With interest rates at secular low levels and an economy rebounding from recession, the stage is set for a buyout wave by managements who are the first on the scene to see the light at the end of the recessionary tunnel. These insiders become aware of the turnaround in a company's operating prospects long before most board members and shareowners.
There is a coming tsunami of management buyout (MBO) bids that will be submitted to boards still relying on internal projections that were based on recession-level operating results. Most corporate boards don't get wise to this "sand-bagging" until there are several periods of exceeding projections, after which, they finally might hold management's projections to a little more scrutiny.
Furthermore, these MBO bids are promoted as doing a favor for shareowners by 'providing liquidity' to shareowners who suffered valuation declines in the recession. The MBO squeezes them out from participation in any future growth in earnings or increase in shareholder value, just as the turnaround kicks in. Shareowners need to become sensitized to the fact that these MBO offers are not being made for their benefit, but for prospective returns to the insider buyers.
Shareowners need to become aware of and arm themselves to take action against self-dealing MBO deal protection measures. Language intended to chill or preclude higher competitive bids and a full and fair auction process blocks shareowners from maximizing the value of a company's rebounding prospects that a buyout freezes them out from.
Case in point: At the end of December 2010, sub-prime auto lender United PanAm Financial Corp. (UPFC.PK) (“UPFC”) entered into a merger agreement with its Chairman, Guillermo Bron, senior members of management, and a private equity firm, Pine Brook Road Associates (the "Insider Buyout Group") to squeeze out all other UPFC shareholders for $7.05/share. Here is the press release announcing the agreement.
This $7.05/share price is well below UPFC’s book value/share and multiples of several other public companies in the industry such as Nicholas Financial (NICK) Consumer Portfolio Service (CPSS), Credit Acceptance Corp (CACC) and America's Car Mart (CRMT) and recent takeout deals such as General Motors' acquisition of Americredit (ACF).
While UPFC's stock price in the teens and twenties before the sub-prime meltdown may not be applicable for comparison to UPFC's proposed buyout price, neither is reference to a "premium" to recessionary era stock prices that were artificially manipulated downwards by de-registering UPFC's stock from SEC disclosures and termination of normal historical investor relations practices.
With no EDGAR filings by UPFC due to its de-registered status, we were only recently able to obtain a Proxy for the upcoming February 24, 2011 Special Meeting being held to vote on this transaction. We have now been successful in getting UPFC to have a link to the merger Proxy (800K PDF to load) on Broadridge’s ProxyVote website for other UPFC shareholders to review. (If the link provided above does not work for you, please contact us and we would be glad to e-mail you a PDF copy of the Proxy.
As a UPFC shareowner, my firm, Lawndale Capital Management, is currently reviewing this Proxy. From our initial review so far, we have confirmed our worst suspicions that, without obtaining a pre-signing market check, UPFC's directors entered into an agreement for the company to be sold to Chairman Bron and his Insider Buyout Group with costly deal protections, including no-shop restrictions and costly expense reimbursement and termination fees. All of these protections greatly chill or prevent UPFC shareholders from obtaining higher alternative bids. There is a long 1-year “tail” on the termination fee that provides a windfall to Bron and this Insider Buyout Group, if, even after shareholders vote to reject the proposed insider sale, UPFC’s enters into a transaction with someone else.
A “majority of the minority” vote requirement in many buyout transactions, traditionally afford public shareholders, being squeezed out by controlling shareowners, some protection from unfair transaction terms. However, not all majority of the minority vote provisions are created equal as is the case here with UPFC.
In this UPFC transaction, the “majority of the minority” vote requirement language requires a majority of only those votes cast either “for” or “AGAINST” in order to cram the Insider Buyout Group's low-ball transaction through. What this means in plain English is that abstention votes or proxies not returned are NOT counted in the divisor. Usually abstentions or proxies thrown away count against a deal's passage. However, due to the unique language in UPFC's Merger Agreement, abstentions or non-votes can actually facilitate merger approval. Thus, it is imperative for all UPFC shareowners, opposed to the Insider Buyout Group's offer to obtain and vote their Proxies at the Special Meeting.
As Lawndale's recent public announcement of our UPFC buyout voting intentions stated, we will be voting our UPFC shares AGAINST the proposed merger and AGAINST adjournment. (Note: we are also seriously considering exercising our Dissenter Rights should this shareowner freezeout get approved. But using Dissenter or Appraisal rights will be the subject of a future article)
As the economy, credit markets, and company prospects rebound from recessionary lows, it is particularly important for shareowners to be vigilante in protecting themselves from the inherent self-interest associated with MBO's, especially those like UPFC's. This proposed UPFC MBO is the tip of the iceberg in a Titanic wave of upcoming shareowner freeze-outs.
Disclosure: At time of writing, funds that I manage are long UPFC.PK. The funds or its affiliates may buy or sell securities of this issuer at any time.