In lieu of seeking a reduction in deal price?directly from the target or via enhanced financing terms?two transactions reflect another strategy: buying time.
The first of these two is Goldman Sachs Capital Partners' proposed acquisition of Myers Industries ? a transaction that was called off for good in April.
Shortly before the contract's original ?dropdead? date in December of 2007, GSCP obtained an amendment that permitted it to delay closing until 15 days after delivery by Myers of its first quarter 2008 financials. To get this extension, GSCP agreed to make a nonrefundable $35 million payment to Myers (an amount not coincidentally equal to the reverse breakup-fee) and conceded that there had not been a MAC as of the amendment date. The amendment also included a renouncement by Myers of its right to seek specific performance, a waiver of any further rights to the reverse breakup fee, and a consent to GSCP terminating the limited guarantee (curiously, effective as of the date of the amendment, i.e., before the actual payment of the $35 million). Myers, in turn, was permitted to shop the company and to terminate the contract upon emergence of a superior proposal without payment of a break-up fee though GSCP retained an express six-day matching right. Myers was also freed from many of the restrictions of the interim covenant. Finally, Myers was granted the right to pay a special $10 million dividend to its shareholders and given the green light to repurchase its shares at prices lower than the merger consideration.
Dubbed ?The Goldman Sachs No-Fault Divorce? by the Wall Street Journal, the Myers approach could just as aptly be characterized as a ?friends with benefits? arrangement
Dubbed ?The Goldman Sachs No-Fault Divorce? by the Wall Street Journal, the Myers approach could just as aptly be characterized as a ?friends with benefits? arrangement. Assuming that GSCP would not have been able to successfully assert a MAC, GSCP would have been required to pay the reverse breakup fee upon passage of the debt marketing period in any event. Rather than merely a payment for release from its obligations, the fee payment thus effectively bought GSCP time to make up its mind, including on whether or not to ask for a price reduction in the future. Permitting Myers to effectuate repurchases while the transaction remains in limbo adds an interesting twist to this compromise. Had the deal gone through, repurchases below the deal price could have made the overall economics sweeter from GSCP's perspective. Now that the deal is off, repurchases may well be a plausible strategic alternative from Myers' perspective.
That said, sponsors should be mindful that share repurchases by a public target during a pending transaction present their own legal challenges. Firstly, they confront the target board with a conundrum, i.e., whether permitting the shareholders to effectively make a bet on the fate of a pending buy-out constitutes an appropriate discharge of the board's fiduciary duties. Secondly, where Rule 13e-3 applies, any repurchases will likely be viewed as an initial, integrated part of a control transaction, requiring the filing of an information statement with the SEC or an amendment to an existing Schedule 13E-3. Thirdly, repurchases may expose a target (and the sponsor) to claims of trading on the basis of material nonpublic information (e.g., assertions that the target and its officers had information about the state of the acquisition financing that was not public at the time of the repurchases) or market manipulation claims. While the securities laws exposure can be managed to some extent with careful legal planning, including by adopting a 10b5-1 plan and bringing repurchases inside the safe harbor provisions of Rule 10b-18, such structuring may have its own drawbacks (such as the volume limitations of Rule 10b-18) and may not fully insulate the parties from litigation risk.
Another renegotiated acquisition that could be viewed as reflecting a play for time, on the sponsors' part, is the acquisition of Harman International. In lieu of commencing litigation over whether or not there had been a MAC, the parties agreed to convert the KKR and GSCP-led going-private transaction into a $400 million PIPEs (private investment in public equity) investment in the form of convertible debt. As in Myers, the proceeds of the $400 million investment were earmarked, among other things, to permit Harman to conduct share repurchases. The debt securities will pay out 1.25% interest annually. They can be converted into Harman shares should Harman trade up to $104 per share in the next 5 years, a number well below the $120 deal price but significantly higher than the current hare price. KKR also was given a board nomination right.
PIPEs transactions raise a host of legal and strategic issues. But a threshold concern is feasibility. Whether or not a particular PIPEs investment is permissible under a target's organizational and debt documents should always be carefully reviewed with counsel. Where practicable, though, acquiring a minority stake in a public target may prove an interesting play for time and can give a sponsor a leg up with respect to a control transaction at a later juncture.
As of early April, more than 40 private equity transactions with an aggregate transaction value of in excess of $60 billion involving North American targets that were signed prior to the credit crunch were pending. While it is safe to predict that the next weeks and months will bring more ?slipping out the back? and more ?making new plans,? it remains to be seen whether the credit crunch will show us 50 different ways (or at least 40) for sponsors to get themselves free. A separate question is how the changed economic environment will impact deal terms going forward. We expect that meaningful answers to this question will likely remain elusive until more sizeable, precedent-setting transactions make a comeback.
Franci J. Blassberg is a partner and Stefan P. Stauder is counsel at Debevoise & Plimpton LLP. This article originally appeared in the Winter 2008 edition of the Debevoise & Plimpton PER.