How one firm made child’s play of tricky M&A games
25/04/2024 13:00
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Jeffrey Goldfarb
NEW YORK, April 24 (Reuters Breakingviews) - Corporate
takeovers tend to be messier than preschoolers at craft time.
Even friendly transactions involve a lot of fussing over price
and scribbling out contract revisions, while contested ones add
sharp elbows and tantrums. It’s ironic, then, that a buyer
recently found a way to sidestep such tumult at a company
catering to kids. Whether the feat can be replicated
elsewhere will be the challenge for grownups in the dealmaking
world.
The Children’s Place PLCE.O , a clothing designer with more
than 500 stores across North America, inadvertently wrote itself
into M&A lore when it issued a dire outlook earlier this year.
Contrary to earlier guidance that it would achieve a narrow
operating profit for the three months through January, the
retailer flagged unanticipated losses. Moreover, it said it was
scrambling to “obtain new financing necessary to support ongoing
operations,” raising the specter of a cash crunch just as it
tried to replenish inventory for the all-important
back-to-school season. Bankruptcy looked like a real
possibility.
As the company’s stock price went into freefall in the hours
after the warning, somebody started buying shares. A lot of
them. The somebody would soon reveal itself to be Mithaq
Capital, an investment fund managing money for Saudi Arabia’s
Al-Rajhi family. By the time the market closed that fateful
Friday in February, the firm owned nearly a quarter of The
Children’s Place. By the following Tuesday, Mithaq had sewn up
a controlling stake. Just like that, without protracted
negotiations or signed agreements, an acquisition was all but
done.
Although a relatively small deal – the market value of The
Children’s Place’s has tumbled to $100 million from a peak of
about $2.8 billion in 2018 – it has captivated merger
practitioners. Mithaq’s maneuvering raises questions about
whether, when and how to deploy anti-takeover tactics. It also
spotlights differences between the United States and other
markets, where regulations would have forced Mithaq to tender an
offer for the rest of the company’s shares. Perhaps most
tantalizing to financial and legal consiglieri is that the
deal now provides a rough practical outline for what was once
only a theoretical exercise: How to buy a public company without
permission.
There were plenty of potential complications for Mithaq and
its attorneys at Cadwalader, Wickersham & Taft to address in the
ensuing weeks, but the campaign was a breeze compared to its
previous one. Just days after gaining control of The Children’s
Place, Mithaq abandoned a C$310 million hostile takeover attempt
of Toronto-based holding company Aimia AIM.TO , in which it had
accumulated a 28% stake. The Saudi firm first tried and
failed to oust the board. Aimia subsequently thwarted the
unwanted advances by unveiling a controversial private share
placement that would dilute Mithaq’s stake. The painstaking,
year-long fight only magnifies the appeal of Mithaq’s speedy
takeover in the United States.
The success owes partly to an obeisant target. The
Children’s Place, led by Chief Executive Jane Elfers since 2010,
might have been able to dig in its heels, too, or worse. Mithaq
informed the company of its presence, and intent to nominate
directors, the day after accumulating its initial tranche. At
that point, the board could have tried some sort of defensive
gambit, including a poison pill that flooded the market with
more shares, to prevent Mithaq from increasing its stake when
trading resumed. Even after Mithaq owned a majority, before it
took control of the board, The Children’s Place had the power to
file for bankruptcy protection. It was already in the process of
trying to borrow $130 million from restructuring shop Gordon
Brothers, a task complicated by a technical default on its
existing debt caused by the change of control.
Instead of intervening, however, Elfers and her fellow
directors let the situation unfold. That decision allowed
shareholders who wanted to sell to do so. Mithaq kept
buying, even as the stock’s price rebounded above where it had
been trading before The Children’s Place issued its distress
signal. Vendors, employees, landlords, creditors and others with
a vested interest in the outcome were thrown a lifeline, too. It
also helped nix the default worry, which lenders waived
temporarily.
Mithaq’s approach was a merciful recasting of a ploy used in
other, more hostile, scenarios. British satellite-TV operator
Sky, back when it was owned by media mogul Rupert Murdoch,
conducted a so-called dawn raid at ITV in 2006, snapping up
almost 18% of the UK broadcaster to upend plans by competitors
to buy it. Two years later, Chinese state-owned miner Chinalco
teamed up with U.S. aluminum producer Alcoa AA.N to stealthily
acquire 9% of Rio Tinto RIO.AX , effectively stopping rival BHP
BHP.AX from attempting a merger.
There are limits to Mithaq’s methods. In Delaware, where The
Children’s Place is incorporated, business law prohibits the
firm from increasing its stake any further for three years
without approval from two-thirds of the other shareholders.
That’s still far less restrictive than many other regimes,
including in Britain, where any investor that exceeds a certain
ownership threshold, often 30%, is required to offer a similar
deal to all other shareholders.
And while the relative ease with which Mithaq took over The
Children’s Place may inspire M&A mavens to search for ways to
apply a similar approach, the range of scenarios in which it can
work is probably limited. For example, it takes a prospective
target with a bleak short-term outlook, a suitor sufficiently
familiar with the company and a differentiated longer-term
strategy, and pockets deep enough to finance a turnaround.
Mithaq has now pumped nearly $170 million of unsecured funding
into The Children’s Place so it can pay suppliers and shore up
its balance sheet.
The real key is a sudden burst of stock available for
purchase, as happened when investors rushed out of The
Children’s Place’s en masse. This component raises the
tantalizing possibility that a crafty buyer could quickly build
up a huge position during an event such as a corporate spinoff
or a merger transaction, when shares change hands quickly and in
chunky volumes. Finding enough to amass majority control while
avoiding any forceful pushback, however, will be anything but
child’s play.
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CONTEXT NEWS
The Children’s Place said on April 17 that it had received an
unsecured and subordinated $90 million term loan from its
majority shareholder, Mithaq Capital, a Saudi family office. It
plans to use the money to pay off an existing loan and reduce
its accounts payable to vendors.
Mithaq’s acquisition of about 54% of the retailer’s common
stock in February triggered a change of control that caused an
event of default with lenders.
The new loan will accrue interest at the Secured Overnight
Financing Rate plus 4% a year, with accruing interest payments
deferred until April 30, 2025.
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Graphic: Active US anti-takeover poison pills are dwindling https://reut.rs/4d4i461
Graphic: The Children's Place has regressed in the stock market
https://reut.rs/4d8Bre5
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(Editing by Jonathan Guilford and Aditya Sriwatsav)
((For previous columns by the author, Reuters customers can
click on GOLDFARB/
jeffrey.goldfarb@thomsonreuters.com; Reuters Messaging:
jeffrey.goldfarb.thomsonreuters.com@reuters.net))