A Bonus for Sellers With Patience

In a novel shift on the dealmaking norm, a major buyer, private equity firm Sun Capital Partners, has added a “contingent payment,” which typically is based on a target’s post-deal performance, to the upfront price of a deal. Whether the sweetener is actually paid depends on how fast the acquirer can close the acquisition of Green Bay, Wisc.-based discounter ShopKo Stores Inc. Sun Capital won the $1.3 billion deal in a bidding contest with PE rival Goldner Hawn Johnson & Morrison, which walked away with a $13.5 million breakup fee. Under the terms of the deal, ShopKo will pay $29 a share plus 6% per annum for every day from December 15 on that the deal isn’t consummated. A proxy statement filed by ShopKo with the SEC describes a lengthy negotiating and bidding process that began in 2003 and led to a temporary victory by Goldner Hawn before Sun submitted a competing bid and the price ultimately was driven up to $29 a share. Both PE firms were willing to pay the base price but Sun carried the day with the 6% kicker, according to an announcement of the agreement on October 18. Because of its lengthy talks with ShopKo, Goldner Hawn would have been able to close the deal much more quickly than Sun. “We couldn’t close for a month and a half,” says Gary Talarico, a Managing Director of Sun. So, the final bid took into account the “time value of money” and “we are paying them an opportunity cost.” “It was designed to make the board indifferent (to the price) and allowed them to weigh all other factors that go into the transaction,” he says. As a result, Sun has an incentive to bring the deal in before December 15 and ShopKo shareholders will be paid extra for any additional time they might have to hang in. Presumably, the payment mechanism also discourages ShopKo from shopping for still another bid as the deal process winds down. Dealmakers say that the upfront “bonus” may surface again in fiercely competitive takeover battles or in other situations where delayed closings are possible. But even those who don’t anticipate widespread use of similar techniques believe that it’s an interesting addition to the dealmaker’s tool chest. (c) 2005 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com