Seeking Alpha
Special situations, event-driven, arbitrage, activist investor
Profile| Send Message|
( followers)  

Renaissance Learning's (NASDAQ:RLRN) mini bidding war has been a boon for risk arbitrageurs, but now it's time to take profits, as the stock is fully priced and higher bids are very unlikely.

The story began on August 16, when Renaissance announced pre-market it had signed a merger agreement with a fund managed by private equity firm Permira. According to the agreement, Renaissance shareholders were to receive $14.85 for their shares with the deal scheduled to close in the forth quarter of 2011.

The RLRN stock closed at $14.57 that day, and for the next week risk arbs were able to buy it in the $14.45-14.60 range, thus locking a highly certain spread of $.30 on average, which is about 2% in just 2 to 3 months. The certainty of the deal was enhanced by the fact that the Paul family, founders and controlling shareholders with 69% of the stock, supported the deal.

Things got interesting when on August 24, after the market close, Plato Learning, a competitor of RLRN, submitted an unsolicited conditional proposal to acquire RLRN for $15.50. The next day the stock price rose accordingly, and the arbs rejoiced.

The board of Renaissance met to consider the proposal from Plato, and was informed by the Pauls that they intend to vote down the Plato proposal and continue to support the deal with Permira, which was much closer to completion. Seeing as a Plato deal can never go through without the support of the over 2/3 Renaissance shares held by the Pauls, the board rejected the Plato proposal. This, however, constitutes a potential break of fiduciary duties by the board, which should be to try and secure the highest price possible for the company -- the Plato bid of $15.50 was higher than the Permira deal of $14.85.

This potential conflict seemed to be resolved when on September 27 Renaissance signed an amended agreement with Plato for $15.50 per share. The Pauls sweetened the Permira deal further by giving up part of their payoff to go towards the remaining shares of Renaissance held by other holders: The Pauls would only accept $15 for their stock, allowing the minority shareholders to receive $16.60 for their shares. This was probably done to silence lawsuits started by two minority shareholders after the board had decided previously to go with the then lower-priced Permira deal.

The next day, September 28, Plato responded with a raised acquisition proposal for an average price of $16.01 per share, which Plato suggested be split so that the Pauls receive $15.10 - slightly more than they were willing to accept from Permira, while the remaining shareholders get $18 for their shares (much higher than the subsidized $16.60 in the Permira deal). While this proposal was obviously aimed to increase pressure on the board by giving the minority shareholders a much higher price than the existing deal, in my opinion it was a snafu by Plato.

The split proposed by the Plato was based on the presumption that the Pauls will be willing to accept less money than the rest of the shareholders. While the controlling shareholders had done exactly that by accepting $15.00 in the Permira deal, this was done voluntary and to ease the Permira deal through with the remaining share holders. The Pauls clearly prefer the Permira merger, and if they're willing to give part of their proceeds to other shareholders, that is certainly their right. However the Pauls have no obligation, legal or moral, to do the same for Plato, whose proposal they opposed. Further, offering different prices to different shareholders may even be viewed as a coercive offer. Predictably, the Pauls informed the board that they would vote down the revised Plato proposal and would continue to support the subsidized Permira deal.

On October 10 Plato Learning revised its controversial proposal again, now offering $16.90 for all shares. This was higher than even the subsidized $16.60 minority shareholders were to receive in the Permira deal, and it did not need any help from the Pauls, which Plato was obviously not getting. The Pauls announced they would vote down this proposal too.

The board's conflict was now renewed, as the revised proposal by Plato was higher than not just the average price of the Permira deal, but the sweetened (by the Pauls) price for the minority holders. Several shareholders demanded in Wisconsin Court (where Renaissance is incorporated) that Renaissance and Permira be enjoined -- blocked from completing the deal, which was supposed to close as early as next week.

In fact, the special shareholder meeting to vote on the Permira deal is scheduled for Monday, October 17. Since the court decision on blocking the deal should be announced today, Friday, October 14, this is the only thing that can stop the deal from closing next week. As the Pauls control 69% of the vote the shareholder approval for the Permira deal is a certainty.

In a Proxy Supplement, filed with the SEC yesterday, October 13, Renaissance discloses that Permira was approached again by the Pauls seeking a raised bid, which, as the Pauls would receive an unchanged $15, would allow the remaining shareholders to get $17.25, thus beating the latest Plato proposal. Permira declined to raise the bid.

Analysis

At this point shareholders and arbs have seen their shares go up from $14.57 the day the Permira merger was announced to a current market price of $16.70. A very nice profit indeed. A raised bid is clearly not coming from Permira and Plato has realized that no price will make the Pauls vote in their favor, so a raised bid will be pointless.

Everything now is in the hands of the Wisconsin judge, but the upside potential is small and very uncertain. If the judge decides to side with the Renaissance board, the Permira merger will close as planned next week, and minority shareholders, including arbs, will get $16.60, which is now 10 cents lower than the current market price. If the judge blocks the merger, which likely would be appealed by the board, shareholders may get the $16.90, but only if the Pauls agree to a merger with Plato. So there is a significant chance that a merger will not happen at all, unless Permira comes back with an even higher bid, which seems unlikely.

Source: Time To Take Profits In Renaissance Learning