing. And, of course, the Ford family can always convert their Class B shares into common and sell them on the open market for about $640 million at today's share price.
Left open for another day is the appropriateness of a family with 4% of the equity ownership of a company controlling its destiny through super-vote stock. But that is really an issue for those Ford minority shareholders who willingly bought into such an arrangement.
Update: The Ford family's lawyer has issued a statement on behalf of the family denying discussion of a possible sale transaction.
DaimlerChrysler today announced an agreement to sell an 80.1% stake in Chrysler to the private equity group Cerberus Capital Management. The transaction is structured as follows: an affiliate of private equity firm Cerberus will make a capital contribution of EUR 5.5 billion ($7.4 billion) in return for an 80.1% equity interest in a new holding company, Chrysler Holding LLC. DaimlerChrysler will hold a 19.9% equity interest in the new company. Chrysler Holding LLC will hold 100% each of the future Chrysler automotive operations and financial services business. Of the total capital contribution of EUR 5.5 billion, EUR 3.7 billion will flow into the automotive business and EUR 0.8 billion will flow into the financial services business. DaimlerChrysler will receive the balance of EUR 1.0 billion. In addition, DaimlerChrysler will grant a loan of EUR 0.3 billion to Chrysler Corporation LLC. Chrysler's healthcare and pension plan obligations, estimated to be $18 billion will travel with the new company. DaimlerChrysler will also hold a shareholders meeting in the Fall 2007 to rename itself Daimler AG.
Daimler will cover the losses of Chrysler group until the sale is completed. These loses are expected to be EUR 1.2 billion. In addition, DaimlerChrysler has agreed to discharge prepayment compensation of approximately EUR 650 million in connection with the transaction. It appears that Daimler will have a negative cash flow of EUR 1.15 billion in the deal (NB. The N.Y. Times has the figure at $678 million but looking at the press release I think my figure is the right one; the Wall Street Journal is closer). Daimler has accordingly agreed to pay Cerberus to take Chrysler and its significant pension and healthcare liabilities, a company it paid $36 billion for in 1998. How about that for a purchase price and deal gone bad?
One of the key conditions to completing a transaction will be the support of the United Auto Workers. I speculated yesterday that this might be a problem due to Cerberus's bad reputation with the UAW arising from its involvement in the Delphi bankruptcy. However, the DaimlerChrysler press release today contains the following quote from Ron Gettelfinger, President of the UAW:
The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler. We are pleased that this decision has been made. Because our members and the management can now focus entirely on the development and manufacture of quality products for the future of the Chrysler Group.
As I've said before, I think there are significant closing risks due to the requirements of union agreement. However, the union statement above is encouraging though clearly here the devil is in the details of any arrangements to be negotiated. DaimlerChrysler is a German company and therefore subject to looser SEC filing restrictions. It remains to be seen if they will actually file the sale agreement, and only need do so if they are required to file the agreement with the German authorities. If it is filed, I will have more on any conditions to completion and the legal ramifications. For those who want a historical perspective, Dealscape has a nice timeline of the auction's main events.
So why did Daimler do this deal? And what is in it for Cerberus? Well, the transaction can only be viewed as a desperate maneuver by Daimler to clean up its balance sheet and improve cash flow. The value for Daimler lies in its soaring share price since the announcement of a possible sale. For Cerberus, it obtains a fire sale price and leverage to bargain with the unions. The value is in such reductions and possibly reduced agency costs due to Cerberus's direct and private oversight of Chrysler. In addition, Cerberus can obtain possible cost-savings and synergies by combining or jointly operating Chrysler's financial services arm with GMAC, General Motor's financial arm which Cerberus acquired a 51% stake in last year. Or perhaps Cerberus's value lies in the sale price: an unbelievably low price negotiated at the bottom of an auto market downturn.
And congratulations to my old law firm Shearman & Sterling, who represented DaimlerChrysler in the transaction.
Update: Dieter Zetsche, CEO of DaimlerChrysler, stated on a conference call today that “[t]his deal is not conditional on any aspects of collective bargaining,” which effectively means there is no condition in the Chrysler sale agreement for a renegotiation of the UAW contract on certain terms. Accordingly, any deal between the UAW and Cerberus will be achieved through the upcoming summer renegotiation of Chrysler's UAW contract.
Sunday, May 13, 2007
The Wall Street Journal has a short, interesting article today on the surge in private equity exit IPOs. According to the Journal, "[o]f the 69 companies that have gone public this year in the U.S., excluding real-estate investment trusts and special-purpose acquisition companies, 23 were sponsored by private-equity firms. . . . Together, they raised $6.6 billion, more than one-third of the $15.4 billion raised in total." Furthermore, "[o]f the 122 IPOs waiting in the wings, 49 are companies owned by private-equity firms. Together, they hope to raise $9.25 billion."
The most interesting thing in the article is the assertion by Jay Ritter, a finance professor at the University of Florida who specializes in IPO research, that private-equity-backed IPOs historically have outperformed the broader market. Ritter doesn't elaborate, but this may be due to a number of factors, including the continued ownership interest of private equity firms in these companies post-IPO and the monitoring function and resulting reduced agency costs, as well as reputational incentives which may encourage private equity firms to under-price their offerings in order to attract additional investors in future ipos.
Whether this trend will continue is uncertain, particularly given the high volume of exits and lately bull-market which creates their own incentives for private equity firms to push out into the public markets less attractive candidates. For example, the Blackstone Group's latest IPO filing is for portfolio company Orbitz to sell $750 million worth of stock. Orbitz will remit all of the proceeds back to its parent Travelport which will remain wholly-owned by Blackstone and retain a controlling interest in Orbitz. The offering is being made less than a year after Blackstone acquired Orbitz. The offering has been criticized for impenetrable financial statment disclosure in its prospectus and nominated by one blogger as "The Worst IPO of 2007". Not a great harbringer.
Addendum: For those who are interested, Ritter has co-authored one of the seminal papers on IPOs generally and the under-pricing puzzle in particular: A Review of IPO Activity, Pricing and Allocations (February 2002);
Over at the Harvard Law School Corporate Governance Blog, Mark A. Morton, a partner at the Delaware law firm of Potter Anderson & Corroon LLP, has posted his paper Go-Shops: Market Check Magic or Mirage? He and his co-author, Roxanne L. Houtman, detail the history, and survey the use, of "go-shops". They find only one instance since 2004 of a standard, limited-period "go shop" which resulted in another higher, bid, that of the acquisition of Triad Hospitals. Based on this review, they conclude that "our practical experience suggests that while go-shops may be beneficial in some circumstances, they may serve as mere window dressing in other cases. If so, then judicial skepticism of the benefit of a go-shop is warranted in the latter cases." Regular readers of this blog will note their conclusion is similar to my own sentiments on these provisions.
Practitioners will also be particularly interested in the handy chart they have compiled which summarizes the material terms of every “go shop” provision used since 2004 through to March 8, 2007.
Stephen Bainbridge is the William D. Warren Professor of Law at UCLA and the editor of a popular business law blog (it also covers politics, wine and a variety of his other multitudinous interests). He also has a new book out, the Complete Guide to Sarbanes-Oxley: Understanding How Sarbanes-Oxley Affects Your Business. Professor Bainbridge is one of the foremost experts on these issues and his book is a must-have for every business owner and manager. Oh, and he also has a Mergers & Acquisitions Textbook.
Mylan Industries, the Pittsburgh based pharmaceutical producer, announced that it was the winner in Merck KGaA's auction of its generic drug unit. Mylan has agreed to pay Euro 4.9 billion or $6.7 billion in cash for the unit; the company also announced a planned issuance of $1.5 billion to $2.0 billion of equity and equity-linked securities to reduce the leverage incurred by the transaction. The auction of Merck's generic drug unit was reported to be a highly contested one and the price agreed by Mylan is at the high end of analyst expectations (particularly for Mylan with the Euro at an all-time high). But, Mylan has been looking for an opportunity and direction ever since Carl Icahn succeeded in blocking Mylan's $3.8 billion takeover of King Pharmaceuticals in 2005. Teva Pharmaceuticals, the rumored other serious bidder in the auction along with India's Torrent Pharmaceuticals, also issued a statement today that "[w]hile Merck's generics business would have been a strategic fit for Teva in certain regards the terms of this opportunity did not fully meet our investment criteria." And so it goes . . . .
The Wall Street Journal is reporting today that Cerberus Capital Management is the winning bidder in the auction for Chrysler (though others are reporting the winner is Magna and Onex; see also the N.Y. Times report on the Journal article here). According to the Journal, an announcement of an agreed transaction betwen Daimler and Cerberus could come as soon as tomorrow. The Journal is not reporting the sum paid by Cerberus to take on Chrysler but is reporting that it is substantial and that, additionally, Daimler will retain a minority stake in the business (the stake will slightly assuage Daimler when sellers remorse sets in -- Daimler is selling at the bottom of the auto industry cycle in a fire sale). Furthermore, and most importantly for Daimler, the Journal highlights that Chrysler's $18 billion in pension and health care liabilities will travel with the sale. If the report is true, the deal still faces significant hurdles to completion, including:
- Union arrangements. The deal will effectively be conditioned on a new agreement with the United Auto Workers. Cerberus already has a bad relationship with the UAW arising from Cerberus's proposed investment in Delphi Corp., and the UAW has previously publicly objected to a private equity buyer for Chrysler. Not a good start.
- PBGC Approval. As I have blogged before, the deal will effectively require the approval of the Pension Benefits Guaranty Corporation. This government agency is likely to require additional contributions to Chrysler's underfunded pension plan as a precondition to the PBGC's approval -- the amount of such contributions and Daimler's liability to make them has a real potential to crater the deal.
- Financing. Given Chrysler's state, the deal is likely to have a financing condition. Although we live in times of easy corporate credit, the financing for this deal is still likley to be a hard one to complete given Chrysler's existing substantial debt, some of which will likely need to be refinanced in connection with the transaction due to change of control provisions in such debt.
In addition, Cerberus already owns through its funds a 51% stake in GMAC, General Motors' financing affiliate. It will be interesting to see General Motor's reaction to the deal and Cerberus's intentions with respect to Chrysler's financing arm, Chrysler Financial.
If there is indeed a sale and when a sale agreement is made public, I'll have more on these conditions, any other interesting points and my further assessment of the legal hurdles to a closing. Of course, the one certainty already is that the price is going to be shockingly below the $36 billion paid by Daimler in 1998 for Chrysler, making it one of the worst M&A deals in history. It is thus fitting here that Cerberus is the three-headed dog from hell.
NB. If the Journal report is true, this leaves Magna with a new, Russian oligarch as a major shareholder and $1.5 billion in extra cash to spend. One wonders what sort of trouble they can get into now?