BJ’s Wholesale Club Inc.’s directors shortchanged investors in a $2.8 billion sale of the third- largest U.S. warehouse-club chain to two private-equity firms by dismissing higher offers, a lawyer argued.
Officials of Westborough, Massachusetts-based BJ’s turned down higher offers from two unidentified bidders to accept a $51.25-a-share going-private deal with Leonard Green & Partners LP and CVC Capital Partners so senior managers could protect their jobs, said Cullin O’Brien, a lawyer for investors suing over the buyout.
BJ’s board members “steered the process toward Leonard Green,” he told Delaware Chancery Court Judge John Noble at a hearing in Dover today. The judge didn’t immediately make a decision on whether to let the case continue.
Last month, Moody’s Investors Service downgraded BJ’s after finding executives adopted a “highly aggressive” financial strategy in the wake of the acquisition. The chain announced this year that it will back two new debt offerings totaling more than $1.6 billion to refinance loans tied to the buyout.
BJ’s is the No. 3 warehouse-club chain after Costco Wholesale Corp. (COST) and Wal-Mart Stores Inc. (WMT)’s Sam’s Club. The New York Post reported in August that BJ’s executives turned down a $55-a-share offer from Wal-Mart because of antitrust concerns.
O’Brien noted in today’s argument that Wal-Mart was one of the unidentified bidders for BJ’s. Noble instructed the court reporter to strike the identification from the record of the hearing to honor an agreement not to officially identify other bidders. The judge said O’Brien’s slip was inadvertent.
BJ’s lawyers urged the judge to throw out the case, saying investors couldn’t show the directors botched the effort to shop the company around for the highest price.
The shareholders “haven’t produced any facts” to back up claims that they engineered the sale of BJ’s to the Leonard Green group, Daniel Halston, one of the company’s lawyers, said.
A Virgin Islands-based pension fund, the asset-management division of a German bank and individual investors who hold BJ’s shares sued company directors over the buyout in Delaware, according to court filings.
The so-called derivative lawsuit would return any recovery from insurance covering BJ’s officers and directors to the company’s coffers.
The investors contend the directors put their own interests ahead of shareholders’ in backing the offer from Los Angeles- based Leonard Green and CVC, which is based in London.
Laura Sen, BJ’s chief executive officer, won assurances that the funds would “retain BJ’s senior management following consummation of the buyout” in return for backing the bid, the investors argued in an Aug. 8 court filing.
Sen and other BJ’s board members dismissed the higher bid from the unidentified rival in warehouse food-store industry because of antitrust concerns that may have been able to be overcome, O’Brien argued today.
Herbert Zarkin, chairman of BJ’s board, negotiated with Leonard Green for three months before alerting his colleagues on the board that the private-equity firm was interested in buying the chain, O’Brien said.
Those talks showed favoritism toward the Leonard Green bid and that “seems shady to me,” O’Brien said. Zarkin is BJ’s former CEO.
Lawyers for BJ’s directors said in their filings and in today’s argument that the private-equity buyout provided a more than 38 percent premium to shareholders and that board members shopped the company around to at least 23 potential buyers. They also said the deal was approved by 99 percent of voting stockholders.
Investors challenging the deal can’t produce any evidence showing board members acted in bad faith in backing the buyout, the company’s lawyers said.
“The board was entitled to rely on advisers,” who said the antitrust problems inherent in a deal with the unidentified industry rival made a buyout unworkable, Halston said.
The case is In Re BJ’s Wholesale Club Inc. Shareholders Litigation, CA6623, Delaware Chancery Court (Wilmington).
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