This summer's activity continues to be at an all time high here at the M&A Advisor. This week, we launch two new Alerts features: the Pipeline Profile and the Metrics Meter. Going forward we will be profiling our membership and giving readers a quick snapshot of the M&A middle market. So if you're an M&A Advisor member and have a firm or corporate professional who has gone the extra mile, let us know. Likewise, if your firm has middle market data that you want to call attention to, by all means, pass it along. We welcome your submissions and will credit any published metrics.
Top Stories
Networking Pays Off: MatlinPatterson
Affiliate Submits $725 Million Offer
This week, MPAM Wireless, Inc., an affiliate of MatlinPatterson Global Opportunities Partners,
submitted to Nortel Networks Corp., and the Company's creditor constituencies a proposal to acquire substantially all of Nortel's CDMA and LTE Access assets for $725 million. MatlinPatterson followed the Nortel bankruptcy and has engaged a number of industry experts and former Nortel executives to serve as advisors. MatlinPatterson has expedited its strategy to form a "New Nortel" in order to maximize value for all stakeholders. The new independently held business should provide a range of opportunities -- from additional bolt-on acquisitions, to partnerships, to reinvention, and new ideas from within the technology asset base. In addition, compared with the NSN's competitor bid, MPAM Wireless's alternative proposal offers $75 million more than NSN's bid for the selected CDMA and LTE Access assets. The MPAM Wireless proposal provides existing creditors with the opportunity to participate side-by-side with MPAM Wireless in its investment, and it creates potentially value-enhancing alternatives for additional Nortel assets other than liquidation.
The Complete Text: Open Text
Completes Vignette Acquisition
Open Text announced it has completed the acquisition of all issued and outstanding shares of Vignette Corporation. The
acquisition has now received final approval by Vignette's stockholders. Pursuant to the terms of the Agreement, each outstanding share of Vignette common stock was converted into the right to receive $8.00 in cash, without interest and 0.1447 shares of Open Text common stock. Open Text will issue approximately 3.45 million shares of its common stock in connection with the merger. Based on the closing price of $36.84 per share of Open Text common stock on the Nasdaq Global Select Market on July 20, the aggregate value of the consideration paid in connection with the merger was approximately $321 million. Open Text anticipates restructuring charges associated with the merger and will disclose, on Monday, July 27, 2009, estimates expected to be incurred in connection with the restructuring initiative in a Form 8-K filing. Management will provide further information regarding the future plans and prospects of the combined company when it provides fiscal year-end results on August 20, 2009.
Bemis Company, Inc. announced it has priced an $800 million underwritten public offering of senior notes, including $400 million aggregate principal amount of 5.650% senior notes due 2014 and $400 million aggregate principal amount of 6.800% senior notes due 2019. Bemis will pay interest on the notes
semi-annually on February 1st and August 1st of each year, beginning on February 1, 2010. The Company intends to use the net proceeds from the offerings to finance a portion of the $1.213 billion purchase price of its previously announced acquisition of Alcan Packaging Food Americas. The Company is required to redeem the notes in the event the acquisition does not occur. The senior-notes offering is expected to close by July 27, 2009, subject to customary closing conditions. Bemis Company is a major supplier of flexible packaging and pressure sensitive materials used by leading food, consumer products, manufacturing, and other companies worldwide. The Company reported 2008 net sales of $3.8 billion.
A Health Plan: UnitedHealthcare to Acquire
Health Net's Northeast Licenses
UnitedHealthcare is set to acquire Health Net's Northeast insurance and HMO entities
in Connecticut, New York and New Jersey, estimated at approximately $450 million in tangible net equity. UnitedHealthcare will also acquire membership renewal rights for the Health Net Life healthcare business in the Northeast. The transaction is expected to be modestly accretive to both Health Net and UnitedHealth Group's net earnings per share. Under the terms of the agreement, UnitedHealthcare will pay Health Net transaction consideration of $60 million at close for the Medicare business, the Medicaid business and the renewal rights for the commercial membership. UnitedHealthcare will pay Health Net additional consideration on a per member basis as Health Net's Northeast commercial customers transition to UnitedHealthcare. The additional consideration may amount to as much as $120 million, should all commercial members move to UnitedHealthcare licenses. Following the closing, UnitedHealthcare will transfer approximately $290 million to Health Net, which represents a portion of the $450 million in tangible net equity acquired in the legal entities. The remaining portion of the tangible net equity will be distributed to Health Net as the business transitions over the next two years, and is currently estimated to be approximately $160 million. Health Net currently expects to record several amounts in connection with the transaction, including tax benefits, severance costs, freed-up capital, other transaction-related costs and operating costs during the transition period. These items may result in an estimated net negative impact to Health Net of approximately $20 million. Health Net is also evaluating other potential noncash charges related to the transaction including potential goodwill impairment.
Banking on Equity: Apax
Partners Acquires Bankrate
Bankrate, Inc. announced that it has entered into a definitive agreement to be acquired by Apax Partners. Under the terms of the
agreement, Apax will commence a tender offer to acquire all of the outstanding common stock of Bankrate, for $28.50 per share in cash, followed by a merger to acquire all remaining outstanding Bankrate shares at the same price paid in the tender offer. The offer price represents a premium of 15.8% over the July, 21, 2009 stock price, and 18.2% over the average closing price for the previous ten trading days. The transaction is valued at approximately $571 million. Apax is providing 100% of the financing for the acquisition from its equity funds under management. Shareholders representing approximately 24% of Bankrate's outstanding shares have entered into support agreements with Apax in connection with the transaction. Bankrate's Board of Directors has unanimously approved the transaction. The transaction is currently expected to close at the end of the third quarter of 2009. Bankrate's financial advisor is Allen & Company LLC, and its legal advisor is Wachtell, Lipton, Rosen & Katz. Allen & Company LLC and Needham & Company provided fairness opinions with respect to the transaction. Apax's financial advisor is Stephens Inc., and its legal advisor is Kirkland & Ellis, LLP.
Pipeline Profile
M&A Advisor dealmakers source deals and bring them to a close. Through our awards and conferences the M&A Advisor highlights and celebrates the best and most active dealmakers on the planet. To that end, we introduce our new Alerts segment "Pipeline Profile."
In each edition going forward, we will offer a quick snapshot of the dealmakers who make the deal world turn. We will also tell you why you may want to reach out to our selected members.
First up is Thomas Kirchner. Tom is a Merger Arbitrage specialist. Readers can find his blog on the M&A Advisor network. Tom's firm is Pennsylvania Avenue Funds, which invests in Lower Middle-Market ($10 mm - $100 mm), Middle-Market ($100 mm - $500 mm). Tom also has a forthcoming book entitled: How to Profit from Event-Driven Arbitrage (John Wiley & Sons, 2009). If you want to reach out to a fund specialist, Tom may be your go to guy. Thanks Tom, for your great blogs!
Metrics Meter
Deal Type: PE Growth/Expansion
PE invested Q2
2007
2008
2009
3722.65M
4111.24 M
7956.00M
As the credit crisis has illuminated and highlighted the need for cash and equity holdings, the events of last autumn's fallout has also brought to bear a new reality. Leverage is out--at least for most--while deleveraging is the strategic play of the day.
The underpinning of deleverage is understood when viewing the financial-sector's own debt. At the close of 2008, financial-sector debt stood between two and five times that in each recession since the 1970s. The total financial sector debt? A whopping 117% of US GDP. No wonder firms, companies and investors are deleveraging, but middle market dealmakers can and should exploit the arbitrage in that number. What do I mean?
Well, if we look at this week's Metric Meter (as seen above), we see that growth expansion deals are on the rise. To make these deals happen, for some middle market dealmakers, the first step might be deleveraging the portfolio.
One middle market case in point: Brewing giant Anheuser-Busch InBev N.V. The company, under advisors Deutsche Bank AG and Lazard Freres & Co., recently announced it will sell off three beverage-can manufacturing plants and a metal-lid plant to Ball Corp. for $577 million in cash. The company is moving to sell $7 billion in assets to help pay down the $45 billion in debt in took on to buy Anheuser. It has already sold Oriental Brewery for $1.8 billion and its stake in Tsingtao Brewery Co. for about $900 million.
Another example of middle market deleveraging comes from the world's third largest spirits maker, United Spirits Ltd. (USL). USL announced it will begin the process of significantly deleveraging its balance sheet. To do so, the company has said it is open to placing the firm's treasury stock, not the promoter holding, with Diageo Plc., the world's largest beer, wine and spirits firm, or private equity firms or both. As of this week (June 22) the two companies have been in discussion for the proposed stake sale. The two companies, however, have been in talks since late last year for a proposed deal. United Spirits has also said the company has received offers from two of the world's top five private equity firms to invest $200-300 million each in the company. The term-sheets have already been submitted but that does not imply the company would pick up these amounts from the private equity firms.
The implication of deleveraging is that it is a science that should be carefully studied.
Remember, the deleveraging process is a balancing act of current cash flow/liquidity weighed against the rising cost of capital.
Here is my checklist of things dealmakers should consider when deleveraging (the order of importance depends on the deal itself):
• PE firms will be focusing their company portfolios and exploiting • the advantages to lower capital costs and valuation gaps.
• Debtor-in-possession (DIP) financing should be re-examined by • all. While DIP is traditionally available to finance reorganization • during restructuring processes, DIP financing is on the wane.
• Debt - equity exchanges are on the rise, as companies and firms • are repurchasing outstanding debt. Having a loan-to-own • strategy is helpful.
• Restructuring debt means reporting the restructuring before, • during and after the due diligence process. In light of this, internal • processes should be reviewed. All great athletes do it and so • should all great dealmakers.
• An open market strategy may be the way to go. For example, • some companies and firms are repurchasing their debt on the • open market and with PE firms.
• Convertible debt for deals is often the best structure for cash • strapped companies that need more immediate restructuring • of the balance sheet or simply have few or no other options.
• Share the ride. Cost sharing agreements help everyone • when it comes to liquidity. Don't be shy, find a partner or two.
• At-the-market offerings based on equity might help shore up • excessive leverage but be careful when using this method. It • can be tricky and market inefficiencies can work against the deal.
• PIPE transactions are can be useful in deleveraging only if • no new debt is created.
• Capital calls are a reality both now and going forward. • So, dealmakers should engage in both informal and formal • restructuring individual creditors' policies.
• The tax man cometh. If deleveraging is employed, be sure to • get expert contract interpretation. Securities law, accounting • issues, and of course taxes are all going to be in play. Because • like death, you can't avoid it.
• Once deleveraging has occurred, your firm or company is in • better shape to improve liquidity, as creditors, investors and the • secondary markets will be much more at ease when it comes f • or the cost of capital both now and in the future.
Whatever happens, middle market dealmakers can take comfort by exploiting deleveraging.
Nomination Deadline is today at 3:00 pm Eastern! The Global M&A Advisor Awards will recognize excellence in 93 unique categories in M&A, Financing and Turnaround transactions across 7 different regions. more
Q & A
Tool to Get M&A Deals
Done in a Tough Market
S. Barth
T. Shea
As deleveraging across markets continues, cash is often preserved for closing acquisitions, even opportunistic ones. Attempting to affect a stock-for-stock deal isn't easy either--with many public company acquirers unwilling to use their stock as acquisition currency, as trading prices are still at depressed values compared to one to two years ago. Unfortunately, many non-troubled-sellers' valuation expectations remain at levels that recall "the good old days" of 2007 and early 2008. These expectations often do not reflect today's economic realities, thus creating a serious valuation gap. In light of this difficulty, we asked Steven Barth, Partner, and Tim Shea, Associate, of Foley and Lardner, LLP what can be done to close the valuation gap.
M.A.: What can dealmakers do to close the valuation gap between buyers and sellers?
S.B & T.S.: One creative tool that may be particularly useful in getting a stalled acquisition to the finish line is the Contingent Value Right, or CVR. There are many different variations of CVRs and the mechanics of CVRs will vary from transaction to transaction.
A CVR is typically used by the acquirer to provide the seller with the right to receive a future potential payment if a certain contingent event occurs. The contingent event may take many forms. Often, the event relates to the future success of the acquired company, in which case the CVR acts much like an earnout payment.
CVRs can also be used to provide for payments upon the achievement of certain future milestones, such as obtaining regulatory approval or achieving clinical trial success for one of the target's pending products, successfully settling an environmental, litigation or other contingent liability, entering into a strategic agreement or achieving certain research and development milestones. Finally, the right to receive a future CVR payment may be tied to the post-closing performance of the acquirer's stock that is used to pay all or part of the consideration for the acquired business, or share-based CVRs.
M.A.: What obstacles may be presented when CVRs are considered?
S.B & T.S.: The use of share-based CVRs can help overcome many obstacles particularly when the acquirer cannot or will not pay the entire purchase price in cash and would like to issue its stock as part of the consideration, but there is a disagreement over how the acquirer's stock should be valued.
While the use of a public company's stock as an acquisition currency in today's market is facially attractive to acquirers as a way to conserve its cash and not increase its leverage, the problem is how to agree on the valuation of the acquirer's stock when it is trading at a substantial discount to its 52-week high and at a discount to the target's acquisition valuation. Incurring this type of share dilution is usually not acceptable to the acquirer, so using share-based CVRs may be a viable alternative to bridge this valuation gap.
For example, an acquirer that has a stock price that is trading at $15, but has a 52-week high of $25, might think it would be more appropriate to value its stock closer to its 52-week high of $25 rather than the current trading price of $15. Additionally, the acquirer may argue that, since the seller is valued at a certain multiple of EBITDA, the acquirer's stock being issued in the transaction should also be valued using the same EBITDA multiple. The seller is likely to disagree and take the position that the acquirer's current trading price is the stock's true "value." Share-based CVRs are a tool that can help overcome these obstacles.
M.A.: How do share-based CVRs work?
S.B & T.S.: In general, the acquirer issues an equal number of shares and share-based CVRs to the seller as all or part of the purchase price. Each share-based CVR provides the seller with the right to receive payment in the event that the acquirer's shares are trading below a certain "target value" on a specified future "true-up" date. For example, if an acquirer believes that its shares, which are currently trading at $14/share, should in reality be valued at its 52-week average price of $20/share, then it would offer to value its shares at $20/share at closing in payment of the purchase price (resulting in its issuance of fewer shares than if the shares were valued at their current price), but would also offer to couple each share with a CVR with a target value of $20/share and a "true-up" date that is two years from the closing date. If the acquirer's shares appreciate and have a value that is equal to or greater than the target value on the true-up date, then the acquirer will not have to make any CVR payment on the true-up date. If, on the other hand, the value of the acquirer's shares is lower than the target value on the true-up date, then the acquirer will be required to pay the seller the difference between the true-up value and the shares' trading value at the closing date. Regardless of what happens, the seller is "guaranteed" total value of at least $20 per share on the true-up date.
M.A.: What are some of the key characteristics of CVRs?
S.B & T.S.: The key characteristics of CVRs are:
Form of True-Up Payment
Share-based CVRs can provide for the "true-up payment" to be made either in cash or in additional shares of the acquirer's stock (issued at the stock's then current average trading value on the true-up date).
Floor Price
While the true-up payment for each share-based CVR is generally the difference between the target value and the then current average trading value on the true-up date, the acquirer can further limit its maximum potential CVR payment by including the concept of a "floor price" with the CVRs. The idea behind the floor price concept is that, while the acquirer is willing to "guarantee" the seller the target value on the true-up date, the acquirer is not willing to assume the downside risk of a share price decline much below the stock's current trading range at closing. In most cases, the floor price is set at, or slightly below, the then current average trading price of the acquirer's stock on the acquisition closing date.
CVRs that include a floor price require the acquirer to pay the seller the amount by which the target value exceeds the greater of (i) the average current trading value of the stock on the true-up date or (ii) the floor price. For example, an acquirer that issues CVRs with a target value of $20 per share and a floor price of $10 per share, would only be required to pay the seller $10 per CVR if the average current trading value of the acquirer's stock is $5 per share on the true-up date. If the concept of a floor price were not included, the acquirer would be required to pay the seller $15 per CVR.
Another share-based CVR variation is the "resetting floor price." A resetting floor is a mechanism whereby the original floor price is automatically increased if the seller sells any shares of the acquirer's stock prior to the true-up date at a price in excess of the previously established floor price. Typically, the floor price just resets with respect to the number of CVRs associated with the shares sold. Generally, the concept behind the resetting floor price is that the acquirer is only willing to "guarantee" a CVR payment that, when added together with the price obtained by the seller from any previous sales of the acquirer's stock at a price above the original floor price, should equal the target value.
Ceiling Price
The corollary to the CVR floor price is a CVR ceiling price. A CVR ceiling price is mechanism that terminates the seller's right to receive a future CVR payment after the acquirer's stock reaches a certain sustained value above the target price prior to the true-up date. Generally, the concept is that, once the acquirer's stock trades above the target value for a sufficient time to allow the seller to sell its shares and realize at least the target value, then the acquirer's CVR obligation should terminate. Like the floor price concept, the ceiling price is also part of the overall CVR negotiations.
Accounting Treatment for the Acquirer
Accounting rules require an acquirer to include the "acquisition date fair value" of contingent consideration paid as part of the consideration transferred in an acquisition. In general, the fair value of the contingent consideration is recorded as a liability on the acquirer's balance sheet. In the periods following the acquisition, the acquirer is required to account for changes in the fair value of the liability, with the change in fair value being recognized in earnings. Accordingly, accounting for CVRs by the acquirer will require valuation work both at the time of the transaction and on a going-forward basis. Any changes in the fair value of the CVR payment liability during the CVR true-up period will cause the acquirer's earnings to fluctuate.
Income Tax Considerations
Like any financial instrument, the federal income tax treatment of the CVR will be determined based on the specific terms of the transaction. Generally, the IRS takes the position that the seller recognizes gain based on the value of the CVRs as of the closing date. The seller may be able to defer recognition of gain until receipt of payment pursuant to the CVR in some circumstances.
M.A.: Can you give the readership an example of how Foley and Lardner, LLP has deployed CVRs?
S.B & T.S.: Sure. We recently represented Nemschoff Chairs, LLC, a Wisconsin-based manufacturer of furniture for the healthcare industry, and its shareholders, in the sale of Nemschoff to Herman Miller, Inc. In this transaction we utilized share-based CVRs as a significant component of the purchase price.
In the Nemschoff transaction, the total consideration consisted of cash, a potential earnout payment based on the combined post-closing revenue of the Herman Miller and Nemschoff healthcare furniture businesses, and shares of Herman Miller common stock then trading at around $14.50/share but valued at $24/share, coupled with non-transferable and attached CVRs. The key terms of the CVRs issued in the Nemschoff acquisition were as follows:
• True-Up Date: The second anniversary of closing.
• True-Up Payment: On the true-up date, each CVR entitles the sellers to a payment equal to the amount of the target value of $24/share to the extent it exceeds the greater of (i) the then current average trading value of Herman Miller shares on the true-up date and (ii) the floor price. The target value represented a premium of over 40% from the closing date average trading value of Herman Miller shares.
• Form of CVR Payment: Herman Miller has the option to pay all or any portion of the CVR payment in either additional shares of its common stock or cash.
• Floor Price: The floor price is equal to 90% of the closing date average trading value of Herman Miller shares. The floor price is also subject to a resetting mechanism.
• Ceiling Price: The ceiling price is $32 per share, or 33% over the target price. If over any sustained period prior to the true-up date the then current trading value of Herman Miller shares is equal to or greater than the ceiling price, then the CVRs will terminate.
Using CVRs in the Herman Miller-Nemschoff deal was an effective way for both the acquirer and seller to bridge differences between both companies' relative equity valuations, as well as the ultimate form of consideration payable to complete the acquisition. Without the use of CVRs, closing the deal would have likely been significantly more difficult, time consuming, complicated and costly to both parties.
