Thursday, May 31, 2007
Mr. Elefante [has] informed the Board of Directors that representatives of the Bancroft family would be meeting with representatives of News Corporation, including Mr. Rupert Murdoch, solely to discuss the issues related to journalistic integrity raised by the News Corporation proposal to acquire all of the outstanding shares of Dow Jones common stock and Class B common stock. Mr. Elefante advised the Board of Directors that there was no assurance the discussions would lead to a proposal satisfactory to the members of the Bancroft family. Mr. Elefante further indicated to the Board of Directors that all aspects of News Corporation's proposal, including the price and the terms proposed by News Corporation, could be the subject of subsequent negotiation by the Board and the Bancroft family.
In light of this information, the Board of Directors has determined to consider strategic alternatives available to the Company, including the News Corporation proposal. The Board of Directors also indicated that a representative of the Board of Directors would be present at the Bancroft family's discussions with Mr. Murdoch and News Corporation. There can be no assurance that any transaction or other corporate action will result from this exploration of alternatives or that the Board of Directors or the members of the Bancroft family will support any specific proposal received by the Company.
By making this decision and issuing this statement the Dow Jones board is now on the edge of Revlon duties. Stay tuned.
The Bancroft Family yesterday issued a statement indicating that they would begin discussions with Rupert Murdoch's News Corp. concerning News Corp.'s $5 billion offer to acquire Dow Jones. In their statement, the family also indicated that they would consider other alternatives that might lead to a change of control of Dow Jones. The relevant parts of the statement are as follows:
After a detailed review of the business of Dow Jones and the evolving competitive environment in which it operates, the Family has reached consensus that the mission of Dow Jones may be better accomplished in combination or collaboration with another organization, which may include News Corporation.
Accordingly, the Family has advised the Company's Board that it intends to meet with News Corporation to determine whether, in the context of the current or any modified News Corporation proposal, it will be possible to ensure the level of commitment to editorial independence, integrity and journalistic freedom that is the hallmark of Dow Jones.
The Family also indicated its receptivity to other options that might achieve the same overarching objective.
The interesting legal drama here will be how the Dow Jones board reacts and the actions it subsequently takes. The Dow Jones board is certainly required under Delaware law to consider any offers and the family's position with respect thereto. But the board has its own fiduciary duties to shareholders, and unless it decides to initiate a change of control or break-up of the country (i.e., it enters Revlon mode) it is not required to agree to a sale of Dow Jones even if the Bancroft family so desires. And it is also not required to make the precedent decision to sell solely because the Bancroft's want it.
The Bancroft family has a controlling voting stake but only own approximately 25% of the economic interests in Dow Jones. And, per Dow Jones' certificate of incorporation, if the family does sell their shares to Murdoch outright outside of a complete sale of Dow Jones the shares will convert to ordinary voting shares of Dow Jones. So, in order for the Bancrofts to realize the full economic value of their shares they can only sell if there is a sale of the company itself. However, Delaware law is also relatively clear that the Bancroft family is not authorized to sell. This raises the possibility of stalemate for Dow Jones if the board and Bancroft family can't agree on both a sale and buyer. While this is unlikely to happen for practical reasons if nothing else, it does mean that things could get much more interesting.
Today's Friday culture recommendation is Fischer Black and the Revolutionary Idea of Finance by Perry Mehrling. Fischer Black is famously known for developing the Black-Scholes formula for options pricing together with Robert C. Merton and Myron Scholes. Fischer died before he could be awarded the Nobel Prize in Economics for this achievement; instead it went to Merton and Scholes (Merton's consolation prize for not having his name on the formula). Fischer was also famously eccentric, a partner at Goldman Sachs, a professor at the University of Chicago and a central uniting figure in the history of finance. But this is more than just a biography of an impressive man. Mehrling uses Black's life as a vehicle to tell the story of the revolution in finance that took place between 1960 and 1990. And he does so in explainable terms.
Any good M&A lawyer or academic must also understand the financing side of a transaction as well as the underpinning architecture of our financial markets. This is a good way to start such an exploration or otherwise get a solid and interesting refresher. Have a good weekend!
Portfolio, the new hip and trendy magazine by Condé Nast and Gawker favorite, has posted an on-line CEO survival guide to quelling your very own options back-dating scandal. I am happy to say I assisted in its preparation. Every CEO should read it, and you can check it out here.
NPR had a nice feature yesterday on the increasing incidence of insider trading and the SEC's detection apparatus. Hint: its related to the private equity/M&A boom. The feature includes commentary by my colleague, noted White Collar Crime expert and White Collar Crime Prof blog editor, Peter Henning. You can listen to the piece here.
Man Group plc, the U.K. based hedge fund operator listed on the London Stock Exchange, has filed a registration statement for an initial public offering of what is being touted as the first U.S.-listed hedge fund. According to the registration statement, the fund will be listed on the New York Stock Exchange and called the Man Dual Absolute Return Fund. It will be organized as a closed-end management investment company. The initial public offering price is $20.00 per common share with a minimum purchase in the offering of 100 common shares.
The fund is being marketed as a public hedge fund and so, accordingly, the fund will seek "risk-adjusted [positive] returns with minimal correlation to the returns of major global equity and bond market indices" (i.e., it will be an alpha fund). Between 80% and 85% of total managed assets will be devoted to a U.S. quantitative long/short equity strategy with the remainder largely invested in a managed futures program called AHL Core.
But, for those now salivating over the chance to invest in a U.S. based hedge fund, don't get too excited yet. Since the fund will be making a public offering it will become subject to the Investment Company Act (ICA). This will require the fund to operate in a markedly different manner than typical hedge funds:
- Restricted Leverage. Unlike normal hedge funds which use extensive leverage and borrowings, this fund will be limited by the ICA to borrowings of no more than 33 1/3% of the fund's total managed assets.
- Restricted Hedging. Hedge funds have their name because of their unrestricted use of hedging. Yet, the ICA limits the use of derivatives and permits only covered hedging.
- Restricted Liquidity. Hedge funds typically permit redemptions on a quarterly to yearly basis. This fund will be a closed-end fund and there will be no ability to redeem shares. Like other closed-end funds, this one is accordingly likely to trade at a discount.
- Fees. Funds subject to the ICA are limited under federal law and NASD rules as to the fee they can charge. But hedge funds typically charge the so-called two and twenty. There is a two percent administration fee and a payment of twenty percent payment of profits over a hurdle rate to the fund manager. The Man fund registration statement has the adviser management fee blank, but the fund will not be permitted under the ICA to charge a profit participation fee. The result is that the administration fee will likely be higher than the two percent to compensate but total compensation to the fund manager significantly less. While fund holders might at first blush be happy about this where would you, as a hedge fund adviser prefer to work? Consequently, the fund adviser may not be able to recruit the best talent.
There are other differences that I won't go into here. Ultimately, the ability of this fund to earn the extraordinary risk-adjusted positive returns that hedge funds have become known for is uncertain in light of these substantial differences. Accordingly, this fund would be better termed the first hedge fund-lite offering in the United States. But, until the SEC ends its hostility to hedge funds and reforms the ICA to permit their public listing, this is probably the closest to a real hedge fund U.S. retail investors can get. Whether it will successfully earn those hoped for positive uncorrelated returns is another matter.
Highland Capital Management L.P. stated in a Schedule 13D amendment filed today that it had executed a confidentiality agreement with Delphi Corp. in order to explore a reorganization plan Highland had proposed last month. Highland is teaming up with Brandes Investment Partners and Pardus Capital Management L.P. Pardus has significant stakes in the auto-suppliers Visteon Corp. supplier Valeo SA. and, according to Highland's filing, would be the lead investor in any transaction with Delphi.
Highland, through its funds, owns 7.82% of Delphi's equity and this is its second proposed plan for Delphi. Delphi spurned Highland's initial $4.7 billion plan for a $3.4 billion alternative reorganization plan proposed by Cerberus Capital Management, Appaloosa Management and Harbinger Capital Partners. Highland's disclosure and progress towards its own deal means that the Cerberus plan is likely now either dead or on life-support. The Cerberus group's plan had met with substantial opposition from the United Auto Workers and it had been rumored that Cerberus had dropped out of the biding group as a result. Cerberus, as we all know, recently agreed to acquire the Chrysler Group from Daimler: hopefully, that transaction will go better.
Notably, the following language in the non-disclosure agreement caught my eye:
You hereby represent that you have, and will have at all times after the execution of this letter agreement and prior to the Pardus Release Date, a “Net Long Position” (as defined below) with respect to the Company. At the Company’s request you agree promptly to provide the Company with reasonable information which supports the initial representation in the prior sentence and your continued compliance with the prior sentence and the next sentence. In addition, subject to the second paragraph following this paragraph prior to the Pardus Release Date, you will not sell, dispose of or otherwise transfer any equity or debt securities, equity or fixed income related credit derivatives or other instruments (including put equivalent and call equivalent instruments) issued by, guaranteed by or relating to the Company. With respect to the Company, a “Net Long Position” means that, on an aggregate basis with respect to all equity or debt securities, equity or fixed income related credit derivatives or other instruments (including put equivalent and call equivalent instruments) issued by, guaranteed by or relating to the Company, your portfolio of such securities, derivatives and other instruments would be reasonably likely to gain in value if an event occurred which would be reasonably likely to cause the credit quality of the Company to improve.
In addition, you hereby represent that you do not have, and will not have at any time after the execution of this letter agreement and prior to the Pardus Release Date, a Net Short Position (as defined below) with respect to General Motors Corporation (“GM”). At the Company’s request you agree promptly to provide the Company with reasonable information on a confidential basis which supports your continued compliance with the prior sentence and the next sentence. In addition, prior to the Pardus Release Date, you will not sell, dispose of or otherwise transfer any equity or debt securities, equity or fixed income related, credit derivatives or other instruments (including put equivalent and call equivalent instruments) issued by, guaranteed by or relating to GM, other than to GM or in connection with a public tender offer for any such securities. A “Net Short Position” with respect to GM means that, on an aggregate basis with respect to all equity or debt securities, equity or fixed income related credit derivatives or other instruments (including put equivalent and call equivalent instruments) issued by, guaranteed by or relating to GM, your portfolio of such securities, derivatives and other instruments would be reasonably likely to gain in value if an event occurred which would be reasonably likely to cause the credit quality of GM to decline.
The language is interesting and increasingly more common. Typically, non-disclosure agreements in M&A transactions have a standstill provision which prevents further acquisitions of a target's shares. Historically, they have not dealt with short positions as these were not a threat to corporate control. But, as hedge funds have arisen, motives are now more suspect and the ability to profit on negative information obtained through due diligence easier. Though these practices sometimes cross the line and become illegal insider trading, they are increasingly common. The above language is one way for a company (here Delphi, and presumably GM) to ensure that the fund it is negotiating with will not profit on any bad news it obtains through the due diligence process. I would expect it to become standard boilerplate in the next few years.
Wednesday, May 30, 2007
The Financial Times is reporting that ICI, the U.K. chemicals company, will delist its American Depositary Receipts from the New York Stock Exchange. The company expects the delisting to occur on or about June 18 immediately after it deregisters its securities under the Exchange Act. ICI will remain listed on the London Stock Exchange, but ICI will also issue American Depositary Shares on OTCQX, a new quotation system launched by the Pink Sheets, the U.S. over-the-counter market home to many a penny stock.
Expect to see more announced delistings from U.S. stock markets by foreign issuers in the next few weeks. This is because the SEC's new rules liberalizing the ability of foreign issuers to deregister their securities and terminate their reporting requirements under the Exchange Act take effect on June 4. Prior to this rule, the Exchange Act was a lobster trap -- deregistering equity securities and terminating or suspending reporting requirements once these securities had been registered was prohibitively difficult if not impossible. 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).
So, the 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.
All-in-all, though, the rules are a step in the right direction. Permitting foreign issuers to more freely delist will encourage them to experiment with a U.S. listing in the first place. The SEC would also do well to take the next step and consider whether all foreign listings need to be regulated at the current level. Does the SEC really need to regulate ICI to begin with? It is, after all, regulated by the FSA and LSE in England. A mutual recognition system for issuers listed in foreign countries who provide an acceptable level of regulation would go a long way to making the U.S. more competitive in the global listings market. It would also provide greater access for U.S. investors to foreign investments. Both good things.
NB. The ICI planned listing on the Pink Sheets highlights this problem. The Pink Sheets is not a stock market, but rather a bulletin board where shares are quoted -- trading on this market is often illiquid and spreads Texas-wide. Yet, the SEC freely permits foreign companies to quote their shares here under the Exchange Act Rule 12g3-2b exemption. I am at a loss to explain why this is appropriate yet not a freer stock market listing regime in the U.S. markets for foreign issuers; one that permits these foreign issuers to list on the NYSE or Nasdaq. Especially since the latter would provide U.S. investors more efficient access to foreign stocks and permit the United States to more easily attract these listings.
The Wall Street Journal reports today that Institutional Shareholder Services has recommended that Biomet Inc. shareholders vote against the $10.9 billion cash acquisition of their company by a private equity group consisting of Blackstone Group, GS Capital Partners, Kohlberg Kravis Roberts & Co., and TPG Capital. ISS based this recommendation on that fact that "[a]lthough the deal terms appear fair as of the time of the deal's announcement in December, the rally of the peer group" and Biomet's main joint reconstruction business "imply that there is little takeover premium in the current $44 offer price."
Per the Biomet Certificate of Incorporation, for the merger to go through it must be approved by at least 75% of Biomet’s common shares. Since the vote is based on the number of common shares outstanding rather than the number of votes cast, any failure to vote and broker non-votes will effectively be votes against the transaction. Biomet is organized in Indiana, and there are no dissenter's rights available under Indiana law for this transaction (a different result than in Delaware).
The vote was always likely to be a close one, particularly since Biomet rejected a slightly higher offer from Smith & Nephew on grounds of completion risk. The ISS report makes it that much closer. And the Wall Street Journal reports the story as highlighting of the increasing activism of shareholders in private equity deals. ISS is a for-profit service which makes these recommendations to earn its living, so I am not equally as sure. In fact, we can't even see the ISS report, it is provided only to fee-paying institutional shareholders. Biomet retail shareholders therefore cannot make their own assessment of ISS's analysis or use it to further inform their vote. So, for me the ISS report instead highlights the sometimes large information gap between common and sophisticated shareholders. Unfortunately, acknowledgment of this disparity doesn't help Biomet retail shareholders who are deciding how to vote.
For more on the role of shareholder advisory services in corporate transactions, see the recent article by Paul Rose, a new professor of law at Ohio State, entitled The Corporate Governance Industry.
CDW Corporation, the technology products retailer, yesterday announced that it had agreed to be acquired by the private equity firm Madison Dearborn Partners, LLC in a transaction valued at approximately $7.3 billion. MDW will pay $87.75 in cash per share. CDW's founder Michael P. Krasny owns 22 percent of the company and has agreed to vote in favor of the transaction.
CDW has yet to file the merger agreement, but according to the press release:
Before approving the merger agreement, the [CDW] Board of Directors conducted an auction process in which a number of potential bidders participated. Under the agreement, CDW will, with the assistance of Morgan Stanley, actively solicit proposals from third parties during the next 30 days.
The go-shop is a bit short for these provisions which are typically more in the range of 40-60 days.
Funny enough, CDW did not disclose the break fees for the transaction in the press release, nor did it give the terms of Krasny's agreement to vote for the transaction. It will be interesting to see how tight Krasny's voting agreement is. It looks like CDW is going to wait the two full business days to file the merger and voting agreement; I'll have more once it is filed.
May is coming to an end, and this sixth wave of takeover activity is on pace to reach record levels. According to preliminary statistics released by Thomson Financial, M&A deals worth over $496 billion have been announced world-wide so far in May; while the figure in the United States is over $191 billion. Year to date, there has been $2.2 trillion in world-wide announced M&A activity with $830 billion of that occurring in the United States. Private equity has accounted for roughly half of this years' M&A activity in the United States. This world-wide activity is the highest ever for a May, and if it continues, will surpass the prior record set in 2000.
Tuesday, May 29, 2007
I was flipping through the Alltel merger agreement this morning, when the following clause caught my eye:
Section 8.4. Governing Law. This Agreement, and all claims or causes of action (whether at Law, in contract or in tort) that may be based upon, arise out of or relate to this Agreement or the negotiation, execution or performance hereof, shall be governed by and construed in accordance with the Laws of the State of Delaware, without giving effect to any choice or conflict of Law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the Laws of any jurisdiction other than the State of Delaware.
I am not sure whether the above clause was from the Cleary or Weil merger form (both are representing the buying consortium), but the underlined text is problematical. This language crept into choice of law provisions at some point and has stubbornly remained there in various forms despite the best efforts of knowledgeable lawyers to eradicate it because of their potential for absurdity. Former Shearman & Sterling partner Michael Gruson aptly explained why this clause is unnecessary and possibly harmful text in his article, Governing Law Clauses Excluding Principles of Conflict of Laws, 37 INT'L LAW. 1023 (2003). Here, Gruson highlighted the resulting absurdities if the language of this clause were strictly applied. For example, depending upon the conflicts of laws wording exclusion, the language may technically requires a court to also exclude the very conflict of laws rules that permit the parties to select a law to govern their agreement as well as to ignore the internal affairs doctrine. Both would be unwanted results. While Gruson's analysis speaks to New York law it is transferable to Delaware law. Accordingly, to avoid such issues, the better practice would have been for Weil and/or Cleary to draft their clause simply as follows:
Section 8.4 Governing Law. This Agreement, and all claims or causes of action (whether at Law, in contract or in tort) that may be based upon, arise out of or relate to this Agreement or the negotiation, execution or performance hereof, shall be governed by and construed in accordance with the Laws of the State of Delaware.
So much easier, and as Gruson notes an equivalent, clearer result. And for those who follow such things, the Alltel merger agreement has a $625 million break-up fee, a provision for reimbursement to the acquirers of up to $35 million in expenses, a no solicit and a rather tight material adverse change clause.
Archstone-Smith today announced that it agreed to be acquired by Tishman Speyer and Lehman Brothers, in a transaction valued at approximately $22.2 billion. The group will pay $60.75 per share in cash. Showing yet agin the depths of our capital markets, the transaction is not conditioned on receipt of financing. The CEO of Archstone, R. Scot Sellers, has agreed to stay with the newly-private company and agreed to terms of a new employment agremeent effective upon the completion of the acquisition.
I'll have more once the merger agreement and the terms of the CEO Sellers' new employment agreement are made public.
Dealscape has a nice post today on the fees Goldman Sachs & Co. is charging to advise Midwest Air Group Inc. on the unsolicited bid to acquire the airline by AirTran Holding's Inc. The post discusses a May 23 letter from CtW Investment Group to Midwest’s board complaining of Goldman's fee structure disclosed in Midwest's proxy filing which CtW says appears to pay the bank $7.4 million if there is no merger, but just $4.9 million if one does take place. However, Dealscape goes through the numbers in light of Midwest's subsequent public comments on the letter and finds that the payment to Goldman is probably about $10.5 million in the event of a deal, an amount higher than what it will get if no transaction is done.
Midwest shareholders have repeatedly complained of Midwest's adamant "Just Say No" response to the AirTrans bid asserting that it is not in the best interests of shareholders. If Goldman were indeed getting more in the case of no deal it would certainly throw gas on the fire. But I wouldn't be terribly concerned -- investment bank conflicts are all too standard when they represent clients. Their fees are typically contingent, they often provide financing to buyers when representing sellers and they issue fairness opinions knowing they will not be paid if they cannot find the transaction fair. Since these are sophisticated parties, the keystone which permits these conflicts to exist is full disclosure. And that is the real problem -- Midwest's proxy does not clearly disclose what Midwest is paying Goldman and what Goldman is doing for its money. Here, provided the services being rendered for a sale and defense were different the fee differential might even be justified. But we just don't know. It would behoove the SEC in its review of Midwest's proxy to force Midwest to correct this disclosure.
The Royal Bank of Scotland Group plc, Fortis and Santander today announced the terms of their proposed €71.1 billion offer for ABN Amro. If completed, it would be the largest financial services deal in history. According to the consortium, its bid is at a 13.7% premium to the competing €64 billion bid from Britain's Barclays plc supported by ABN Amro. The consortium is offering €38.40 per ABN share comprising 79% cash with the remainder consisting of new RBS shares. But the group will also hold back €1 a share in cash (or $2.5 billion) as a reserve against litigation costs and damages that might arise from the Bank of America's lawsuit against ABN Amro to enforce the sale of LaSalle Bank to it. In a just world this would be money that would come out of the pocket of ABN Amro CEO, Rijkman Groenink and the ABN Amro Supervisory Board for mucking up this sale process instead of their shareholders.
The group detailed the financing arrangements for the bid, and also detailed their plans to break-up ABN Amro upon its acquisition: RBS will acquire ABN Amro's Global Wholesale Businesses (including the Netherlands but excluding Brazil), LaSalle Bank and International Retail Businesses for a consideration of €27.2 billion. The full offer document can be accessed here. The group will now proceed to have their required shareholder meetings and expect to commence the full offer in August of 2007. However, this is a pre-conditional offer -- certain conditions must be satisfied before the full offer can commence. The most significant pre-condition is one requiring a favorable ruling on the currently pending litigation over the LaSalle matter. It requires that:
The preliminary ruling of the Dutch Enterprise Chamber that the consummation of the Bank of America Agreement should be subject to ABN AMRO shareholder approval has been upheld or otherwise remains in force, whether or not pursuant to any decision of the Dutch Supreme Court, or of any other judicial body, and ABN AMRO shareholders have failed to approve the Bank of America Agreement by the requisite vote at the ABN AMRO EGM.
Thus, like many a U.S. takeover, the final disposition of ABN Amro will be decided by the courts. The Dutch Supreme Court is expected to rule in July or August. Until then, there will continue to be significant uncertainty in the market over the RBS-bid and the future of ABN Amro.
NB. The RBS group has also decided to take a different course in this offer document with respect to the acquisition of LaSalle Bank. The consoritum offer itself, once it commences, is now conditioned upon "ABN AMRO shareholders hav[ing] failed to approve the Bank of America Agreement by the requisite vote at the ABN AMRO EGM convened for that purpose." The group's previous offer was cross-conditional on ABN Amro reaching an agreement to sell LaSalle directly to RBS. Now, it appears RBS is content to acquire only ABN Amro, and subsequently purchase LaSalle.
The N.Y. Times is today reporting that the Federal Trade Commission has opened a preliminary antitrust investigation into Google’s agreed $3.1 billion purchase of DoubleClick, the on-line ad agency. The review only started after the FTC and Justice Department settled a turf war over who could conduct the review. I guess even regulators think Google is hot.
The report is one of a non-event. The FTC review is standard procedure to determine if the agency will initiate a second request. The second request is actually where the FTC will, if it makes one, initiate a more extended review. Still, AT&T, Microsoft and other industry leaders have been lobbying the government for a thorough antitrust review of this deal. And a number of internet non-profits, such as the Electronic Privacy Information Center, a privacy rights group, have been lobbying for government scrutiny based on privacy concerns. The latter is a non-starter for the FTC; the privacy issue is really one for Congress. But still, there has been a flurry of activity in this industry space: WPP has agreed to acquire 24/7 Real Media for $649 million and Microsoft has agreed to acquire aQuantive for $6 billion. I'm no antitrust expert and do not know this market or Google's market-share, but the politics and situation here point towards a second request. I'd also expect Google to try the same thing and turn the tables for Microsoft's aQuantive deal.
Sam Zell's $12 billion buy-out of Tribune Co. is making ominously fitful progress. On Friday, Tribune announced that approximately 224 million shares or 92% of outstanding shares were tendered in its self-tender offer. The tender offer was to repurchase only up to 126 million of Tribune's shares for $34.00. Tribune will now purchase the tendered shares on a pro rata basis. The remaining shareholders will now have to wait until the fourth quarter of 2007 to receive the same consideration in a back-end merger, effectively providing the company (and its prospective buyers) with some short-term financing.
More interestingly, to finance this purchase Tribune last week sold more than $7 billion in notes. According to this report in the Wall Street Journal, the notes were a tough sell, and the investment bankers ended up forgoing roughly a third of about $120 million in fees to get the deal done. Furthermore, to push the sale through, Tribune agreed to higher interest rates and a faster repayment schedule than originally planned on most of the debt.
Zell is contributing $315 million in equity, while Tribune's ESOP is contributing $250 million, but the company will have post-transaction debt of $12 billion, a debt to equity ratio that is exceedingly high. Moreover, the financing for the back-end merger is still not locked in. Tribune must raise $4 billion more in financing for the back-end merger. The tender of 92% of Tribune's shares in the front-end of the transaction highlights the fact that many think there is significant risk that the back-end will not find financing and be effected. And even if the transaction is completed, Tribune is going to have a tough time servicing these loans, having an interest burden of $1 billion a year before any asset sales (read the Cubs) to pay down debt. This will leave no margin for error or misfortune. A recession or management failure at the Tribune will quickly result in a financial crunch for the company.
The Zell deal has always been an envelope pusher in structure and it is a clever tax-dodge. But the deal appears to be pushing the envelope for risk-tolerance as well, something a bit unsettling given that Zell is using the Tribune employee stock option plan to finance his bid. Tribune's employees may end up on the very raw side of this transaction losing not only their ESOP money but perhaps their jobs in a transaction they unwittingly facilitated. Alternatively, if the back-end cannot be financed, it will be Tribune's remaining shareholders who will suffer under the weight of debt. Meanwhile, Zell's risk is only his $315 million on the table to acquire a 40% interest in a $12 billion company. Nice deal maker that Sam Zell.
Despite talks of the sale of Avaya to private equity and a host of other current sale rumors over the past long weekend, the Wall Street Journal today goes with an article entitled Private Equity: Is Deal Frenzy Nearing an End? It is the usual, probably correct, stuff about over-inflated prices and Carlyle's recent decision to pull-back from the bidding frenzy. In this vein, I thought I would draw your attention to a recent article, the Eclipse of Private Equity, by Brian R. Cheffins & John Armour, two professors at Cambridge University Here is the abstract:
Private equity, characterized by firms operating as privately held partnerships organizing the acquisition and “taking private” of public companies, is currently dominating the business news due to deals growing rapidly in number and size. If the trend continues unabated, the 1989 prediction by economist Michael Jensen of “the eclipse of the public corporation” could be proved accurate soon. This paper argues matters will work out much differently, with private equity being at least partially eclipsed.
One possibility is that current market and legal conditions, which are highly congenial to public-to-private transactions, could be disrupted in ways that cause the private equity surge to stall or even go into reverse. The paper draws on history to make this point, discussing how the spectacular rise of conglomerates in the 1960s was reversed in subsequent decades and how the 1980s buyout boom led by LBO associations - the private equity firms of the day - collapsed. Factors that undercut conglomerate mergers and buyouts by LBO associations (e.g. the tightening of debt markets and increased regulation) potentially could do the same with the current wave of private equity buyouts, and cause at least a temporary eclipse of private equity deals.
Even if conditions remain favorable to private equity, its eclipse is likely to occur in a different way. Privacy has been a hallmark of private equity, with industry leaders operating as secretive partnerships that negotiate buyouts behind closed doors and restructure portfolio companies outside the public gaze. However, assuming market conditions remain sufficiently favorable, top private equity firms, following the lead of the Blackstone Group, may well carry out public offerings. If this happens, then even if the taking private of publicly quoted companies remains a mainstream pursuit, the exercise will occur largely under the umbrella of public markets.
Monday, May 28, 2007
My colleague Peter Henning at the White Collar Crime Prof Blog is talking about the mess at Dow Chemicals related to the firing of two senior executives (one also a director) over their alleged unauthorized talks to take the company private. See the post here.