Ten Bullet Points on CLCT
Disclaimers: https://www.transactionaldelights.com/disclaimers
Collectors Universe (NASDAQ: CLCT) went through a process that could be a novel. I’m not going to write a novel. Instead, I’m going to give you some bullet points on some interesting aspects of the deal and the deal’s activist, Alta Fox.
The Deal
The Merger Agreement does not require a special meeting for shareholders to vote on. Instead, shareholders will have their say by deciding whether to tender their shares. CLCT will not receive all of the outstanding shares in the tender[1], using a second step (251(h) under the DGCL) after acquiring at least a majority of the shares outstanding. When there is an activist (and other disruptive shareholders), 251(h) may be a preferable standard to a short form under 253(a), which requires at least 90% of the outstanding shares to tender.
The reverse termination fee at 6.25% of the transaction value is on the high end (one wonders what the RTF would be if CLCT did not know Nathaniel Snead Turner V, see footnote 7). This percentage was negotiated a few times, ranging from 5% to 7% of the transaction value, along with negotiations on a go-shop provision[2]. Ultimately the parties settled on 6.25% and a no-shop with a window-shop exception. If CLCT receives a superior proposal, buyer has 96 hours to match, with each successive change to a superior proposal triggering a new 72-hour window to match. RTFs are more typical when the acquirer is a financial buyer.
Another advantage that a financial buyer may have is speed; a financial buyer usually is not in a position to structure the deal with stock. All-cash deals are quicker because the SEC review process is slower in stock-for-stock exchanges (more things to review on the buyer end) and doesn’t require the filing of an S-4. In CLCT’s situation the group of buyers are Turner (an entrepreneur and avid sports trading car collector), Daniel Sundheim, through D1 Capital Partners, and Steve Cohen, through his family office, Cohen Private Ventures. You might have heard of Cohen. He is the Chairman, CEO, and Co-CIO of Point72 (and owner of the Mets).
Regarding the process - it’s not like CLCT took the first potential acquirer they came across. Prior to negotiations with the buyers, in 2016 CLCT contacted over 100 potential acquirers as part of its review of strategic alternatives[3]. In 2019, CLCT was in contact with three separate financial buyers with each party terminating their pursual due to various concerns including the long-term growth prospects of CLCT’s business. During negotiations with Turner, one other family office dropped out of the biddings due to concerns with CLCT’s valuation.
Following the public announcement, CLCT disclosed that four lawsuits have been filed by “purported” CLCT shareholders, generally alleging that the public filing disclosing the deal contains “materially incomplete and misleading information”[4]. Where does the deal currently stand? Aside from the litigation, which seeks to enjoin the merger, the initial TO window is set to expire on January 19[5]. This window can be extended if needed, and observers should expect to see an update on how many shares have been tendered soon[6]. One activist investor, Alta Fox, has announced that it will not tender and instead seek appraisal for its shares. As of its last 13D, Alta Fox holds 5.5% of the shares. It is unlikely that the appraisal alone will impede the deal, unless it is a signal of greater shareholder discontent.
Alta Fox (Activist Investor)
Alta Fox was an activist investor who nominated 6 nominees to CLCT’s Board. One of those nominees was Turner. Turner would later drop off of Alta Fox’s slate and enter into a merger agreement with CLCT to initiate a tender offer for its shares. Interestingly, prior to the nomination, Turner had an informal relationship with CLCT[7]. Without doing a deep dive into every activist engagement that has ever happened, I haven’t seen that before.
Alta Fox’s cost basis in CLCT is ~$21.40/share[8]. They entered into a settlement agreement with CLCT on 9/29/20[9] a couple of months before the announcement of the deal, and as part of the agreement, Alta Fox dropped its proxy contest and entered into a standstill restricting Alta Fox from taking certain actions[10]. One notable aspect to the standstill is that it does appear that the definition of "Restricted Period" is pretty narrow. In some standstills an activist has the ability to terminate the period with a director resignation. That’s not the case here with the standstill lasting for a defined period. In the CLCT standstill, however, is an exception that allows Alta Fox to exercise its statutory appraisal rights.
As it stands, the bid is for $75.25/share. Initially my thought was that it was unlikely that Alta Fox was not cheering this deal on, or that the handcuffs felt particularly tight (because of the delta between the cost basis and the offer price). That said, in a new 13D filing, Alta Fox has announced that it will exercise its appraisal rights, which is allowed under the settlement agreement with CLCT and available under Section 262 of the DGCL. There is some risk involved in this for Alta Fox - a Court could determine that the fair value of CLCT is actually less than the offer price[11]. In addition, appraisal litigation can be lengthy and pricey. Here’s a possible explanation: short-term capital gains (vs. long-term gains) are costly – and maybe there is something with respect to timing the disposition of shares[12].
Based on public disclosure, Alta Fox’s purchases were from 4/20/20 to 6/11/20. Tender offers are typically speedy, while appraisal litigation is lengthy; it does kind of make sense if one’s purpose is to stretch a sale to 4/20/21-6/12/21 so that you are paying long-term capital gains rather than short-term capital gains. Essentially you would be weighing the probability and betting that it is more likely that you save on the delta between long term gains and short terms gains compared with a Delaware court finding a fair market value less than the deal consideration. That would not be a bad bet for Alta Fox.
There are other explanations that are more straightforward: Alta Fox thinks CLCT is worth more than $75.25/share; that CLCT’s future earnings power is not reflected in its most recent financial report; that CLCT has the potential for a public market valuation re-rating per the Pembroke letter[13]; or maybe something more emotional.
[1] No tender does.
[2] Even 5% is high. But, then again, the transaction value is estimated to be $698 million, which is not much for some of these buyers.
[3] Of course, that was also four years ago.
[4] “Concerning: (1) Collectors Universe’s financial projections; (2) the fairness opinion and financial analyses performed by Houlihan Lokey; and (3) the background and process leading up to the Merger, including the settlement agreement we entered into with Alta Fox on September 29, 2020, and Deborah A. Farrington’s recusal from deliberations of the Collectors Universe Board in connection with approving the Transactions. The Stefano and Palkon Complaints also allege that the Schedule 14D-9 contains materially incomplete and misleading information regarding (1) Houlihan Lokey’s compensation and potential conflicts of interest, and (2) whether Collectors Universe entered into any confidentiality agreements that contained standstill and/or ‘don’t ask, don’t waive’ provisions.”
[5] The merger agreement’s termination date is April 30.
[6] As of 1/15 close, CLCT is trading at $77.48. The offer price is $75.25.
[7] In a public filing, CLCT stated that “As a prominent collector and frequent user of our card-grading authentication services, Mr. Turner is well known to Collectors Universe management, and he and members of Collectors Universe management have spoken from time to time about the collectibles industry generally and Collectors Universe Specifically. Prior to 2020, these conversations never involved any discussion of an acquisition of Collectors Universe.”
[8] In my view, cost basis is one of the most telling signals for how a shareholder will act under certain circumstances. Can it be more complicated? Yeah, *wink*.
[9] Two days prior to the settlement agreement, CLCT amended its employment agreement with Joseph Orlando, CLCT’s CEO. In hindsight it is easy to identify, but that looks like a pretty clear signal that CLCT was clearing up business for a transaction to take place.
[10] Including a provision that restricts Alta Fox from disparaging CLCT.
[11] Appraisal litigation has actually been decreasing in recent years, following an uptick in litigation, after a few decisions determined that the fair value of the target was equal to or less than the offer price.
[12] Alta Fox disclosed purchases between 4/20/20 and 6/11/20, meaning they are a bit away from the one-year mark.
[13] Pembroke states that it believes that the recently reported financial results, while strong, markedly understate the future earnings of CLCT, that CLCT has the potential for a public market valuation re-rating not captured by offer, and that it has questions about the process for approving the deal.
