Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Another leveraged buyout, another group of disappointed shareholders.

West Corp. -- which specializes in conference calls, 911 calls and other communications services -- agreed late Tuesday to be acquired by Apollo Global Management LLC. The deal values the Omaha, Nebraska-based company at roughly $5.1 billion, including debt, or $23.50 a share -- a discount to its closing price Tuesday. Shareholders had gotten so swept away with the idea of a deal that they pushed the stock to as high as $26.91 a share in late April following reports that West Corp. was in advanced negotiations with the private equity firm. 

That Was Quick
Like many private equity-backed companies, West Corp.'s publicly traded era was short lived
Source: Bloomberg

While it's true that the M&A market is still running pretty hot, whatever happened to a sense of restraint? Just a month ago, I wrote that investors betting on lofty takeover premiums risked getting burned. And the West Corp. deal emphasizes that shareholders should exercise even more discipline if target companies have a long-time private equity investor (or investors), because such parties have proven willing to accept offers that while decent, aren't a knock-out.

In this case, Thomas H. Lee Partners LP and Quadrangle Group LLC have been invested in West Corp. since 2006. Even though they were earning a decent quarterly dividend for sticking around (and the stock remains above its IPO price), both firms likely faced pressure to sell their remaining combined stakes of 21.4 percent and 4.5 percent, respectively.

If that dynamic seems familiar, it's because it's playing out in several other recently announced deals. Shares in laboratory-supply distributor VWR Corp. fell more than 2 percent last Friday when the company announced it would be acquired by Avantor Performance Materials, a portfolio company controlled by private equity firm New Mountain Capital LLC. VWR Corp.'s motivated seller with a nearly 35 percent stake? Madison Dearborn Partners LLC, the private equity firm which has backed the company since 2007. 

Shares in Capital Bank Financial Corp. also slid more than 5 percent last Thursday after agreeing to be bought by First Horizon National Corp. for a discount to where it was trading (it had jumped on hopes of a deal). And guess what? Shareholders on the company's registry include private equity firms Crestview Partners and Oak Hill Capital Management LLC, which each have a board seat and have backed the lender since before its 2012 IPO. 

Sliding Doors
Investors in a number of takeover targets including Capital Bank have anticipated loftier premiums than what has been ultimately agreed
Source: Bloomberg

The same theme applied to ski resort operator Intrawest Resorts last month, whose stock also fell after the deal's announcement: Long-time investor Fortress Investment Group LLC, which backed the company since 2006, endorsed a lower price than what other shareholders expected.

This phenomenon isn't going to happen every time a private equity-backed company is up for sale. But investors should stay on their toes (I'm talking to you, shareholders in Thomas H. Lee-backed Party City Holdco Inc.).  

Perhaps it's worth considering buying a target company's bonds or even taking a short position in shares if it seems that optimism ahead of a deal has gone too far.

Hello From the Other Side
Although West Corp.'s shares fell on its deal with Apollo, its bonds actually rallied because investors willl get made whole at 104 cents on the dollar
Source: Bloomberg

For those shareholders who are risk averse, it's somewhat safer to sell and then watch what transpires from the sidelines, if only because some takeovers are beginning to look a little more like "takeunders." 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net