Scrap-car deal battle is a heaping mess

RB Global

23/02/2023 16:01

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Jonathan Guilford
       NEW YORK, Feb 23 (Reuters Breakingviews) - When is a
merger worth it? For shareholders, when it gets the buyer
something it couldn’t get otherwise. Unfortunately for investors
in industrial equipment purveyor Ritchie Bros Auctioneers
 RBA.TO , that’s not entirely the case in its $7 billion deal
with salvage-yard operator IAA  IAA.N .
    Announced in November, the cash-and-stock merger has drawn
stiff opposition. Investors owning 10% of Ritchie’s shares, as
well as IAA shareholder Discerene, want it nixed. There are
boosters, too. Ritchie sealed a $500m investment from Starboard
Value in support. Holders of a further 8% of Ritchie are in
favor, along with IAA shareholder Ancora, who after pushing for
the deal’s terms to be re-cut now backs it.  
    Ritchie’s shares have been fickle, too. They are about where
they were before the deal was announced, but only after crashing
20% upon its unveiling. There’s some reason for that. Acquirers
justify paying a premium for a company by touting new
opportunities gleaned by combining, including at the very least
some cost savings. In this case, the companies say savings
should juice EBITDA by around $110 million, at the midpoint.
Taxed and capitalized, that’s worth under $900 million, barely
more than the premium Ritchie is paying. 
    Worse, because Ritchie shareholders will only own part of
the combined company, they don’t get the benefit of all of those
savings, unlike in an all-cash deal. To get a sense of how much
they’ll lay claim to, put together the unaffected market values
of Ritchie and IAA from before the deal and add in the
synergies. Then take Ritchie investors’ 59% ownership of that
value, and deduct the cash paid to IAA. They’re left with around
$6.4 billion - less than the company’s market value today.
    Cost savings aren’t the whole story, though. After weeks of
pushback, Ritchie boss Ann Fandozzi revealed a list of “revenue
opportunities” the deal unlocks. The company says these should
increase EBITDA by anywhere from $250 to $780 million. Though
revenue synergies are often unrealistic – and in this case the
company's estimated value for them runs nearly as high
as Ritchie’s standalone stock price – generous shareholders
could give Fandozzi some credit. Some of IAA’s scrap yards are
in locations that can’t be duplicated, because of zoning and
other issues, and Ritchie’s access to them could enable the new
company to be more nimble with its equipment inventory. 
    The problem is, that will account for, at the high end, $125
million in extra profit, and there is no guarantee it won't be
closer to the lower end of Ritchie’s estimate. Plus, some of the
identified opportunities aren't clearly connected to this
particular merger. Goals like winning share from IAA arch-rival
Copart  CPRT.O  - the largest identified opportunity - and
moving into new markets once a non-compete with the target’s
former owner expires don’t require a deal. So if the opportunity
is simply one in which IAA’s existing business gets better, its
existing shareholders can push existing management to do that
without the hassle of a merger.
    Fandozzi, who has a background in the world of private
equity-backed dealmaking, is confident that she sees things more
clearly. In a response released on Wednesday, Ritchie casts
opponent Luxor Capital’s case as factually inaccurate. In the
end, she would need at least $150 million in extra synergies to
get the math just to break-even for Ritchie shareholders, while
successfully navigating the risk inherent in merger
integration. In that sense, the deal requires a lot of faith in
Fandozzi for it to stack up.
    Follow @JMAGuilford on Twitter
    CONTEXT NEWS
    Heavy equipment auction company Ritchie Bros Auctioneers
agreed on Nov. 7 to acquire salvage-yard operator IAA for $7.3
billion, including debt. 
    IAA shareholder Discerene and Ritchie Bros investors Luxor
Capital, Janus Henderson, Vontobel, Deep Field Asset Management
and Eminence Capital have publicly announced their opposition to
the deal. Starboard Value has agreed to invest $500 million in
Ritchie Bros in support of the deal, while IAA shareholder
Ancora is also in favor. 
 (Editing by Lauren Silva Laughlin and Sharon Lam)
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