Take-privates Encounter More Troubled Waters

Problems keep piling on public-to-private deals.

After learning of a proposed $115 million buyout last November led by venture capital firms Bessemer Venture Partners and Insight Venture Partners, Netsmart shareholders sued the company, saying that the $16.50 per share offer was too cheap, even if the price represented a 25 percent premium for investors. The crux of the dispute centered on the shareholder argument that management’s vested interest in the deal kept the offering price low. It’s a growing sentiment that’s complicating several live take-private deals, including the buyouts of Clear Channel Communications and EGL Inc.

Last month, a Delaware Chancery Court judge proved sympathetic, forcing software maker Netsmart to delay a shareholder vote on the proposed take-private. Judge Leo Strine ruled that despite having a go-shop provision and approval from a committee of independent directors, the company failed to take sufficient steps to solicit interest from strategic buyers. Moreover, the ruling suggested that the buyers and management were too cozy.

The case highlights a new aspect of the deal making landscape: Buyout firms and their target company boards must demonstrate that management has not influenced the sale process in any way, according law firm Weil, Gotshal & Manges (the law firm isn’t involved, but issued commentary about it). In the Netsmart case, there were a few faux pas. The company’s chief executive officer, for example, participated in meetings with the board’s special committee formed to evaluate the deal, and the special committee relied on the company’s long-time financial advisor for guidance, the law firm wrote. Netsmart, in a statement issued following the ruling, said it would provide supplemental materials and expected to obtain shareholder approval for the deal.

Ironically, even buyout firms are complaining about management-backed LBOs that just don’t feel competitive. Apollo Management is engaged in one such scrap over Houston-based shipping logistics firm EGL Inc. James Crane, EGL’s CEO and largest shareholder, has joined with two buyout firms, Centerbridge Partners and the Woodbridge Company, to offer stockholders a $38 per share bid for the company.

In agreeing to the offer, Crane and the company’s board passed on a $40 per share tender from Apollo, according to the New York buyout firm. In a rare public display of brinkmanship, Apollo socked EGL with a lawsuit, demanding equal access to company information in order to mount a credible offer for EGL. Apollo also raised its bid to $41 per share. Crane responded with a statement saying that Apollo’s offer wasn’t firm and contended the LBO shop saw “substantial” nonpublic information, enough to perform adequate due diligence.

In still another management-backed public-to-private that appears to be headed south, hedge fund Highfields Capital Management, one of the largest shareholders of radio operator Clear Channel Communications, said last month that it will vote against the $18.7 billion buyout led by Bain Capital and Thomas H. Lee Partners. The buyout shops in the Clear Channel deal teamed with the controlling Mays family, and shareholders have complained the offering price is too low.

The San Antonio-based company’s biggest shareholder, Fidelity Investments, already announced it intended to vote against the take-private. Highfields and Fidelity together own 15 percent of Clear Channel. Texas law requires 75 percent of Clear Channel’s shareholders to approve the LBO in the April 19 vote.

Facing significant opposition, Clear Channel has already postponed the vote once.—J.H. & D.P.