Tender Offer Strategy Gets A Second Wind

Target: Laureate Education

Price: $3.82 billion

Sponsor: Kohlberg Kravis Roberts & Co.

After disappearing from the buyout playbook, tender offers are making a comeback thanks to new regulatory guidance and a climate that favors quick deal-making.

In the last month, several LBO firms entangled in knotty take-privates have abandoned the traditional buyout model in favor of the tender offer. Kohlberg Kravis Roberts & Co., the New York buyout firm, led the way with its $3.82 billion cash tender launched June 8 for Laureate Education. KKR, working with a host of hedge funds, other passive investors, and the company’s CEO, used the tender offer to raise its original bid after three major shareholders expressed dissatisfaction with it.

Less than a week later, a buyout consortium consisting of The Blackstone Group, GS Capital Partners, KKR and TPG Capital launched an $11.4 billion tender offer for Biomet Inc., the medical device company. The firms’ original bid, made in December 2006, failed to earn support from a key proxy advisor, and they were forced to respond with a higher offer before commencing the tender.

In tender offers, bidders bypass boards of directors to make cash offers directly to stockholders, who typically must respond within 30 days. If the premium to the share price is right, and roughly 85 percent of shareholders go along, sponsors can complete a deal with relative ease. “It can give a private equity firm a real speed advantage over strategic buyers,” said David Grinberg, a partner with Manatt, Phelps & Phillips in Los Angeles.

Tender offers largely fell out of favor after the Securities and Exchange Commission adopted a series of rules in 1986 that, among other things, require bidders to pay all stockholders the same amount per share. Simple enough, but courts subsequently ruled that when sponsors agreed to new compensation packages and severance payments for the target company’s managers and directors, all of whom owned stock in the company, the buyout firms violated the rule requiring equal sums to be paid for each share. “Most of us tend to favor the least expensive way to do a deal,” said Joe Bartlett, of counsel to law firm Fish & Richardson, explaining why tender offers became unpopular.

“With every tender offer, unless it was lilywhite, there was a threat of litigation,” added Douglas Cifu, partner at Paul, Weiss, Rifkind, Wharton & Garrison, who hasn’t worked on a tender offer since 2001.

But last fall, the SEC updated its rules, giving buyers the ability to make severance and retention payments without having those sums affect the per-share amount due to all stockholders. Throw in the fact that shareholders are now taking a decidedly more pronounced role in the fate of buyout bids, and LBO shops have suddenly found that tender offers can offer a potentially quick and simple remedy to a protracted shareholder battle.

KKR, for instance, initiated the tender offer for Laureate because it presents a “faster and more efficient process,” according to a regulatory filing. And because the tender option is only open to those who held Laureate shares before the sweetened bid was announced, the KKR sponsor group is seeking to restrict the involvement of arbitragers who might have jumped into the stock to force an even higher bid, according to the filing. The tender offer involves “less risk and more certainty for a target that they’re going to get money in their pocket,” said Paul Weiss’s Cifu, who’s not working on the Laureate deal.

Buyout firms can also use tender offers to knock aside a bidder that already has an agreement in hand, said Len Nannarone, a Boston-based partner with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo who is now working on four tender offers on behalf of buyout firms. “To come in and take somebody out and get a board to agree to a new deal is hard, and a tender offer can be a way to do it,” Nannarone said.

Tender offers aren’t without risks. Delaware law prohibits bidders from collateralizing against more than 50 percent of the target company’s assets until the target is owned by the sponsor. That means that buyout firms must rely more heavily than usual on equity bridges from banks to complete tenders, Grinberg said. Buyout firms can refinance the deal after it closes, but banks might be reluctant to assume the long-term risk of an equity bridge, he said.—J.H.