T. Rowe Doesn’t Like Private Markets Taking From Public Investors and Is Being Vocal About It at CKH
Disclaimers: https://www.transactionaldelights.com/disclaimers
In what seems to be a trend of shareholders contesting go-privates based on concerns over valuation (Vista – Pluralsight, Alta Fox / Pembroke / etc. – CLCT), T. Rowe has declared publicly that it will not tender its shares for the CKH – American Industrial Partners tie up[1]. Here’s a brief summary of what has happened to date.
On December 4, 2020, Seacor agrees to be acquired by AIP, a financial buyer, to take the company private. The deal is valued at ~$1 billion and expected to close by the first quarter of 2021[2]. Under the terms, AIP will commence a tender at $41.50/share and must receive at least 66.6% of the outstanding at the expiration of the offer.
On January 11, 2021, T. Rowe sends a letter to the Board of CKH stating that they are writing to notify CKH that they will not be tendering their shares and that they have “serious concerns about the proposed tender offer by American Industrial Partners to take the company private.”
Also on January 11, T.Rowe files a 13G amendment (No. 9) stating that T.Rowe has sole dispositive power over 2,994,468 shares (~14.7%[3]), sole voting power over 1,024,410 shares (~8.0%) and that its Mid-cap Value Fund, has sole dispositive power over 0 shares (0%) and sole voting power over 1,622,849 shares (~7.9%). The 13G amendment is not a model of clarity, but when I compare No. 9 to No. 8 it appears to me that T. Rowe + the Mid-Cap Value Fund have a combined voting power of ~15.9% and a combined dispositive power of ~14.7%. If this were a proxy contest, we would be thinking about voting power. Because this is a tender and the question posited is whether to tender, we look at the ~14.7% outstanding number.
On January 19, 2021, CKH responds to T. Rowe’s letter citing the “robust process”, a review of a “full range of strategic alternatives”, a “competitive auction”, “numerous potential financial and strategic parties involved”, and a “detailed and exhaustive review” including an “in-depth analysis of future cash flows”, and that the CKH Board maintains its offer price of $41.50.
On January 22, 2021, AIP announces that it will extend the tender until February 4, 2021, but at the same offer price of $41.50. Prior to the initial expiration, ~27.8% of the outstanding shares had been validly tendered. That means it has to convince another ~38.8% of the outstanding shares in order to close under the existing agreement.
Who are other major shareholders? BlackRock, Vanguard, Dimensional, and Wellington. Three of those five are passive, the other two are active. T. Rowe and Wellington have been at the vanguard (not intentional) of active management sliding towards activist strategies. There’s a lot to be said on how institutional funds are situated on the Management/ISS/Glass Lewis spectrum and for active managers’ new vocalism.
So, what exactly did T. Rowe Price argue in its letter? In my view, the most interesting words to come out were: “[T]he deal carries the hallmarks of a particular, problematic type of transaction we have observed (and objected to) many times: an opportunistic transfer of value from public-market investors to private investors." The first part of the statement that is interesting to me is the contrast between private markets and public markets. T. Rowe seems to be tapping into possible tension between private and public markets investors. Put crudely, public markets are available to all investors (with means), while private markets are offered to wealthier investors who have access to various financial products that are unavailable to those without the means. At this point I’m also going to reference WSB, Robinhood, and GME, because well, this. Retail can be scary.
The second part that is interesting to me is the trend I mentioned in the intro and the use of the word opportunistic – a theme that we have seen repeated in three recent go-privates. T. Rowe taps into this theme that valuations (and specifically, the valuation done for CKH) are out of whack because of the volatile times we are living in: “Our disagreement with the board’s decision in this case boils down to the opportunistic timing of the valuation assessments performed. Conditions for the shipping industry were volatile and difficult for much of 2020, which clearly affected the market value of the company for a short period of time. With a little patience and some normalization of economic conditions, we believe SEACOR’s value would, within a reasonable time frame, significantly exceed the $41.50 offer price if it were to remain independent.”
[1] Here’s some interesting history for CKH, ~5 ½ years ago, in August 2014, CKH nominated four nominees to Penford’s eleven-member board, a rare example of a corporate going hostile against another corporate. A couple of months later, Penford entered into a merger with Ingredion and CKH entered into a voting agreement to support the merger.
[2] Merger Agreement has an outside date of April 5.
[3] T. Rowe’s letter to CKH states that they own just under 3 million shares at ~14.6%.
