Thursday, May 24, 2007

Let Me Call You Sweetheart

If any of you Dear Readers out there doubt that there is drama concealed underneath the dry prose and completely off-putting format of disclosure documents filed with the SEC, you have only to visit Michelle Leder's blogsite to have the wool pulled back off your eyes. The SEC's requirement that publicly traded companies disclose material information and events leads to all sorts of goodies reaching the public domain, even if management or the directors would much prefer they didn't. And, notwithstanding corporate lawyers' best efforts to wrap such dirty laundry in sixteen double-layer, airtight garbage bags' worth of impenetrable legalese, the diligent reader is still able to get a satisfying whiff of scandal.

The latest such goodie to cross my (virtual) desk is an SC 13D/A filed today by Houston-based air freight forwarder EGL, Inc., which has been smack dab in the middle of a hotly contested takeover battle. On one side is Jim Crane, founder, Chairman, President, and CEO of the company, who teamed first with private equity shop General Atlantic and later with Centerbridge and Woodbridge to make an offer to take the company private at $36 and later $38 per share. On the other side is Apollo Management and its recently acquired portfolio company, CEVA Logistics, which has been conducting a very public campaign to counterbid, including suing the company earlier when it claimed it was not given a fair opportunity to submit an initial bid.

Well, the latest twist in the long-running saga is that EGL's Special Committee announced today that Apollo and CEVA have finally won the war, and will buy the company for around $2 billion, or $47.50 per share. As previously agreed with the Crane group, EGL will pay a $30 million break-up fee to them to go away. Now, I know Jim Crane, and I can tell you that notwithstanding a substantial goodbye kiss and $47.50 per share for his 17.4% of the company, he will not be a happy camper to be sent packing from the company he built with his own two hands. I can imagine that the post-deal debrief over at Camp Crane is not a pretty sight, with recriminations flying left and right and fingers being pointed liberally.

For proof, we have this gem from today's 13D amendment:

EXPLANATORY NOTES: This Amendment No. 8 to Schedule 13D (this "Amendment") is being filed by James R. Crane and the other reporting persons (collectively, the "Reporting Persons") signatory hereto as identified in the Schedule 13D filed on January 22, 2007, as amended by [blah, blah, blah—trust me, you are missing nothing important here] ... Capitalized terms used but not defined in this Amendment shall have the meanings given in the Schedule 13D.

The Reporting Persons wish to make clear that Mr. E. Joseph Bento, who was one of the signatories to the Schedule 13D filed on January 22, 2007 and to Amendments No. 1 through 7 thereof as previously filed, was not a signatory to Amendment No. 8 to the Schedule 13D and is not a signatory to this Amendment.

The Reporting Persons have excluded Mr. Bento as a signatory and as a member of the group because they believe, based on reliable information, that Mr. Bento, while purporting to cooperate with the Reporting Persons in their offer to acquire the Issuer, in fact has been secretly and improperly cooperating with Apollo Management VI, L.P. and its portfolio company, CEVA Group Plc (collectively, "Apollo/CEVA") in the competing offer by Apollo/CEVA to acquire the Issuer.

The Reporting Persons further believe, based on reliable information that, while holding himself out to the Reporting Persons as a person cooperating with the Reporting Persons' bid for the Issuer, Mr. Bento in fact has, without the prior knowledge of or permission from the Reporting Persons, improperly shared confidential information relating to the Reporting Persons' bidding strategy and other confidential information regarding the Reporting Persons' offer to acquire the Issuer. The Reporting Persons cannot give any assurance that prior statements of Mr. Bento in the Schedule 13D as to his intentions were in fact truthful and accurate.

The Reporting Persons intend to explore all appropriate remedies, including legal action for damages and other relief, that they may have against Mr. Bento.

Ooooh, Mr. Bento! Juicy, if true. A rat, a mole, a squealer, buried deep in the heart of the management bidding group. The skin tingles.

Apart from being an entertaining soap opera and a rare instance where the corporate litigators are likely to earn more than the investment bankers, the whole EGL saga illustrates a few salient points about the current private equity boom that are worth noting.

First, the take private played out the way it did initially because it was launched by current management, in this case a dominant entrepreneur-founder with close to an effective blocking stake in the company stock. The initial agreed deal of $38 per share was viewed by many outsiders as too low, but no-one could see how another bidder could get around management's sweetheart deal. Conclusion #1: Big management equity stake = potential for a sweetheart MBO deal. Caveat investor.

Second, EGL's board was packed with Mr. Crane's golfing buddies from Houston (Jim is a single digit handicapper, apropos of nothing), which he clearly dominated and directed how to behave. To no-one's surprise, the Special Committee deputized to run a fair process apparently did a crap job, effectively signing a $38 per share deal plus a break-up fee with the Crane group without giving Apollo a chance to table a competing bid (or so Apollo claimed in its initial lawsuit). Only when Apollo did sue and went public with its complaints, did the Special Committee begin to behave in a fiduciarily responsible manner. (Let's give one lackluster cheer for Special Committee advisor Deutsche Bank.) Conclusion #2: Run a fair process, or the other side's attorneys will force you to.

And third, if there ever was a "gentleman's agreement" among private equity shops not to jump each other's agreed deals—which I doubt was very strong if it did exist—those days seem to be drawing to a close. However, it could be argued that Apollo/CEVA really represented a competing strategic bidder, not a pure PE shop, and one which was strongly motivated to buy EGL because it represented a rare opportunity to acquire a substantial freight forwarding business to integrate with CEVA's contract logistics business. Perhaps that is why Apollo fought so hard, and Apollo/CEVA ended up paying a very full price for what has been viewed as a distinctly second-rate property in the marketplace. Conclusion #3: Hell, I don't know. You figure it out.

In any event, the EGL take private is a nifty example of how private equity can indeed do the right thing by existing public shareholders in a situation where entrenched management can potentially deter competing bids. While EGL shareholders did not recoup their 52-week high stock price of $51.49, they did end up receiving a 59.5% premium to the pre-deal announcement share price. I only hope Apollo's limited partners make out as well.

© 2007 The Epicurean Dealmaker. All rights reserved.