Saturday, April 10, 2010
On February 12, SkillSoft PLC (SKIL) agreed to be acquired by a consortium of Berkshire Partners, Advent International Corp, and Bain Capital for $10.80/share, an 11% premium to SKIL’s prior close. The transaction requires approval from a majority of SKIL shareholders, assuming at least 75% of them vote. A go-shop provision allowed SKIL to solicit alternative proposals until March 6. SKIL hosted a conference call to discuss the $1.1 billion deal, which set the tone for a trade that caught investors by surprise. Let us take a look at this risk arbitrage example.
As with most deal calls, the interesting part began with the Q&A. Of course management is in favor of the deal, or else there would be no agreement. We obviously have our own opinions on deals, but it is imperative to know how others perceive a transaction, and the Q&A portion is the first chance to discern their thoughts. Right off the bat, the questions force management to take a defensive stance. How well was the company shopped to other bidders? How did you arrive at the low takeout valuation? Why are you selling now, instead of a year down the road, when the sales that you said would pick up will be higher? Did you discuss the deal with any of your largest shareholders before signing? (The answer was no.) Even the largest shareholder chimed in, which rarely happens on deal calls. “Just out of curiosity, why weren’t the larger shareholders consulted?” After an unsatisfactory answer, the 22% holder said to the CEO “would you mind coming to see me?”
You understand the general tone. Investors are displeased, and the largest shareholder is unimpressed and surprised. So now, all eyes are on the go-shop period. The day the deal was announced, SKIL closed at $11.03/share, a spread of -2%. The spread was negative for the entire go-shop period, and SKIL peaked at $11.29/share (-4.3%) on March 9, as the market knew the go-shop expired, and announcement of a superior proposal was anticipated. The following day, SKIL provided an update on the process and said that Credit Suisse contacted 45 parties on SKIL’s behalf, entered 10 confidentiality agreements, and received one conditional preliminary proposal for an offer above $10.80/share, but no formal offer was made. So there it is. The company was shopped to third parties and no one took the bait, and SKIL immediately fell to $10.71/share.
On March 12, SKIL held its earnings call, and during the Q&A, the issue of shareholder approval arose again. Management said they had spoken with shareholders “both large and small”, and they are “feeling very good” about the April 6 shareholder vote. So with a 22% holder who sounded unimpressed by the deal initially, one would think that said holder’s blessing was secured in order for management to have such optimism. The spread should be tight, right? Wrong. As late March 29 SKIL was trading at $10.18/share, a 6% spread, for a deal that should close in two months. That is too wide, so we must be missing something. Reviewing the conference call transcript, we can determine one of two things. By saying that they are comfortable with the shareholder vote, management is either lying, or they are not disclosing all of the information they have. With a 6% spread, arbs were pricing in a low probability that the deal closes. It would be much tighter if there were any confidence in the vote. It’s tough to be a buyer (will the vote be successful?) or a seller at this point (SKIL’s downside valuation is attractive).
On April 1, with arbs’ hands behind their backs, and the vote a few days away, SKIL announced that the offer price was revised from $10.80 to $11.25/share. The vote was rescheduled from April 6 to April 29. Columbia Wanger Asset Management, the largest holder, entered a voting agreement in favor of the new terms. The offer was increased because SKIL thought the likelihood of success with the original deal was insufficient. SKIL closed that day at $11.10/share, for a spread of 1.3%. Not only did the market not expect a higher offer, which the 6% spread indicated, but you have to give credit to Columbia Wanger and the other parties involved for not showing their hand. The event-driven space is so used to having leaks that it is a shock when people don’t have an idea of what is going on behind the scenes.
The lesson here is that shareholders matter. If deal parties do not consult with, and receive voting agreements from, shareholders before a transaction is announced, then they better be sure that the valuation is attractive enough for the holders to agree with ex post.