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.
Thursday, May 24, 2007
The rumors yesterday that BHP Billition was to be a white night for Alcan with respect to Alcoa's pending $28 billion offer to acquire Alcan, had me thinking about M&A nirvana: the Tri Listed Company. BHP Billion is a dual listed company. A DLC structure is a virtual merger structure utilized in cross-border transactions. The companies do not actually effect an acquisition of one another, but instead enter into an unbelievably complex set of agreements in which they agree to equalize their shares, run their operations collectively and share equally in profits, losses, dividends and any liquidation. In the case of BHP Billiton, this structure involves Billiton, an English company, and BHP, and Australian company.
If BHP Billiton were to acquire Alcan, it could do so by adding a third leg with Alcan and forming the world's first tri listed company. The agreements to do this would reach new levels of complexity (hence my thoughts of M&A nirvana), and the operation of the company could become a bit complex to say the least. For example, the shareholder meeting for the company would have to last almost 24 hours in order to encompass meetings on three continents for three companies. But the structure is feasible. Thomson, a Canadian company, and Reuters, an English company, showed its viability by recently agreeing to combine using this structure in the first English/Canadian DLC (see my blog post on this here). The Australian element should be able to fit within this framework.
And a BHP Billiton acquisition through a TLC would actually make good sense. It would assuage issues of Canadian nationalism by maintaining the presence of Alcan in Canada. It would preserve beneficial dividend tax treatment for Canadian shareholders and establish a strong Canadian shareholder base for the TLC. It would also avoid triggering any existent change of control provisions in any joint venture agreements that Alcan might have. Finally, an acquisition in this form would ensure that certain valuable hydroelectric, power and other rights and agreements that the Quebec government has granted to Alcan would not be terminated, an event Alcan asserts would happen with a true acquisition.
The above calculus would also apply if Rio Tinto decides to bid for Alcan. Rio Tinto like BHP Billiton is also a DLC involving an English company and an Australian one.
If BHP Billiton and Alcan (or Rio Tinto and Alcan) agreed to such a structure it would permit Alcoa to counter with its own DLC proposal thereby raising further complexity to this takeover battle. And if Alcoa succeeded this would also be a milestone as there has yet to be a true U.S. DLC. BP came close in 1998 with Amoco, but the SEC refused to allow pooling accounting and so it was at the last minute converted into a true acquisition. The closest is Carnival, a Panamanian and English DLC. Carnival's Panamanian company has equivalent U.S. corporate governance provisions and is treated as a U.S. tax-domiciled entity.
Final Note: Legal geeks should note that the SEC recently revised its position on the requirement to register the shares of newly-formed DLCs (or presumably TLCs). Historically, the SEC did not require a new registration statement to be filed as the shares of both companies remained outstanding and there was no triggering offering. But, with the Carnival DLC the SEC took the position that the changes in the character of the securities of the company were so fundamental that a registration statement is now required with respect to both sets of shares of the DLC. So, a BHP Billiton/Alcan tie-up would require reregistration of the shares of each of the three companies with the SEC unless U.S. holders constituted 10% or less of the company's shareholder base.
Wednesday, May 23, 2007
Alcan, Inc. yesterday filed with the SEC its response to Alcoa's $27 billion unsolicited offer to acquire the company. Alcan disclosed in the response that its board unanimously recommended its shareholders reject the Alcoa offer calling it "inadequate in multiple respects." The response document (called a Directors' Circular) is a fine piece of work and the financial sections a model for these things; these were presumably prepared by Alcan's investment bankers JPMorgan Securities Inc., Morgan Stanley, RBC Capital Markets Inc., and UBS Securities LLC. Two things caught my eye in this response:
1. Poison Pill. Alcan is taking the position that Alcoa's offer does not meet the definition of “Permitted Bid” under its shareholder rights plan (also known as a poison pill). To qualify as a “Permitted Bid” under the rights plan and avoiding triggering it, the Alcoa offer must contain an irrevocable and unqualified provision to the effect that no Alcan common shares may be taken up or paid for prior to the close of business on a day which is not less than 60 days following the date of the offer. Alcan is asserting that, "[t]he Alcoa Offer, while open for more than 60 days, does not contain an irrevocable and unqualified no take-up provision in respect of the first 60-day period. The Alcoa Offer is therefore not a 'Permitted Bid' under the Rights Plan." Alcoa's response is likely to amend its offer to respond to Alcan's assertion, so Alcan's position will only buy it a few weeks of time. [NB. The Alcan rights plan is different than U.S. ones in that it permits a bid to proceed without triggering the rights plan on the above basis; this is a requirement of Canadian securities regulators who permit a Canadian public company to employ a rights plan only to gain enough time for their shareholders to consider an offer, and after a period of 40-60 days force the company to redeem the rights or terminate the plan].
2. Inadequacy Opinion. Morgan Stanley has delivered an opinion to the Alcan board that the "the consideration to be received by holders of Alcan Common Shares pursuant to the Alcoa Offer is inadequate from a financial point of view to such holders." An inadequacy opinion is the opposite of a fairness opinion. It is often used outside the United States by targets fending off unsolicited bids. But you don't often see them here. One reason offered by practitioners for this is that by stating the price is inadequate, a board legally undermines a "Just Say No Defense." By rejecting an an offer based on price, a board implies that this was determinate in its decision and there is consequently a higher price at which it will agree to an acquisition. I'm not sure about the concerns, the Delaware courts last invalidated a "Just Say No Defense" in 1988 in Interco and that case has dubious validity at best in light of subsequent Delaware decisions (see City Capital Associates v. Interco Inc., 551 A.2d 787 (Del.Ch.1988)). Nonetheless, in Canada a "Just Say No" defense is not permitted, takeover defenses can only be used to provide a limited amount of additional time for shareholders to consider a bid. The Alcan board therefore did not face the same calculus a Delaware company does.
By the way, inadequacy opinions have the same problems as fairness opinions. Since financal valuation is a subjective exercise and there are no set agreed guidelines or practices for it, there is substantial leeway for investment banks to arrive at their clients desired conclusion. This is particularly true in light of the typical investment bank contingency-based fee arrangement. Here, the contingency component may not have been an issue as Morgan is aiding the defense of the company and not advising on its acquisition, but still Morgan did not disclose its fee structure in the Directors' Circular. (The SEC will oftentimes force a target to correct this omission).
Wednesday, May 16, 2007
The Financial Times is reporting that the Dutch Supreme Court is expediting its consideration of ABN Amro's appeal of a lower court decision halting the $21 billion sale of its subsidiary LaSalle Bank to Bank of America until an ABN Amro shareholder vote is held on the matter. According to the FT:
The court could complete its deliberations "by the end of June or early July", far quicker than expected, said a person familiar with the matter. The most optimistic estimates had suggested the process would take three or four months.
It is at these times that one must extol the virtues of the Delaware and other U.S. courts for their efficiency and responsiveness. If the matter arose in this country, any appeal would likely have been heard in weeks and certainly not months. In the interim, the competing bids for both ABN Amro and LaSalle are in limbo and the operations of ABN Amro, including LaSalle Bank will be run under the handicap of an uncertain future.
Tuesday, May 15, 2007
On Monday, an analyst at Prudential Equity Group, John Tumazos, sketched out the benefits of a reverse takeover by Alcan of Alcoa. Alcoa has commenced an unsolicited offer to acquire Alcan in a transaction valued at $33 billion. A reverse takeover, known as the pacman defense, whereby a target turns the tables on an acquirer and offers to acquire it instead, has not been used in the United States since the 1980s (most notably in the Bendix/Martin Marietta wars) [correction: a reader pointed out that in 2000 Chesapeake Corp. employed a successful pacman defense against Shorewood Corp.; details of that transaction are here). As reported by DealBook, the analyst highlighted the political benefits of a reverse-takeover; it will increase business by relocating the combined company outside the United States thereby stemming anti-American sentiment against Alcoa in other countries and be more politically palatable to the Quebec authorities where Alcan is headquartered and based. And so it goes . . . .
The analyst may have been a bit too hasty in his calculus as to the balance of local politics. Aloca is organized under the laws of the state of Pennsylvania. Pennsylvania has the strictest anti-takeover laws in the country, including a constituency statute, business combination statute, control share acquisition statute, fair price statute, and employee severance statute. For a good description of the Pennsylvania law and each of these provisions, see the article by William G. Lawlor, Peter D. Cripps and Ian A. Hartmann of Dechert LLP, Doing Public Deals in Pennsylvania: Minesweeper Required. Alcoa had the option to opt-out of these anti-takeover provisions when they were first enacted in 1990, but chose not to. The company also has in its Certificate of Incorporation an anti-greenmail provision. Although Alcoa doesn't currently have a poison pill, it could adopt one if Alcan made an offer. Pennsylvania courts, unlike courts in Delaware and New York, have allowed targets to utilize no-hand provision in these pills. The Pennsylvania courts also haven't yet considered the validity of a dead hand provision. Any pill adopted by Alcoa to fend off an Alcan bid would therefore also likely contain these powerful anti-takeover devices. Moreover, the Pennsylvania state legislature has been more than willing to change its laws to help a Pennsylvania organized company fight off an unwanted suitor when its current laws appeared insufficiently protective (most recently it acted to protect Sovereign Bancorp).
The effect of all of this would be to permit Alcoa to effectively undertake a "Just Say No" defense to any Alcan pacman bid. And while shareholder pressure may, if Alcan's bid goes high enough, force the Alcoa board to accept an offer this will likely take time and more consideration than Alcan, which is slightly smaller than Alcoa, can offer. And Alcoa, also has a staggered board making a proxy contest a multi-year affair (and still facing the problem of Pennsylvania's antitakeover laws making any proxy contest win moot). Compare this with Quebec law which permits Alcan to keep its poison pill for only a short period of time and has similar time limitations on other explicit anti-takeover maneuvers (see my previous blog post on this here). In light of the comparative advantage of Alcoa, a pacman would have a small chance of succeeding against any protracted resistance by Alcoa and before Alcoa could complete its offer for Alcan.
Addendum: Shares of Pennsylvania companies which have not opted out of the Pennsylvania anti-takeover statutes have been found to trade at a discount to their market comparables. For more on this point, see P.R. Chandy et al., The Shareholder Wealth Effects of the Pennsylvania Fourth Generation Anti-takeover Law, 32 Am. Bus. L. J. 399 (1995).
Monday, May 14, 2007
ABN Amro yesterday released a copy of the RBS consortium's inter-conditional offer to acquire ABN Amro for approximately $98 billion and ABN Amro's subsidiary, LaSalle Bank, for $24.5 billion. The disclosure was made at the prompting of the Autoriteit Financiële Markten, the Dutch regulator, and its inquiries into the propriety of ABN Amro's rejection of the RBS consortium's offer.
I link to a copy of the full RBS consortium offer as disclosed by ABN Amro here (RBS also released similar documents in response to a virtually identical request by the AMF). The first link also includes the subsequent correspondence between ABN Amro and the consortium, as well as the correspondence between their lawyers and bankers. It is fascinating reading. Notably, it includes ABN Amro's response to the RBS offer: a memo of 31 issues, questions and requests for additional information by ABN Amro which it requested be answered satisfactorily before it would even consider the bid. Reading the ABN Amro response, it is hard to make any other conclusion than that ABN Amro was framing the correspondence to justify rejection of the RBS offer. Although to be fair, RBS wasn't terribly cooperative in its subsequent response either stating that it had already supplied all needed information. Also notable is the clear lack of a financing condition in the RBS-group offers, a blow to ABN Amro's repeated attempts to justify its rejection on the lack of a clear financing commitment by the consortium. In other related news, the CEO of ABN Amro, Rijkman Groenink also yesterday withdrew his nomination for a board seat at Royal Dutch Shell in order to devote his full attentions to ABN Amro. Given what has occurred thus far, this may not be best news for ABN Amro shareholders.
Wednesday, April 25, 2007
ABN Amro yesterday filed with the SEC the agreement with respect to Bank of America's $21 billion dollar purchase of ABN Amro's U.S. subsidiary, LaSalle Bank.
Per the terms of the agreement (and Bank of America counsel Wachtell's fine negotiating skills), the LaSalle Bank contract contains a "calendar" 14 day "go shop" clause which continues until 11:59 PM New York time on May 6th, 2007. Under that clause an alternative bidder has 14 days to execute a definitive sales agreement on superior terms for cash and not subject to a financing condition. This is followed by a 5 business day right for Bank of America to match the new bidder's superior proposal. There is a $200 million termination fee to be paid by ABN Amro if Bank of America does not match.
This short time fuse almost certainly forestalls other bids for LaSalle Bank. And, as I speculated it would do on Monday, through an almost certain sale of LaSalle Bank ABN Amro has implemented a big roadblock to the $103.75 billion cash and RBS shares bid for ABN Amro announced today by the RBS consortium (Fortis, RBS and Santander). This competing bid is conditioned on ABN Amro having taken such steps as may be required to ensure that LaSalle Bank remains within the ABN Amro group. This is all just wrong. Nonetheless, under Netherlands law no ABN Amro shareholder vote here is required for the LaSalle Bank sale because it consitutes less than 30% of ABN Amro's assets, and Netherlands law does not otherwise prohibit a "crown-jewel" lock-up of this nature. For those who are wondering, it is questionable whether Delaware in a similar situation would permit these machinations.