M & A Law Prof Blog

WGM on Mitigating Fraudulent Conveyance Risk

When an over-leveraged LBO turns out to have an unsustainable capital structure, creditors in an ensuing bankruptcy or other restructuring MAY seek to recover payments made to selling shareholders in the LBO as fraudulent conveyances.  In this client alert, WGM describes what selling sponsors can do to mitigate the risk of successful post-LBO fraudulent conveyance claims.

MAW 

The Death of a FUN Deal

As predicted by our friend the Deal Professor, Apollo Management’s proposed $2.4 billion leveraged buyout of Cedar Fair, the amusement park operator, has died. This deal and its death are important for two reasons.  One, it's yet another confirmation that the LBO market is going to continue to be slow at least in the next year.  Second, the deal represents the dangers that boards face in moving forward with M&A transactions. The two sides terminated the deal, with Cedar Fair agreeing to pay Apollo $6.5 million for its expenses, in advance of a scheduled April 8th unitholders meeting since it was clear that the deal would be voted down by Cedar Fair’s unhappy investors.  This is a big blow to the Cedar Fair board that just months ago unanimously approved the transaction and even got two fairness opinions (for which they paid $3 million in total) to support their recommendation.  Knowing that the company is now in a vulnerable position, in connection with terminating the Apollo deal, the board also adopted a 3 year poison pill with a 20% trigger. 

The next few months will likely not be FUN for the Cedar Fair board and management.  The company has a heavy debt load which it will need to refinance.  In addition, the company’s next scheduled unitholders meeting is on June 7th.  The company’s investors, some of whom tried to hold a meeting on the street when the company postponed the initial meeting to vote on the Apollo deal, are really unhappy with the board and management.  I expect that there will be a big push to replace at least some of these people.  The Cedar Fair board and management should brace themselves for a wild ride in the next few months.  I suspect that the Cedar Fair investors are not going to be distracted by all the fun they can have on the company’s two new roller coasters, the Intimidator305, a 305-foot-tall roller coaster at Kings Dominion, and Intimidator, a 232-foot-tall roller coaster at Carowinds.

In the meantime, I look forward to following the fallout from this deal.  Busted deals may not be fun for the players, but they do provide some amusement for law profs.

- AA

Looking for a White Knight

The once-venerated fashion label, Emanuel Ungaro, is looking for a white knight to buy the company.  According to both the business press and the NY Post, Lindsay Lohan, Ungaro’s short-lived “artistic adviser” “may have been the straw that broke the fashion house's bank.”  It appears that Ungaro, like many other companies, has took on an enormous amount of debt and now is courting suitors and cutting costs to pay back this debt.  Ungaro’s business problems and its lack of fashion vision, may mean that no white knight will be willing to swoop in and rescue the company. 

Ungaro's problems present just one example of the enormous role that existing debt plays in M&A deals.  In another high profile debt-driven deal, the WSJ reported yesterdaythat the debtors of MGM, the iconic Hollywood studio, have thrown a wrench in the company’s plan to sell itself as part of efforts to pay off the billions of debt that it took on in connection with its 2004 leveraged buyout.  Given the private equity LBO boom of the 2004-2007 period, we are definitely not going to see the last of companies suffering under a heavy debt load and the influence of existing debt holders in acquisition transactions.  Companies may find a white knight, but that knight may need to court not just equity holders, but also existing debt holders.

- AA

More on NACCO Industries from Davis Polk

Brian recently posted about the NACCO Industries case (here), As he reminds us:

NACCO reminds us that if you are going to terminate a merger agreement, you better comply with all its provisions.  If you don't, if you perhaps willfully delay your notice to the buyer about a competing proposal, you might not be able to terminate without breaching.  And, if you breach, your damages will be contract damages and not limited by the termination fee provision.  Remember, you only get the benefit of the termination fee if you terminate in accordance with the terms of the agreement.  Willfully breaching by not providing "prompt notice" potentially leaves a seller exposed for expectancy damages.

Davis Polk has just issued this client alert, drawing a few more lessons from the case.  Here's a sample:

A recent Delaware Chancery Court decision raises the stakes for faulty compliance with Section 13(d) filings, holding that a jilted merger partner in a deal-jump situation may proceed with a common law fraud claim for damages against the topping bidder based on its misleading Schedule 13D disclosures.  NACCO Industries, Inc. v. Applica Inc., No. 2541-VCL (Del. Ch. Dec 22, 2009).  The decision, which holds that NACCO Industries may proceed with numerous claims arising out of its failed 2006 merger with Applica Incorporated, also serves as a cautionary reminder to both buyers and sellers that failure to comply with a "no-shop" provision in a merger agreement not only exposes the target to damages for breach of contract, but in certain circumstances can also open the topping bidder to claims of tortious interference.

MAW

Acquisition Financing in 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

Just in time for the holidays

The M&A Market Trends Subcommittee of the ABA just announced that the 2009 Private Target Deal Points Study is now available to Subcommittee members here.   Highlights of the 2009 Study were presented last month at an ABA telecast on "M&A Negotiation Trends: Insights from the 2009 Deal Points Study on Private Targets." The MP3 is available here. 

If you want full access to this and the many other valuable studies published by the subcommittee, you must be (or know really well)  an active member. You can directly sign up for update alerts here. 

One supplement already in the pipeline focuses on financial sellers (i.e., VCs and private equity groups). Benchmarking "financial seller deals" with the Study sample generally, the subcommittee is trying to answer the age-old question: "Do financial sellers really get a better deal?" It expects to release this supplement at the Subcommittee's meeting in Denver (April 23-24)

MAW 

What must a Board do to satisfy its Revlon duties?

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.

 

MAW

ACS: The Legal Analysis

It is hard to know where to begin.  That is my first thought when confronting the legal issues arising from the fiasco at Affiliated Computer Services.  When we last left this matter on Friday, the independent directors of ACS had resigned pending the election of new directors, filed suit in Delaware Chancery Court for a declaratory ruling that they did not breach their fiduciary duties in negotiating the potential sale of ACS, and sent a letter to Darwin Deason, Chairman of the Board of ACS and controller of 40% of the voting stock of ACS (but only 10% of the economic interest), accusing him and ACS management of breaching their own fiduciary duties in unduly favoring a deal with Cerberus.  For his part, Deason in his own letter, demanded the ind. directors' “immediate resignations” because of “numerous and egregious breaches of fiduciary duty and other improper conduct,” related to their own running of the Cerberus auction.  Then the lawyers for each of these groups (Weil for the ind. directors/Kasowitz for Lynn Blodgett CEO of ACS) exchanged their own letters making further allegations of inappropriate conduct against the other parties (though Weil alleges Kasowitz's letter was written by Deason's counsel Cravath, although Cravath may also be company counsel?!).  Throwing all of this into the mix, two of the firms involved -- Cravath and Skadden -- are now being accused of acting in a conflicted manner.  Whew, I'm exhausted already. 

Preliminary Observations 

1. The lawsuit by the Cerberus independent directors was a smart tactical move likely to preempt a similar suit against them brought by Deason (read the complaint here).  Now the independent directors can be viewed as the plaintiffs, the good guys and drive the litigation.  Plus, they can now engage in discovery, amend their complaint as necessary and have a bargaining chip against Deason.  And most importantly, since they brought this action in their capacity as directors under Delaware law they can receive indemnification under DGCL 145 and, in fact, under ACS's By-laws (s. 33) automatically are advanced attorney's fees in prosecuting this action.  Nifty.  See Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 343 (Del. 1983) (holding that per the contractual indemnification provisions of the company the directors only needed to be a party to the lawsuit not the defendants to be indemnified).
2. Relatedly, my big question is why didn't the ind. directors here sue Deason and management for breach of their fiduciary duties?  I find this almost certainly intentional omission odd.  Perhaps it was because they need/want to do so on behalf of the company but cannot currently call a board meeting to so act (see the next point).  Although a derivative suit is possible.  Hmmmm.
3. The future governance of ACS is a nightmare.  First, per the By-laws (Art. 16) only Deason or the CEO can call a special meeting of the Board.  In the interim, per DGCL 141(f), they can only act by written consent with the approval of all the directors (there is no By-law or Certificate of Incorporation provision that I saw to the opposite).  So, the ind. directors are stuck, waiting for the next meeting to act.  Deason has a clear incentive here to postpone the holding of the next board meeting until the next shareholder vote in order to prevent the ind. directors from acting and perhaps firing him.  This means board paralysis for months until then; a terrible way to run a company.   
4. Deason's employment agreement gives him unprecedented control over the company.  I've actually never seen anything like this structured in this manner.  Under his employment agreement he is given sole authority for:
   • (i) selecting and appointing the individual(s) to serve in, or to be removed from, the offices of Chief Executive Officer, President, Chief Financial Officer, Executive Vice Presidents, General Counsel, Secretary and Treasurer and (subject to appropriate charter amendment confirming the Executive's authority to fill such vacancies) to fill any director vacancies created in the event any such removal from office, (ii) recommending to the Board individuals for election to, or removal from, the Board itself, (iii) recommending to the Compensation Committee to the Board, or as applicable, to the Special Compensation Committee to the Board, salary, bonus, stock option and other compensation matters for such officers, (iv) approval of 3 4 acquisitions to the extent authority has previously been granted by the Board to the Executive in his capacity as the member of the Special Transactions Committee (except to the extent the Executive had previously delegated authority to the President with respect to such acquisitions which do not exceed $25 million in total consideration), (v) spending commitments in excess of $5 million, and (vi) approval of expense reports for the CEO and CFO.

I love the last two -- he has to approve the expenses of the CEO?!  How independent of him is she?  In any event, hornbook law in Delaware is that, under DGCL 141(a), the business and affairs of every corporation shall be managed by or under the direction of a board of directors, except as may be otherwise provided in its certificate of incorporation. I'm still tracing through all of the (complicated) governance provisions, but my preliminary conclusions are that they didn't put enough of the above in the Certificate, but rather put most of Deason's powers in the By-laws and the rest in the employment agreement itself.  I'll have a longer post on this later this week (I promise) once I'm done with my analysis, but my preliminary view is that these provisions violate 141(a) because to be effective in limiting the board's power they must be in the Certificate.  They are not.  In any event, this is the poorest of the poor in corporate governance to say the least.  This is particularly true when your CEO was famously accused of threatening to kill his personal chef.

4.    This company is a mess.  Only the bravest (or the foolhardy) would invest in this situation. 

The Case Against the Ind Directors

As outlined in Deason's and Kasowitz's letters, the case against the ind. directors is as follows:

1. They refused to accept the Cerberus offer negotiated by Deason with a go-shop and "low" break-up fee and instead insisted on conducting an auction of the company.
2. Relatedly, they failed to present the Cerberus offer to the shareholders directly.   
3. They inappropriately provided proprietary information to a competitor of the company.
4. They received and relied upon the advice of company counsel, Skadden, without authorization of ACS.
5. They paid themselves substantial fees (>100K each) for serving on the ind. committee. 

The Case Against Deason

1. He worked with Cerberus to force their deal through against the will of the special committee.  Specifically, he entered into an initial exclusivity agreement which he refused to waive for three months. 
2. Deason and management worked to ensure that other bidders did not receive full information or management cooperation.
3. Deason and management refused to permit the ind. committee to meet with company counsel.
4. Deason attempted to coerce the ind. directors to resign last Tuesday at a board meeting. 
5. Deason took all of these actions in order for his own personal financial gain through the bid with Cerberus.  Management followed his lead because they were beholden to him and their post-transaction employment depended upon it. 

The Legal Analysis

My opinion is that the ind. directors here did the right thing.  Deason, on the other hand, engaged in conduct that Delaware courts have historically condemned.  There is not enough here for me to give an opinion on management's liability, but to the extent they followed Deason's direction they are also liable. 

This is actually a relatively simple case.  Since Smith v. Van Gorkom, the Delaware courts have been adamant that the sale of the company is something for the board to decide.  It is not something that can be forced upon it by a singe executive (or here Chairman).  Moreover, the Delaware courts most recently in Topps and Lear have repeatedly endorsed the idea that the sale process, whether it be by the Board or a comm. thereof, is something for the board to set, even when the company is in Revlon mode.  Here, the board's refusal to accept a pre-negotiated deal that Deason had a personal financial interest in appears quite justified.  Other bidders would likely be deterred by his and management's involvement and financial interest; something which a go-shop and low break-up fee would not ameliorate.  In particular, it is increasingly recognized that go-shops provide only limited benefits and do not work particularly well when the initial deal is one involving management.  The head start and management participation is too much of a deterrent for bidders. Thus, my hunch is that on these bare facts, Deason is likely in the wrong and a Delaware court would not only rule so but rule Deason (and likely management) breached their fiduciary duties by unduly attempting to influence the auction process.   

As for the other claims:

1. I can't see how wanting to consult with company counsel can ever be a bad thing. 
2. The compensation of the ind. directors here is high but not extraordinary or something that would otherwise disqualify them. 
3. The provision of proprietary information could be troubling.  We need more facts to make this determination. 
4. Deason should ultimately be careful in his crusade here.  As Conrad Black proved, the Delaware courts do not look kindly on mercurial, imperial controlling shareholders. 

Possible Legal Conflicts Claims

1. Skadden provided advice to the ind. directors when it was company counsel.
2. Cravath is now company counsel when it had previously been Deason's counsel.

As I said, I'm not sure I see the problem in the first.  The second may be more problematical to the extent ACS may have a claim against Deason.  Moreover, what is Cravath, a nice, reputable firm doing sullying its name in this mess?  They likely realize the same thing which is why Kasowitz is taking the public lead here. 

Stuck on You (High Yield Debt)

Bloomberg is reporting today that Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can't readily sell.  The debt is largely related to leveraged buy-out high yield notes which failed to garner buyers.  At least six leveraged buyouts over the past month have failed to fully sell, including the debt to finance the acquisitions of U.S. Foods, Dollar General and ServiceMaster Co. (as well as Maxeda announced today).  And, there may be more on the way.  Bloomberg reports that only three of the 40 biggest pending LBOs are contingent on financing (i.e., an escape clause that permits the acquirer to terminate the acquisition if funding can't be arranged).  If this financing is not bought the banks will be required to provide bridge loan financing or otherwise acquire this debt themselves. 

For those looking for a halt to the private equity boom, this is one sign.  A seizure in the high yield market is a certain way to stop private equity acquisitions.   And the market is beginning to crack a bit.  According to Merrill Lynch, high yield bonds fell 1.61 percent last month and regular debt fell 2.73 percent.  Still, the high volume of successful acquisitions shows that there is still momentum in the market.  But banks are likely to respond to this uncertainty by cutting back on offered terms in the future.  They will likely no longer freely offer covenant-lite loans and toggles which provide buyers more flexibility in down times.  Financing contingencies may also begin to appear more frequently in transactions.  The end result is likely a bit of a slow-down in the private equity train, but unless something momentous happens there is not likely to be a full brake.  Nonetheless, given the situation banks would also be advised to proceed with caution on committed financing and bridge loans lest they get stuck with a large amount of debt that they can't sell as First Boston Corp. famously did in 1989 with a bridge loan for a buyout of Ohio Mattress Co., the predecessor to Sealy Corp.  The deal is known as  the "burning bed", and First Boston only avoided bankruptcy by receiving a bail-out from Credit Suisse.

BCE (Or So Much For Last Week's Private Equity Implosion)

On Saturday, BCE, the Canadian telecommunications company, announced that it had agreed to be acquired by an investor group led by Teachers Private Capital, the private investment arm of the Ontario Teachers Pension Plan, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC.  The offer price is C$42.75 in cash per common share and the transaction is valued at C$51.7 billion (U.S.$48.5 billion), including the assumption of C$16.9 billion in debt.  The equity ownership of BCE post-transaction will be as follows:  Teachers Private Capital 52%, Providence 32%, Madison Dearborn 9% and other Canadian investors 7%. NB. Canadian investment rules require that BCE be majority owned by Canadian entities. 

Showing signs that last weeks constant talk of a slow-down in private equity may have come too soon, the transaction if completed would be the largest leveraged buy-out in history beating out the pending U.S.$32 billion takeover of TXU, the Texas utility, by a private equity consortium comprising Kohlberg Kravis Roberts & Co. and TPG.  And a syndicate of banks has committed financing for the transaction showing similar confidence in the debt markets.

Perhaps the most interesting aspect of the transaction is the involvement of Teachers Private Capital.  TPC has more than C$16 billion in assets and is part of the C$106 billion Ontario Teachers' Pension Plan.  According to this slick brochure they have put out, TPC actively makes sole and co-investments in companies throughout the globe and has co-invested with KKR in over $5 billion of acquisitions in prior years.  Their activity and investment highlight the strength of pension plans in the current investment market.  Although ERISA rules would likely forestall a similar majority acquisition by a U.S. pension plan, expect these funds to take a more active role in investing in the near future, working to drive investments rather than follow their historical practice of passively investing through funds themselves. 

Addendum:  According to the New York Times, "the auction featured several bizarre twists, including accusations that Bell’s board was manipulating the process, the withdrawal of big-name bidders and an atmosphere that many characterized as lacking any transparency. 'It was a black box,' said Brent D. Fullard, the executive managing director of Catalyst Asset Management who is urging Bell shareholders to push for recapitalization rather than a sale."  And apparently, losing bidders Telus and Cerberus Capital Management are considering counter-offers. 

Games People Play

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.    

Sam Zell's Nice 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. 

Trading Baseball Card Companies

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.

The Bloomin' Onion (Redux)

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.