Friday, January 8, 2010
Davis Polk has some thoughts based on trends from 2009. Here's the conclusion:
The fundamental tensions in acquisition financings have not changed: buyers and sellers desire deal certainty and unconditional loan commitments, and arrangers desire flexibility to ensure a successful syndication. In 2009, we saw a continuing evolution in the ways that market participants balanced these competing objectives in light of new market realities and reduced access to credit. [T]he "SunGard" limitations have survived but are more carefully negotiated for the individual transaction; and market MACs have not returned, but concerns about changes in market conditions have been addressed through expanded flex provisions. Some of the post-credit crunch technology is likely here to stay: base rate pricing will not be permitted to be less than LIBOR pricing; solvency conditions will continue to be more carefully scrutinized; and arrangers will continue to look for ways to reduce and quantify their exposure. As credit conditions continue to improve, one question will be to what extent buy-side loan market participants’ appetite for yield, and arrangers’ appetite for fees, will outweigh some of the current focus on structural issues. Evidence from late 2009 suggests that some "top of the market" features that were viewed as "off the table" in 2008 (covenant-lite, equity cures) may, under the right circumstances, be fair game for negotiation between borrowers/sponsors and arrangers in 2010. And finding the right balance with respect to 2009 developments such as enhanced market flex and pre-closing securities demands will likely occupy a significant amount of participants’ time and energy. It promises to be an interesting year for arrangers and sponsors alike. Read the whole thing here. MAW
The fundamental tensions in acquisition financings have not changed: buyers and sellers desire deal certainty and unconditional loan commitments, and arrangers desire flexibility to ensure a successful syndication. In 2009, we saw a continuing evolution in the ways that market participants balanced these competing objectives in light of new market realities and reduced access to credit. [T]he "SunGard" limitations have survived but are more carefully negotiated for the individual transaction; and market MACs have not returned, but concerns about changes in market conditions have been addressed through expanded flex provisions. Some of the post-credit crunch technology is likely here to stay: base rate pricing will not be permitted to be less than LIBOR pricing; solvency conditions will continue to be more carefully scrutinized; and arrangers will continue to look for ways to reduce and quantify their exposure. As credit conditions continue to improve, one question will be to what extent buy-side loan market participants’ appetite for yield, and arrangers’ appetite for fees, will outweigh some of the current focus on structural issues. Evidence from late 2009 suggests that some "top of the market" features that were viewed as "off the table" in 2008 (covenant-lite, equity cures) may, under the right circumstances, be fair game for negotiation between borrowers/sponsors and arrangers in 2010. And finding the right balance with respect to 2009 developments such as enhanced market flex and pre-closing securities demands will likely occupy a significant amount of participants’ time and energy. It promises to be an interesting year for arrangers and sponsors alike.
Read the whole thing here.
Monday, January 4, 2010
Is it the new year already?
I have posted on the 3(a)(10) fairness hearing process before. The 3(a)(10) fairness hearing provides a valid exemption for the issuance of stock so that such stock can be freely traded without being registered with the SEC. In the deal context, buyers will sometime rely on a 3(a)(10) fairness hearing in lieu of an S-4 when they are using stock as consideration and the sellers want that stock to be able to trade immediately. The advantages of the fairness hearing are chiefly in the price and speed. When the amount of stock being issued is relatively small and/or parties are looking to avoid a potentially protracted SEC review process, the fairness hearing can be an attractive alternative. This is particularly true in California, which has more experience than most in conducting fairness hearings.
Wednesday, July 29, 2009
Milbank, Tweed reviews the decision of the Delaware Court of Chancery in Police & Fire Ret. Sys. of the City of Detroit v. Bernal, et al. and concludes
[The Delaware Supreme Court’s recent decision in Lyondell Chemical Company v. Ryan] confirmed that directors may aggressively pursue a transaction that they determine in good faith to be beneficial to shareholders, despite the absence of an auction process, so long as their actions are reasonable and aimed at obtaining the best available price for shareholders. However, . . . the language used by the Court in Bernal certainly suggests that when a company has attracted more than one bidder, the best way for a board to satisfy its Revlon duties and maximize shareholder value is to follow a robust sale or auction process that avoids taking actions that could be perceived as favoring one bidder over another. As Court of Chancery decisions in recent years have demonstrated, when only one bidder exists, Delaware Courts are reluctant to upset the deal and risk losing an attractive opportunity for target company shareholders. In contrast, when more than one bidder is involved, Delaware Courts are more comfortable scrutinizing a deal and taking steps to permit an auction to continue.
Get the full story here.
July 29, 2009 in Asset Transactions, Deals, Going-Privates, Leveraged Buy-Outs, Management Buy-Outs, Merger Agreements, Mergers, Private Equity, Takeovers, Transactions | Permalink | Comments (2) | TrackBack (0)
Tuesday, November 6, 2007
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.
Wednesday, October 24, 2007
The Journal has the story here. Cablevision stated that it will take several weeks to announce the final tally. But the clear winners here may be the shareholder plaintiffs' attorneys who will likely still attempt to collect the $29.25 million in fees Cablevision agreed to pay them to settle the shareholders class action over this deal. Here, these advocates settled for $30 million in increased consideration well before a full assessment of the transaction could be made (i.e., it being voted down for insufficient consideration). Cablevision has agreed to pay these fees but hopefully the judge considering this settlement will also take notice of these other facts and read Vice Chancellor Strine's opinion in In re Cox Communications about the perils of such practice under Delaware law.
For my prior posts on this deal see:
The special meeting of stockholders of Cablevision Systems Corporation is to be held today to vote on the third take-private proposal put forth by the Dolan family. For those who wish to attend the meeting is at 11:00 A.M., New York time, at their corporate headquarters building at 1111 Stewart Avenue, Bethpage, New York, 11714. The Dolans are a pretty rich bunch so perhaps there will be some good free food, or maybe even a Knick.
The vote is going to be a close one. Earlier this week, Mario Gabelli's GAMCO stated in an SEC filing that they would exercise appraisal rights with respect to the 19,042,259 shares of Cablevision they own. This represents about 8.25% of the total number of outstanding shares. And the Gabelli's issued their own statement. Cablevision President and CEO James L. Dolan stated:
On behalf of my parents, brothers and sisters, I want to state emphatically that there will be no modification of the family’s accepted offer to acquire Cablevision. We are looking forward to next week’s vote and hope that the transaction is approved, but I’d underscore that I am completely prepared to continue to lead the company into the future as a public company if the transaction is not approved.
For those handicapping the deal, note two very important milestones. Under the merger agreement, the required vote to approve the plan is a majority of the minority of the unaffiliated, public stockholders. But, even if the majority of the minority provision is met, the deal can still fail because it is conditioned on no more than 10% of Cablevision's class A shareholders exercising appraisal rights under Delaware law (DGCL 262). The condition specifically requires that:
The total number of Dissenting Shares shall not exceed 10% of the issued and outstanding shares of Class A Stock immediately prior to the filing of the Merger Certificate . . . .
Under Delaware law appraisal rights need to be exercised prior to the meeting today. So, if the deal is approved, also look in the announcement of the vote for the number of dissenting stockholders. If it is over 10% the Dolan's can walk. In the words of a Yankee -- "it ain't over until it is over"
Wednesday, October 17, 2007
The Dolan's third attempt to take Cablevision private in a $10.6 billion transaction appears to be teetering on the brink. Earlier this week, Mario Gabelli, whose mutual funds own 8.3 percent of Cablevision, wrote to the company to signal that he would vote against the plan. And the Wall Street Journal is reporting today that ClearBridge Advisors LLC, Cablevision's biggest investor with a 14% interest, plans to vote against the deal. Two other large institutional shareholders T Rowe Price and Marathon Asset Management have also indicated their intention to oppose the buyout. Finally, ISS Governance Services, and Proxy Governance Inc have recommended that their clients vote against the transaction. Last night, Cablevision Chief Executive James Dolan released a statement asserting that the Dolan family would not raise its offer.
Under the merger agreement, the required vote to approve the plan is:
Public Stockholders holding more than 50% of the outstanding shares of Class A Stock held by Public Stockholders other than executive officers and directors of the Company and its Subsidiaries . . . .
Public Stockholders excludes "the Family Stockholders, Family LLC, any Subsidiary of Family LLC and the Other Dolan Entities." These terms as defined in the merger agreement are essentially the Dolan family group. So, in order for the proposal to succeed it needs to be approved by a majority of the minority of the unaffiliated, public stockholders. According to the proxy statement this comprises approximately 113 million shares of Cablevision Class A shares. But, even if the majority of the minority provision is met, the deal can still fail because it is conditioned on no more than 10% of Cablevision's class A shareholders exercising appraisal rights under Delaware law (DGCL 262). The condition specifically requires that:
The total number of Dissenting Shares shall not exceed 10% of the issued and outstanding shares of Class A Stock immediately prior to the filing of the Merger Certificate . . . .
In his 13D filing last week, Mr. Gabelli indicated that he was considering exercising these rights. This would mean only 1.7% more of the Class A shares would need to exercise appraisal rights for the condition not to be met. Appraisal rights in Delaware must be exercised prior to the vote on the transaction, and are typically exercised immediately prior to the meeting. Thus, this deal may still fail even if the majority of the minority condition is met. I seriously doubt the Dolan's would want to face the substantial uncertainty of Delaware appraisal proceedings and the significant extra costs it may impose on their acquisition. If the 10% threshold is met, my instincts are that they will walk.
Oh -- and for those waiting for the plaintiffs' lawyers to bail them out of this mess. Don't. At the time this third attempt at a take private was announced, the press release had the following statement:
Lawyers representing shareholders in the pending going private action in Nassau County Supreme Court actively participated in the negotiations, which led to improvements to the financial terms of the transaction as well as significant contractual protections for shareholders. . . . The parties have agreed in principle to the dismissal of the pending going private litigation, subject to approval by the Nassau County Supreme Court.
In the proxy statement, Cablevision stated:
following participation by representatives of the plaintiffs in the Transactions Lawsuits in the negotiations. . . . the Dolan Family Continuing Investors agreed to a $30 million increase in the merger consideration . . . . For their work on behalf of stockholders in the Transactions Lawsuits and in the actions relating to alleged options backdating in the Nassau County Supreme Court and the U.S. District Court for the Eastern District of New York, plaintiffs’ counsel intends to request that the Nassau County Supreme Court award them fees, including expenses, of $29,250,000. The settling defendants have agreed not to challenge the fees and expenses application for this amount. Cablevision has agreed to pay such amount, if approved by the court, following completion of the merger.
This just doesn't seem right. The shareholders plaintiffs' attorneys are receiving $29.25 million in fees for adding (at best) value of $30 million, and settling well before a full assessment of the transction could be made. For more criticism, I'll link to Vice Chancellor Strine's opinion in In re Cox Communications about the perils of such practice under Delaware law and the possibility of selling minority shareholders short, particularly here where the Dolan family has been repeatedly accused of underbidding for Cablevision.
Tuesday, July 10, 2007
Lear Corporation, the automotive seating, electronics and electrical distribution systems manufacturer, yesterday announced that it had agreed to amend its merger agreement with Carl Icahn's American Real Estate Partners, L.P. to increase AREP's offer price for shares of Lear common stock from $36 to $37.25 per share. The $100 million increase in aggregate consideration paid values Lear at approximately $2.9 billion.
The Lear management is participating in the Icahn bid, and have entered into new employment agreements to continue their positions with the post-transaction entity. And the transaction had a go-shop provision which did not result in any other bidders, perhaps due to bidder wariness at this management participation. Nonetheless, shareholders in Lear have been actively opposed to the Icahn bid claiming it significantly undervalues the company. The leader of this charge has been Pzena investment management which yesterday again asserted its opposition to the bid according to Reuters. Pzena maintains that Lear is worth $55-$60 per share. The California State Teachers Retirement System and Institutional Shareholder Services were also opposed to Icahn's $36 offer.
The interesting twist here is that, in connection with the increase, Lear agreed to pay AREP $12.5 million in cash as well as 335,570 shares of Lear common stock (valued at about $12.35 million) if Lear's stockholders do not approve the merger by July 16, 2007. The provision is unusual; bidders are usually lucky to get their expenses in a deal that is not approved by shareholders. And coming on the heels of shareholder opposition and the Delaware court's recent intervention in Lear's sale process in In re Lear Corporation Shareholders Litigation, 2007 WL 1732588 (Del. Ch., June 15, 2007), the move is a bit cheeky (to use the English expression). Still, in a world where the Lear board had conducted the sale process above board this fee would be a legitimate one. It would be justifiable to secure an increase in the consideration paid for a deal that the board reasonably believed would now be approved by its shareholders. The only problem is that these considerations appear absent here.
Monday, June 25, 2007
On June 14, 2007, Vice Chancellor Strine issued an opinion in In re Topps Shareholders Litigation, 2007 WL 1732586 (Del.Ch. June 14, 2007). Vice Chancellor Strine, a well-respected member of the Delaware Chancery Court, preliminarily enjoined the shareholders meeting of The Topps Company to vote on Topps´s agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash. The Tornante Company is headed by former Disney CEO Michael Eisner. Topps is also subject to a competing proposal to be acquired by The Upper Deck Company for $416 million offer or $10.75 per share. (For a history of this transaction so far, see my prior posts The Battle for Topps and Trading Baseball Card Companies).
In his opinion, Vice Chancellor Strine issued a preliminary injunction against the holding of a vote on the Eisner acquisition agreement until such time as:
(1) the Topps board discloses several material facts not contained in the corporation's “Proxy Statement,” including facts regarding Eisner's assurances that he would retain existing management after the Merger; and (2) Upper Deck is released from the standstill for purposes of: (a) publicly commenting on its negotiations with Topps; and (b) making a non-coercive tender offer on conditions as favorable or more favorable than those it has offered to the Topps board.
The opinion is 67 pages and worth a full read for the nuggets it contains, but I want to point out two important parts:
Go-Shops. In the opinion, Vice Chancellor Strine broadly endorses the use of ¨go-shops¨ as a way to meet Revlon´s requirement that in a sale the board must take reasonable measures to ensure that the stockholders receive the highest value reasonably attainable. Here, the Eisner merger agreement had contained a 40-day "go-shop" period with a lower 3.0% termination fee during the "go-shop" period and matching rights for the Eisner group. Thereafter, the fee rose to 4.6%. Vice Chancellor Strine stated:
Most important, I do not believe that the substantive terms of the Merger Agreement suggest an unreasonable approach to value maximization. . . . Critical, of course, to my determination is that the Topps board recognized that they had not done a pre-signing market check. Therefore, they secured a 40-day Go Shop Period and the right to continue discussions with any bidder arising during that time who was deemed by the board likely to make a Superior Proposal. Furthermore, the advantage given to Eisner over later arriving bidders is difficult to see as unreasonable. He was given a match right, a useful deal protection for him, but one that has frequently been overcome in other real-world situations. Likewise, the termination fee and expense reimbursement he was to receive if Topps terminated and accepted another deal-an eventuality more likely to occur after the Go Shop Period expired than during it-was around 4.3% of the total deal value. Although this is a bit high in percentage terms, it includes Eisner's expenses, and therefore can be explained by the relatively small size of the deal. . . . Although a target might desire a longer Go Shop Period or a lower break fee, the deal protections the Topps board agreed to in the Merger Agreement seem to have left reasonable room for an effective post-signing market check. For 40 days, the Topps board could shop like Paris Hilton. Even after the Go Shop Period expired, the Topps board could entertain an unsolicited bid, and, subject to Eisner's match right, accept a Superior Proposal. The 40-day Go Shop Period and this later right work together . . . .In finding that this approach to value maximization was likely a reasonable one, I also take into account the potential utility of having the proverbial bird in hand.
The important point here is that Strine is merely endorsing the use of a ¨go-shop¨as one way to satisfy Revlon duties. But it does not appear that he is going so far as to suggest that this is a requirement that a "go-shop" be included any time there has not been a full auction in advance of signing a merger agreement when Revlon duties apply. However, as ¨go-shops¨become increasingly common, it may be likely that at some point the Delaware courts more firmly embrace their use under Revlon (though this is my own conjecture).
Standstills. Vice Chancellor Strine found that the Topps Board had violated its Revlon duties by favoring the Eisner bid by, among other things, continuing to require Upper Deck to honor its standstill agreement. In making this ruling, Strine emphasized that it is important for a board which has not previously engaged in a shopping process to reserve the right to waive a standstill if its fiduciary duties require. However, Strine also noted that standstills provide "leverage to extract concessions from the parties who seek to make a bid" and in a footnote contemplated that in certain circumstances such as a full auction it may be appropriate for a target to agree not to waive standstills for the losing bidders. Strine then held that the Topps board´s refusal to waive Upper Deck´s standstill likely was a breach of its Revlon duties since the:
refusal not only keeps the stockholders from having the chance to accept a potentially more attractive higher priced deal, it keeps them in the dark about Upper Deck's version of important events, and it keeps Upper Deck from obtaining antitrust clearance, because it cannot begin the process without either a signed merger agreement or a formal tender offer.
The opinion is also notable as another instance where a Delaware court found the proxy disclosure concerning a financial advisor´s fairness opinion to be deficient. I´ll post more on this point later in the week.
The Topps opinion was followed the next day by In re Lear Corporation Shareholders Litigation, 2007 WL 1732588 (Del. Ch., June 15, 2007). Here, the Chancery Court also granted preliminary injunctive relief because the Lear ¨proxy statement [did] not disclose that shortly before Icahn expressed an interest in making a going private offer, the CEO had asked the Lear board to change his employment arrangements to allow him to cash in his retirement benefits while continuing to run the company.¨ However, the Court refused to grant injunctive relief on the plaintiffs´other claims stating that ¨the Lear Special Committee made an infelicitous decision to permit the CEO to negotiate the merger terms outside the presence of Special Committee supervision, [but] there is no evidence that that decision adversely affected the overall reasonableness of the board's efforts to secure the highest possible value.¨
Thursday, June 7, 2007
Biomet, Inc., the orthopedic company, announced today that it had agreed to an increased offer from a private equity consortium to acquire Biomet for $46.00 per share in cash, for an equity value of $11.4 billion. The increase comes on the heels of a recommendation by Institutional Shareholder Services that Biomet shareholders vote against the transaction. 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 [previous] $44 offer price." (For more on this recommendation, see my previous blog post ISS Recommends Against Biomet Deal)
In connection with the increase, Biomet also revised the structure of the acquisition from a merger to a tender offer. The amended merger agreement now requires the consortium – which includes affiliates of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co. and TPG – to commence a tender offer on or before June 14, 2007, to acquire all of the outstanding shares of Biomet’s common stock. Biomet previously planned to have a shareholders meeting to vote on the merger agreement on June 8, 2007. That meeting is now canceled.
Per the Biomet Certificate of Incorporation, a merger 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, this would have meant that any failure to vote and broker non-votes would effectively have been votes against the transaction.
In converting to a tender offer structure Biomet has fiddled with the minimum condition. According to Biomet:
Completion of the tender offer is subject to the condition that at least 75% of the Biomet common shares have been tendered in the offer – the same percentage approval requirement as with the previous merger structure. The amended merger agreement permits the investor group to revise the condition regarding minimum acceptance of the tender offer to decrease the minimum acceptance threshold to a number that, together with shares whose holders have agreed to vote to approve the second-step merger, represents at least 75% of the Biomet common shares.
The second sentence is a bit unclear to me and Biomet has yet to file the amended agreement. But it likely means that the private equity group and Biomet agreed to the provision in order to obtain agreements to vote from management in connection with the tender offer. If this is the intention, I'm still not sure why there was a need to convert to a tender offer -- the transaction could have closed quicker had Biomet simply postponed or adjourned the shareholder meeting and management could have also voted for the transaction then. But my hunch is that in this language there is an effective lowering of the required shareholder approvals. I'll have more once the amended agreement is actually filed.
Note to Biomet shareholders: there are no dissenter's rights available under Indiana law for this transaction (a different result than in Delaware; Biomet is organized under the laws of Indiana).
Tuesday, June 5, 2007
The shareholders of OSI Restaurant Partners yesterday approved the amended merger agreement for the company to be acquired by an investor group consisting of Bain Capital Partners, LLC, Catterton Management Company, LLC, OSI's founders and its executive management. OSI did not disclose the exact vote in its press release announcing the results, but it has been reported that the merger agreement would not have been approved had OSI not acted to lower the threshold required vote a few weeks ago. OSI now expects the transaction to now close on June 19, 2007. Presumably, the extra time is to rearrange the financing for the transaction.
I've written a lot on this deal (see posts Bloomin' Onion, Bloomin' Onion (Redux), Bloomin' Onion Part III, Free Food! OSI Restaurant Partners Shareholder Meeting Today, and Games People Play). I was also quoted yesterday in a piece in the St. Petersburg Times (OSI is headquartered there) where I stated that this deal is "an interesting case study in management buyouts with private equity and how the process can be, for lack of a better word, manipulated . . . ." More specifically, I believe that management's undue influence on the OSI sale process left the OSI shareholders with a Hobson's choice -- giving shareholders no other option than to accept this bid. The St. Petersburg article chronicles management's impropriety here, and its effect is also illustrated by Institutional Shareholder Services statement recommending the transaction:
We recognize the shortcomings in the process and the conflicts of interest of management and founders . . . . but given the downside of a failed transaction resulting in a loss of premium and likely continued deterioration of fundamentals, support for the transaction is warranted.
Hopefully, OSI was at least nice enough to serve their soon to be former shareholders some tasty, free food at the meeting yesterday. They deserve that at least.
Avaya yesterday filed the merger agreement with respect to its acquisition by Silver Lake and TPG Capital for approximately $8.2 billion or $17.50 per common share. The deal terms appear rather standard for a private equity buy-out. Avaya had previously announced that the agreement contained a fifty day go-shop; in what is becoming the norm, the agreement also sets a staggered break fee of $80 million during the go-shop period and $250 million thereafter. For more on the transaction, see the Marketwatch article here.
The deal is a nice Illustration of the dynamic nature of our capital market and the effect of a thick M&A market. Avaya was spun-off from Lucent. Lucent has subsequently merged with Alcatel to form Alcatel Lucent. And Lucent was itself was spun off by AT&T -- AT&T has itself been acquired by SBC which took on AT&T's name.
Monday, June 4, 2007
OSI Restaurant Partners, Inc., owner of the Outback Steakhouse and Cheeseburger in Paradise restaurant chains, will tomorrow hold its shareholder vote with respect to the $3.2 billion offer to be acquired by a consortium led by Bain Capital Partners, LLC and Catterton Management Company, LLC.
This buy-out has been problematical from the start. OSI's founders, CEO, CFO, COO and Chief Legal Officer are all involved in the buy-out and at times have acted to influence the process. In addition, the buy-out has been criticized for its low premium and OSI has postponed its meeting three times in order to round up enough shareholder support. With the last post-ponement, OSI announced that the buy-out group had agreed to increase the consideration offered to $41.15 up from $40.00 per share.
In connection with the announcement, OSI also agreed with the buy-out group to lower the threshold vote required to approve the merger. The original vote per the proxy statement required approval by:
a majority of the outstanding shares of our common stock entitled to vote at the special meeting vote for the adoption of the Merger Agreement without consideration as to the vote of any shares held by the OSI Investors.
The revised vote per the merger agreement amendment now requires approval by a majority of the outstanding shares, the required threshold under Delaware law and:
the affirmative vote of the holders, as of the record date, of a majority of the number of shares of Company Common Stock held by holders that are not Participating Holders, voting together as a single class, to adopt the Agreement and the Merger.
OSI Investors and Participating Holders in the above two clauses are the same group: the executive officers and founders of OSI who are participating in the buy-out. Careful readers here will note that the change in language above reduces the required vote for approval of non-participating shareholders from a majority of all outstanding shares to a majority of the minority shares. The St. Petersburg Times reports that this change has the effect of lowering the number of required votes to approve the transaction by 4.4 million (from 37.8-million of the 66.8-million shares not owned by OSI participants to 33.4-million votes plus one).
As noted, Delaware only requires an absolute majority, so the required vote in either case is higher. OSI is requiring this higher vote due to the requisites of Delaware law which require a majority of the minority of OSI shareholders to insulate the OSI participants and the Board from liability by waiving management's conflict. So, both votes still preserve this majority of the minority aspect (a smart move given managements conflicted metaling in the buy-out process). But, the special committee's agreement to lower the vote is a dubious one at best, and though probably acceptable under Delaware law, is further evidence of the problems which can arise with management buy-outs generally and the board process here in particular.
Wednesday, May 30, 2007
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.
Friday, May 25, 2007
The Topps Company, Inc. yesterday announced that it had received a $416 million offer from The Upper Deck Company, to acquire Topps for a price of $10.75 per share. Both Topps and Upper Deck are in the trading card business; Topps also makes Bazooka bubble gum. Topps currently has an agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash. The Tornante Company is headed by former Disney CEO Michael Eisner.
The Tornante led bid was opposed by three of the 10 members of Topps's board and hedge fund Crescendo Partners II, which says the offer undervalues the company. Topps initial agreement had a 40-day go-shop provision, and Topps disclosed in its press release that it had rejected an indication of interest previously made by Upper Deck during that time period. Topps had previously identified Upper Deck in its proxy statement for the transaction only as a competitor. The disclosure of Topps on this point is actually a bit funny:
On April 12, 2007, prior to the expiration of the go-shop period, one of the potential go-shop bidders, who is the principal competitor of our entertainment business, submitted a non-binding indication of interest to acquire Topps for $10.75 per share, in cash. Lehman Brothers called this interested party on the first day of the go-shop period, and numerous times during this period, for the purpose of soliciting and/or assisting them with the development of their bid for Topps. Lehman Brothers’ calls were infrequently returned . . . . .
One hopes it wasn't because of this that a deal was not reached. Topps response to yesterday's offer was similarly tepid:
[Topps's] Board of Directors noted that there are material outstanding issues associated with Upper Deck's latest indication of interest, including, but not limited to, the availability of committed financing for the transaction, the completion of a due diligence review of the Company by Upper Deck, Upper Deck's continued unwillingness to sufficiently assume the risk associated with a failure to obtain the requisite antitrust approval and Upper Deck's continued insistence on limiting its liability under any definitive agreement. Upper Deck's present indication of interest was accompanied by a highly conditional "highly confident" letter from a commercial bank.
I'm usually skeptical of private equity buy-outs and target attempts to put the fix in on a chosen acquirer. This is particularly true here where both board members and shareholders have complained of the offer price. Still, Topps may be justified in its own skepticism. A deal between Topps and Upper Deck apparently has substantial antitrust risk. Upper Deck's bid may therefore not be a "true" bid but rather an attempt for Upper Deck to gain access to its main rival's confidential information. In addition, a deal for Topps by Upper Deck would apparently require approval by Major League Baseball. Moreover, the financing for this deal does appear to be uncertain. In this day of cheap and easy credit the best Upper Deck could obtain from its lenders was a "highly" confident letter. This is a 1980's invention of Michael Milken; bankers issue these letters for deals that are riskier and financing uncertain. Instead of a firm commitment letter, they therefore state they are "highly" confident that financing can be arranged. So, if Topps has a firm deal on the table the extra money being offered here by Upper Deck might not be worth it given the deal completion risks and possible harm to Topps if it permits a competitor to review its confidential information. Still, Upper Deck's offer is a nice negotiating tool with the current buy-out group even if a deal is not possible. Topps shares rose 48 cents, and closed at $10.26 yesterday, so the market presumably agrees.
OSI Restaurant Partners is holding its three times postponed shareholder meeting today. According to OSI's press release, the purpose of the meeting is only to adjourn it to June 5, 2007 in order to provide OSI shareholders more time to consider an increased offer from a consortium led by Bain Capital Partners, LLC and Catterton Management Company, LLC. The buy-out group on Tuesday announced that it will now pay $41.15 per share in cash up from $40.00 per share.
I've blogged before about this deal and management's inordinate and inappropriate involvement in the process. OSI's founders, CEO, CFO, COO and Chief Legal Officer are all participating in the deal. I believe that their undue influence on the process and participation has given shareholders a Hobson's choice: no deal at all or a less than full premium in the private equity/management buy-out being offered. Nonetheless, analysts believe that the latest increase offered by the buy-out group should be enough to gain shareholder approval. A substantial number of OSI's shares are now held by arbitrageurs, and Tuesday's 3% raise is a nice return on an annualized basis for them.
For aggrieved OSI shareholders, I note that dissenters' rights are available if the transaction goes through and you don't vote for it. Additionally, another way to earn some extra return, would be to attend the next two meetings. These meetings typically have a spread of food and refreshments, and since OSI is a restaurant company it might be tastier and more copious than normal. I make no promises about this, but if there is food it would be free for shareholders, so the more you eat the more money you can put into your pocket (actually stomach). Not to mention you can exercise your shareholder rights. Today's meeting time and place for those OSI shareholders hungry and/or interested is:
Friday, May 25, 2007, at 11:00 a.m., Eastern Daylight Time, at A La Carte Event Pavilion, 4050-B Dana Shores Drive, Tampa, Florida 33634.
Let me know if it was worth the trip and I'll make another post on June 5 as a reminder, perhaps including the menu from this meeting.
Update: The meeting today voted to adjourn to June 5.
Monday, May 21, 2007
Alltel Corp., the cell-phone network operator, today announced that it had agreed to be acquired by TPG Capital and GS Capital Partners, in a transaction valued at approximately $27.5 billion. TPG Capital and GSCP will acquire Alltel in a merger transaction paying $71.50 per share in cash.
The deal has already been criticized for its small premium, and the press release offers few details of the transaction. But it appears that there is no "go-shop", break fees have yet to be disclosed and it is uncertain if there is any financing condition on the deal. The absence of a "go-shop" is a bit puzzling, it could have at least provided the buyers some aesthetic cover particularly since it has been reported that Alltel has been throughly shopped over the past few months and no buyers have emerged. I'll have more once the merger agreement is filed: it looks like Alltel is going to wait out the two business days they have to file. In particular, Alltel CEO Scott Ford has already agreed to continue as CEO with the private company and so it will be interesting to see his arrangements.
Monday, May 14, 2007
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.