Firms Get Creative On Take-Privates

On the heels of “stub equity” and go-shop clauses, two LBO firms recently demonstrated yet another creative a means of quieting the growing shareholder discontent that threatens to scuttle take-privates.

On March 30, Silver Lake and TPG successfully delisted Sabre Holdings, the owner of the Web site. But before closing the $4.5 billion deal on March 30, Silver Lake and TPG agreed to give Sabre’s shareholders a cut of the profits if the firms sell their majority holding in Sabre within six months.

The agreement, part of a settlement of lawsuits filed by shareholders opposing the buyout deal, came two days before 87 percent of Sabre’s shareholders approved the LBO. The suits were filed shortly after Silver Lake and TPG announced the buyout in December.

Under the terms of the settlement, if Silver Lake and TPG sell at least 60 percent of Sabre or 60 percent of the Travelocity unit within six months of March 30 and turn a profit of at least 10 percent on the sale, then the former Sabre shareholders would be entitled to a quarter of that profit, according to a regulatory filing.

“The question is whether this will set a standard of fiduciary responsibility for boards and what a buyer should do,” said John LeClaire, a partner in the private equity practice of law firm Goodwin Procter in Bostno.

He added that these kind of clawback agreements are common in private takeovers, and he placed it under the category of what he calls “schmuck insurance,” a thin layer of protection for boards of directors. “It’s a post-deal check on the board having been wrong that the price wasn’t fair.”

The agreement is the latest attempt by buyout firms to gain approval from shareholders who believe that LBO shops buy public companies on the cheap, hold them for a short amount of time, and reap big rewards when taking them public again. In November, for instance, The Carlyle Group, Clayton, Dubilier & Rice and Merrill Lynch Global Private Equity took public Hertz Corp. seven months after carving the rental-car company out of cash-strapped Ford Motor Co. The public offering was used to pay down a loan that paid out a $1 billion dividend to the three firms. Since the IPO, the stock has risen 50 percent.

To curry favor with recalcitrant shareholders such as hedge funds, buyout firms in the United Kingdom have come to rely on so-called stub equity that allows big stockholders to retain an interest in a public company after it’s taken private. The move allows the shareholders to partake in any gains the private equity firms are able to achieve.

In a similar attempt to mollify the unhappy shareholders of Clear Channel Communications, buyout firms Bain Capital and Thomas H. Lee Partners proposed that a hedge fund roll its 5 percent stake in the radio company into an investment in the private company. The hedge fund turned down the offer and said it would vote against the proposed buyout.—J.H.