Proxy Advisory Firm Glass Lewis Says "DO NOT TENDER" Article in the Globe and Mail today
Letko says Vote Against
Brandes LP says Vote Against
Glass Lewis Says Do Not Tender
Cerberus hikes Dorel offer more than 10% in bid to clinch support for privatization deal
U.S. private equity giant Cerberus Capital Management is hiking its offer for Canadian consumer good company Dorel Industries Inc. by just more than 10 per cent as it tries to clinch support for a privatization deal that has met stiff resistance from some investors.
An affiliate of funds managed by Cerberus is now offering $16 in cash a share for Dorel’s two classes of shares, up from a $14.50 price disclosed in November, Montreal-based Dorel said in a statement Monday. Shares held by Dorel chief executive Martin Schwartz and the company’s other controlling shareholders are not part of the revised arrangement.
The proposed takeover has run into opposition from almost the get-go and in early January Dorel said it was postponing a previously scheduled vote on the transaction to give the company more time to engage with investors. Monday’s revised offer follows those discussions, Dorel said.
Dorel shares climbed 5.6 per cent in trading Monday on the Toronto Stock Exchange to close at $15.70.
A vote on the proposed go-private transaction is now scheduled for Feb. 16. To pass, it needs support by holders of two-thirds of the votes cast and by a simple majority of investors holding the subordinate voting shares.
Under the proposal, Mr. Schwartz and the other family shareholders would roll over their investment in exchange for an indirect equity interest of about 26.7 per cent in the Cerberus-led acquiring company. They’re expected to stay on as managers and share in a limited portion of future profits at a maximum rate of about 31.5 per cent contingent on achieving certain performance levels, according to an explanation of their rollover agreement.
Montreal-based investment firm Letko, Brosseau & Associates Inc., which holds 12.5 per cent of Dorel’s subordinate stock, opposes the proposal and last week reconfirmed it would vote against it. It says Dorel has a resilient business and the controlling family’s desire to remain shareholders under the proposal is proof of its long-term potential.
Brandes Investment Partners, which holds about 7 per cent of Dorel’s subordinate shares, has also stated it opposes the deal. The investment management company said in December the offer significantly undervalues Dorel and expressed confidence in the longer-term upside potential of Dorel stock.
That’s a stark contrast to the narrative that the company itself has pushed to try to convince investors to tender their shares. Dorel says the offer provides its shareholders with certainty of value and immediate liquidity in a context where the company has continuing “operational challenges” despite a tailwind from the COVID-19 pandemic that has boosted demand for its bicycles and home furnishings. In sum: Get out while you can because the business isn’t going to get any better in the near term.
Shareholders should not tender, proxy advisory firm Glass Lewis says. In a report published before the revised offer, it concludes: “The Cerberus-funded privatization, initiated in the wake of mediocre operational execution and in the midst of all-time lows in Dorel’s value, does not clearly represent a compelling exit, in our view. Much to the contrary, we are concerned the arrangement appears to directly reward the family executives and their affiliates by allowing them to cheaply privatize a business which, by their own characterization, they have failed to effectively manage since at least 2016.”
With the new offer, the total value of the transaction including assumed debt jumps to about US$1-billion. Cerberus would buy Dorel for an enterprise multiple of about 8.5 times its adjusted earnings before interest, taxes, depreciation and amortization over the past 12 months.
Dorel operates three separate business arms that are each very different. Its sports unit controls bike brands such as Cannondale and Schwinn, while its juvenile unit makes car seats, strollers, toys and other children’s products under brands including Maxi-Cosi and Quinny. The third division makes and distributes home furniture.
Cerberus frequently makes investments in distressed assets. It is perhaps best known in Canada for leading the US$7.4-billion purchase for an 80-per-cent stake in car maker Chrysler and financing arm Chrysler Financial in 2007. The company also bought Montreal-based telecom provider Teleglobe out of bankruptcy protection in 2003 and made a significant investment in Air Canada the year afterward.