This is the second time Alliance has sued Blackstone over the proposed merger. In January, they withdrew a law suit that attempted to force the completion of the merger after Blackstone assured them the deal would go through. Apparently and no one can blame them, they backed out again, prompting the latest law suit.
Blackstone said the pull out is due to a $400 million backstop requirement imposed by the Office of the Comptroller of the Currency to support OCC regulated Alliance. Alliance alleges Blackstone failed to use "its best efforts" to earn OCC approval and that Alliance took many steps to solve the problem.
Blackstone maintains they did not breach any conditions outlined in the merger agreement and the accusations will be strongly contested. Alliance shares are down over 2% today to $51.55 on a 52-week range of $39.54 to $80.79. The deal valued Alliance shares at $81.75. Blackstone shares are also down by 2% to $18.50 on a 52-week range of $13.40 to $38.00.
However, things got a little easier yesterday, according to a piece in the Wall Street Journal. That is, the Office of the Comptroller of the Currency said it will place a cap on the liability for Blackstone if ADS's credit card segment implodes (up to $400 million). Hey, in light of the turbulence in the financial markets, this is certainly a material issue and should be a relief for Blackstone.
Of course, there are still other issues, such as the credit crunch and the slowing economy. Such things make it difficult to justify a deal for ADS.
Yet, in today's trading, ADS's shares spiked 17% to $52.22. Then again, the buyout offer is still at a hefty $81.75. In other words, the Street thinks that -- if this deal gets done -- expect a much lower price.
Many buyouts have failed over the last six months. That "material change" clause in every deal is frequently as vague as asking someone if they promise not to get mad at you before you tell them the problem. Many of these blown-up mergers have resulted in large break-up fees being paid out by the would be buyer to the intended buyout company. But many private equity firms have been able to get out of these break-up fees.
The truth is that your definition of "a material change" will differ from mine, and mine will differ from others. You can bet that "a material change" differs greatly between the opinions of a buy a seller. Here are some of the deals where break-up fees "ot other damages and penalties" may come up shortly.
3Com Corp. (NASDAQ: COMS) just hinted at this today, as it wants a YES Vote from holders from the Bain-led offer and noted that it has been unable to appease CFIUS review concerns because of Huawei's involvement in the deal.
This pending Clear Channel Communications inc. (NYSE: CCU) has been noted as the longest standing current large club deal that is still in pending deals, but all indications point to the banks wanting to get out of the loans. They might not be able to get out of it. And they might. After this long, it isn't even clear what damages would be eligible if any. Scott Sperling of Thomas H. Lee was just on CNBC shortly to discuss the Clear Channel deal, and to discuss his new $10 billion fund he recently raised. He didn't comment about Clear Channel, but he said it may take another 6 to 12 to 18 months before values and conditions come in line with deal making strategies.
The company noted that since Blackstone maintains that it will seek to complete the merger that perhaps suing it isn't the best strategy. Blackstone had previously noted that it did not expect to be able to reach certain clearances and approvals in order to complete is buyout.
Just last Thursday, analysts came out to defend shares of Alliance Data after the company showed solid earnings. On that morning before analysts defended the stock, shares had been $42.70 before the analyst calls and had traded down as low as $39.54. Now today shares are up over 6% at $54.80 after being released from their share halt. More than a 25% analyst return Isn't bad at all, particularly if it is in a week. Sometimes analysts choke and sometimes they score. These guys obviously scored a win.
In the press release, Chip Schorr, a Senior Managing Director at Blackstone, proclaimed: "We are excited about the opportunity to work together with management and with Alliance Data's dedicated employees to help continue to grow the business and further strengthen the company's competitive position."
Well, now the deal is in shambles, with ADS's stock price trading at a lowly $41.40. This week, Blackstone indicated that it is having troubles getting regulatory approval from the Office of the Comptroller of Currency (OCC), which wants Blackstone to provide a $400 million backstop of support in the event there is a problem with the banking segment.
But the folks at ADS think this is a ruse. As a result, the company has filed a lawsuit (you can find the complaint at the SEC website).
According to the complaint: "After the parties signed the Agreement, however, a liquidity crunch developed in the credit markets and the stock market declined, making the Transaction less attractive to Blackstone and more expensive to finance. Inconvenient timing, however, is not a permissible basis on which Blackstone can walk away from its deal."
Alliance Data Systems Corp. (NYSE: ADS) shareholders are not going to be too happy this morning with shares trading down close to 40% in pre-market trading.
The Blackstone Group (NYSE: BX) led-buyout group sent notice to Alliance Data that they do not anticipate the condition to closing the merger relating to obtaining approvals from the Office of the Comptroller of the Currency will be satisfied. If you look at Alliance's reaction, it is probably safe to assume that another busted merger lawsuit is about to be filed.
In the press release Alliance Data said it "strongly disagrees with Blackstone's stated assertions that (i) the OCC's most recent written proposal to Blackstone's counsel embodied the OCC's "final position" with respect to the terms on which the required approvals would be granted and (ii) the OCC is "demanding that extraordinary measures be taken by ADS and various Blackstone entities in connection with the Change in Control Notice" that "represent operational and financial burdens on ADS, Blackstone and it affiliates that cannot be reasonably assumed."
It also believes that Blackstone has the ability to cause the condition to closing cited in Blackstone's letter to be satisfied. Alliance also noted that Blackstone's notice did not assert any breach of the merger agreement by Alliance Data or the occurrence or anticipated occurrence of any material adverse effect.
Alliance Data Systems shares closed at $65.60 Friday, and the 52-week trading was $47.49 to $80.79. Shares are trading down 43% at $37.10 in pre-market. How ugly are blown-up private equity mergers.
Merger arbs are a key part of the M&A ecosystem. Basically, these are traders who assume the risk of buying shares in M&A targets, hoping to make a profit when the deals close.
Of course, during the boom times, this was a nice profit center for Wall Street.
In fact, according to a piece in the Wall Street Journal [subscription], it looks like merger arbs are thinking in terms of worst-case-scenarios. As a result, the spreads on deals (the difference between the buyout offer and the current stock price) have widened significantly, even for marquee deals.
Unfortunately, if some of these deals crater, we are likely to see real damage. That is, it will likely take quite some time for the private equity marketplace to make a comeback.
The newspaper is stating the obvious. The market already knows the deals are unlikely to close. BCE shares trade at $34, down from at 52-week high of $44.59.
The by-products of these problems are two-fold. The first is that LBO firms have obligations to close some of these deals. That means that break-up fees or lawsuits may be on the way. Boards at these companies may have little choice if their shareholders are billions of dollars underwater.
The other factor is that trust in LBO firms will probably fall to all-time lows with public companies. Whatever happened to the "our word is out bond" stuff?
Douglas A. McIntyre is an editor at 247wallst.com.
Back in late November, the stock price of Alliance Data Systems (NYSE: ADS) suddenly dropped more than 20%. The rumor was that Blackstone (NYSE: BX) was going to renegotiate its $7.8 billion buyout deal for the company.
Actually, the Securities and Exchange Commission is now investigating the matter.
Despite this, there is still some jitters with the deal. That is, an analyst for SunTrust Robinson Humphrey, Andrew Jeffrey, has downgraded the stock from a "buy" to "neutral." Basically, he's concerned about the slowing economy and the continued credit crunch. He thinks there's even a chance of a deal breakup, which could take the stock to the mid $40s.
Keep in mind that Blackstone recently ditched its deal for PHH Corp. (NYSE: PHH) because it was unable to raise the financing. As a result, the firm instead paid a $50 million breakup fee.
Interestingly enough, the Delaware Court may be more amenable for deal bust-ups as seen with the recent case between United Rentals (NYSE: URI) and Cerberus (check out this piece in The New York Times). In fact, according to M&A professor Steven Davidoff, the ADS merger agreement has some ambiguities that are similar to the Cerberus deal.
And the markets are showing some concern as well. In today's trading, ADS' stock price is down 1% to $72.99. The buyout price is $81.75.
Alliance Data Systems (NYSE: ADS), a provider of loyalty and marketing solutions derived from transaction-rich data, announced on 5/17 it would be acquired for $81.75 in cash ($7.8 billion) by Blackstone Capital Partners (NYSE: BX). ADS is recently down $2.80 to $75.48. ADS December option implied volatility of 48 is above its 26-week average of 18 according to Track Data, suggesting larger risk.
Sprint Nextel (NYSE: S) is recently up .39 to $15.23. The Wall Street Journal reported S rejected a $5 billion investment offer from a group led by ex-Sprint Chairman Donahue according to sources. S option volume of 10,285 contracts compares to put volume of 3,125 contracts. S December option implied volatility of 37 is above its 34 according to Track Data, suggesting larger risk.
Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
With higher interest rates and pushback in the debt markets, it's been tougher for the private equity folks to get deals done. Just look at the recent IPO of the Blackstone Group (NYSE: BX). The stock has been, well, like a stone.
But, according to this week's Barron's [a paid service], this may be an opportunity. That is, there may be a way to arbitrage returns.
Huh? Well, many deals have a spread between the buyout price and the current stock price. Why? Since a deal has not been closed, there's a risk of a deal falling through.
With the recent general problems in private equity, there's been a widening of spreads.
These firms have top-tier private equity sponsors. And, in terms of reputation, it would not be good for them to walk away. So while the financing costs may be higher, I still think private equity firms will work pretty hard to get these deals done. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Over the past year, the activist hedge fund ValueAct Capital Partners waged a proxy fight against Acxiom Corp. (NYSE: ACXM) and ultimately got a board seat. By having a board seat, not only did ValueAct have some leverage, but I'm sure had a much better understanding of the company.
Well, now for the payoff: Acxiom has agreed to a $2.25 billion buyout.
Interestingly enough, ValueAct has partnered with the traditional private equity firm Silver Lake Partners to pull off the deal.
Acxiom has extensive databases and analytics to help companies with their marketing programs. In fact, it's similar to Alliance Data Systems (NYSE: ADS), which agreed to a $7.8 billion buyout today from the Blackstone Group.
These types of companies tend to have long-term contracts and cater to necessary business functions. Thus, it makes it easier to pile on debt and do leveraged buyouts.
On news of the deal, Acxiom's stock price spiked 15.29% to $27.29 per share. Although, the buyout offer is for $27.10. Thus, it looks like the Street thinks another bidder may come to the table.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Alliance Data Systems (NYSE: ADS) is a data junkie. The firm tracks consumer behavior and helps clients develop cost-effective loyalty and marketing programs.
Now, the company has decided to go private for $7.8 billion; the private equity buyer is the Blackstone Group.
Interestingly enough, ADS is the result of the financial engineering of Welsh, Carson, Anderson & Stowe. Back in 1996, this private equity firm put together a variety of acquisitions to build the marketing giant. Then in 2001, ADS went public.
Now the firm has 600 customers in sectors like financial services, utilities and specialty retailers. What's more, the contracts tend to be long-term (lasting from three to five years). This is the kind of stability that always gets the attention of private equity firms.
Recently, ADS has suffered from a slowdown in earnings and this has resulted in a lagging stock price. I suspect that Blackstone will engage in some cost cutting to get things back on track.
On the news of the deal, ADS's stock price surged 25.73% to $79.16. Blackstone's offer is for $81.75 a share. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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