Legal Issues With the Private Equity Takeover
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In late December of 2012, New York-based asset management firm Duff and Phelps (NYSE: DUF) announced that it had accepted a buyout offer from an investment consortium led by the Carlyle Group (NASDAQ: CG). The consortium features a number of Carlyle Group subsidiaries, including Stone Point Capital and the Edmond de Rothschild Group. It will also benefit from significant investments by certain members of the Duff and Phelps senior management team. As such, it is currently the subject of a potential lawsuit that challenges both its legality and methodology. If the deal goes through in its current form, it will be worth about $665 million and may close by the end of the second quarter of 2013.
About Duff and Phelps and the Buyout Consortium
Duff and Phelps is a financial advisory service and investment bank that has worked with a number of high-profile sports teams and buyout consortia in recent years. The company provides merger-and-acquisition support, due diligence, valuation services and other investment banking services. It employs just under 1,300 full-time workers and earned $21.9 million on $448.2 million in revenues in 2011.
The consortium that aims to buy out Duff and Phelps is led by Washington, D.C.-based Carlyle Group and its subsidiaries. With over $150 billion in assets currently under management, Carlyle is one of the world's largest private equity firms and does business using several wholly-owned and partially-owned subsidiaries. Crucially, its buyout of Duff and Phelps involves several members of the smaller firm's senior management team. This has formed the basis of the ongoing legal investigation into the pending deal.
How the Deal Is Structured
The Carlyle Group-led consortium will issue cash payments of $15.50 per share to all of Duff and Phelps's outstanding shareholders. Once this has taken place, the company will cease to trade on the public markets. Under the terms of the deal, the current Duff and Phelps senior management team will remain in place.
Prior to the announcement of the buyout, Duff and Phelps traded in a range between $11.50 and $13 per share. On its last full day of trading before the announcement, it closed at $13.05. Relative to this closing price, the buyout offers a return of 19.1 percent. As of mid-January of 2013, the company's stock is trading between $15.50 and $15.80 per share. Relative to its January 18 closing price of $15.68, the buyout offer represents a .9 percent discount. However, events that transpire during the coming months could make the deal substantially more attractive for savvy investors.
Pending Legal Action
A raft of legal investigations threatens to culminate in a class-action shareholder lawsuit that could temporarily derail the deal and force the buyout consortium to reissue its offer at a higher per-share price. In the aftermath of the deal's announcement, several law firms have piled on and launched information-gathering expeditions that could result in the formation of a class-action suit. Unlike many other such investigations that fizzle out as the merger date approaches, this action looks to have some merit.
At issue is the fact that Duff and Phelps has traded above the $15.50 offer price as recently as May of 2012 and sports analyst price targets of up to $24 per share. In addition, the announcement of the merger blindsided many industry observers who doubted that Duff and Phelps represented a viable takeover target. Collectively, the investigations allege that the company's fair value is at least $22 per share.
These investigations also highlight the potentially inappropriate buyout-related roles of certain members of Duff and Phelps's management team. While there have been no allegations of criminal misconduct, the investigations insinuate that participating executives may be seeking to enrich themselves by knowingly contributing to a buyout that significantly undervalues the company. If this is the case, the investigations' claims that the company's executives have abdicated their fiduciary responsibilities to their shareholders may hold water.
Likely Outcomes and Long-Term Prospects
At this point, much uncertainty surrounds Duff and Phelps's pending "going-private" transaction. This uncertainty has the potential to create tremendous opportunities for interested investors. If the deal goes through without significant changes, those who buy into Duff and Phelps at these levels do not stand to earn much on their investment. If the buyout consortium is forced to issue a higher bid for the company, quick-witted investors could earn returns of 20 to 30 percent on the deal. Such returns could be magnified by a temporary drop in Duff and Phelps's share price following the consortium's withdrawal of the initial deal.
Alternatively, other publicly-traded investment banking or private equity firms could step in to offer rival bids. Potential suitors include the Blackstone Group and Kohlberg Kravis Roberts. Both of these companies have billions of dollars under management and have actively sought to beef up their private equity holdings in the past. With a manageable debt load and a stable portfolio, Duff and Phelps would complement either firm's holdings. Such a deal would not be without complications: Given the ample size and reach of both Blackstone and KKR, any buyout of Duff and Phelps might be subject to intense regulatory scrutiny.
As such, the events of the coming months will prove instrumental. Aggressive investors who believe that the bid will be withdrawn in the face of a formal lawsuit may wish to buy into Duff and Phelps at these levels. More cautious investors may wish to wait until the official withdrawal. In either case, a higher buyout offer could spark a massive and lucrative rally in Duff and Phelps shares.
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