Wednesday, January 2, 2008
The demise of the PHH Corp. deal has me thinking about the next victim of the 2007/2008 private equity blow-out. I think the clear nominee for the dead pool has to be Reddy Ice Holdings -- it currently has a Feb 5 termination date for its merger agreement, a date which seems increasingly likely to bring the agreement's termination.
Back on July 2 Reddy Ice, the largest maker of packaged ice in the United States, announced that it had agreed to be acquired by GSO Capital Partners for $681.5 million in a deal valued at $1.1 billion including debt. Debt financing for the transaction was committed by Morgan Stanley. According to the merger agreement, the deal had a 45-day go-shop and a $7 million dollar break fee during the go-shop period, rising to $21 million thereafter. At the time I celebrated Reddy's apropos slogan "Good Times are in The Bag", not picking up that the merger agreement also contained an ominously low $21 million reverse termination fee.
The deal quickly shifted into troubled category. The definitive proxy statement describes a deal almost immediately in crisis after announcement as Reddy Ice was hit by shareholder protests against the price by Noonday Asset Management, L.P. and Shamrock Activist Value Fund L.P. and the company missed July earnings targets. By mid-August GSO was already asserting that it needed more time to market the financing for the transaction given the state of the debt markets and Reddy Ice itself. In light of these problems, GSO and Reddy Ice ultimately agreed to amend the merger agreement on August 30, 2007 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. According to the proxy statement, it did so because of fears that GSO would simply walk from the transaction by paying the reverse termination fee of $21 million. Reverse termination fees are powerful negotiating tools folks.
Morgan Stanley then promptly raised an objection to the amendment. We have little information on this objection but from the little public disclosure it appears that MS is claiming that the merger agreement amendment and its extension of the marketing period was entered into without MS's consent thereby disabling its obligations under the commitment letter, a fact MS stated it reserved its rights with respect thereto. GSO and Reddy Ice publicly disputed MS's claim and the transaction is not contingent on financing (NB. unless it claims a MAC GSO has no other choice but to take this position or simply pay the reverse termination fee). The MS debt commitment letter is not publicly available but the language is likely standard and requires the banks approval to amendments of the merger agreement that are not "material and adverse to the interests of the Lenders" or some formulation thereof. If this is indeed the language, one can quibble whether these amendments, particularly the extension of the marketing period, are adverse. Nonetheless this is a similar position which the financing banks also successfully took in the Home Depot Supply renegotiation.
That was all by the end of summer, but since then Reddy Ice has continued its slow melt (pun very much intended). The new go-shop period came and went without a bidder, on Nov. 30 its CEO Jimmy C. Weaver resigned and on Jan 2 Reddy Ice announced that its COO Raymond Booth had also resigned. Meanwhile, management (now gone) has thrice lowered full-year guidance blaming adverse weather conditions since the announcement of the agreement. Note that the MAC contains an exclusion for adverse effects based on weather conditions -- Reddy Ice's finger-pointing at the weather not coincidentally provides it a convenient out on the MAC. The only good news for the deal is that Reddy Ice's shareholders have approved it.
And thus far, GSO has not asserted a MAC (for the definition of a MAC see pp. 53-54 of the merger agreement). But on Oct. 5, GSO informed Reddy Ice that it planned to extend the marketing period for the deal's $775 million debt package through Jan. 31. According to the merger agreement amendment the drop-dead date for deal is defined as follows:
“End Date” shall mean December 15, 2007, provided that the Company shall have the right, in its sole discretion to extend the End Date by up to 60 days if any of the conditions set forth in Sections 6 or 7 shall not have been satisfied or waived as of December 1, 2007, provided, further, that if the Marketing Period has commenced but not ended before any such End Date (including as a result of any extension pursuant to the final proviso of the definition of the term “Marketing Period”), such End Date shall automatically be extended to occur three Business Days after the final day of the Marketing Period.
And marketing period is defined as follows:
“Marketing Period” means the first period of 20 consecutive calendar days after all of the conditions set forth in Section 6 (other than conditions that by their nature can only be satisfied at the Closing) have been satisfied . . . . provided further that, prior to the expiration of the Marketing Period, the Parents shall be entitled in their sole discretion, from time to time on written notice to the Company, to extend the duration of the Marketing Period beyond a 20 calendar day period to end on any date on or prior to January 31, 2008 and, if, and only if, the Company consents in its sole discretion following the request of the Parents, to extend the duration of the Marketing Period beyond a 20 calendar day period to end on a date after January 31, 2008 but on or prior to February 28, 2008.”
The bottom-line is that the marketing period expires on Jan 31 unless the parties agree to extend it to Feb 28. And if the financing is not in place by Jan 31 or the Feb 28 extension, section 8.1(i) of the merger agreement provides that it can be terminated:
(i) by the Company if the Parents have failed to consummate the Merger by 5:00 p.m. on the third Business Day after the final day of the Marketing Period and all of the conditions set forth in Section 6 would have been satisfied if the Closing were to have occurred on such date.
The third business day after Jan 31 is Feb 5. The signs are ominous -- there has been no word from the parties on the status of the debt marketing (and no word that it has even begun). Moreover, it does not appear that Reddy Ice has commenced the tender offer for its 10 1/2 percent discount notes as contemplated (if requested by GSO) by section 5.11 the merger agreement. It appears that the only issue left in this deal is whether GSO quietly decides to pay the reverse termination fee of $21 million or assert a MAC to limit its payment and negotiate a lower reverse termination fee. In such a case we may very well have another sort-of MAC dispute in Delaware -- the choice of law and forum of the merger agreement. But I doubt Reddy Ice will pick this fight -- left without a management team and a rapidly declining business Reddy Ice will likely want to move on as other (Acxiom, Harman) have done to restore their business and their market credibility. GSO likely knows this and will play hardball on the fee.
Of course there is also the issue of MS's conduct. In September I would have speculated that MS would not be treating a first-tier private equity firm like Blackstone this way. But as the Fall has progressed and the potential liability increased it is clear that banks are willing to risk even their largest clients to wriggle away from some of these deals.
Final lesson: For M&A lawyers, remember that financing commitment letters as currently drafted can provide financing banks an out if the deal is renegotiated. Consider negotiating for wider language permitting freer amendment of the transactions documents and particularly consider denoting specific amendments which can be made without bank approval (e.g., lowering of the consideration, extension of the marketing period, etc.)
Final Note: For those who enjoy their deal code names, in the merger agreement merger sub is Hockey MergerSub and its parents are Frozen, LLC and HockeyParent. Sort of cute.