Troutman Client Shops for a Better Deal
By Andy Peters, Staff Reporter
PRIVATE EQUITY FUNDS have been on a tear in recent years, buying up scads of companies across all industries. But these big funds have eschewed the auction model of acquiring assets.
Now a client of Troutman Sanders partner Terry C. Bridges is exploiting an innovative technique, called a go-shop provision, that’s emerging as an alternative to auctions.
Semco Energy, of Port Huron, Mich., on Feb. 23 agreed to be acquired by Cap Rock Holding of Midland, Texas, for $867 million in cash and assumed debt. Bridges’ client is Semco.
As part of the transaction, Semco was able to secure from Cap Rock a go-shop provision; Semco has until March 29 to find a better offer, if it can.
The arrangement is the first of its kind in the public utilities industry, Bridges said.
Go-shop provisions have become more popular recently in the M&A world because private equity funds want to have exclusive negotiations with companies they’ve targeted as buyout candidates.
“Private equity firms, by and large, would prefer to not participate in an auction,” Bridges said. “They deal primarily with companies that had not thought of themselves as being for sale.”
Some recent big private equity deals, including the $33 billion buyout of hospital chain HCA, have included go-shop provisions. A recently unveiled deal that would be the biggest private-equity buyout in history, a $45 billion acquisition of Texas utility TXU by a group of funds, includes a go-shop provision.
TXU’s legal adviser also happens to be lead counsel to Cap Rock on its Semco deal—Cravath, Swaine & Moore partner Richard Hall.
Semco and its investment bankers are scouting the landscape for better offers than what Cap Rock bid, Bridges said. So far Semco has solicited more than 40 potential investors. Semco is not required to tell Cap Rock the identity of these potential bidders.
An interested investor gets full access to Semco’s books for the purpose of conducting due diligence.
“After you sign a confidentially agreement, you get full access to our electronic data room and you can download our projections and agreements and everything else,” Bridges said.
Cap Rock, which is controlled by New York private equity fund Lindsay Goldberg & Bessemer, didn’t initially want to let Semco try to find a higher offer. But Semco was able to secure the go-shop provision after lengthy negotiations, Bridges said.
“The decision on the part of Cap Rock to concede the go-shop was part of a broader discussion, on which a number of issues were resolved, some of which were favorable to Cap Rock and others of which were not,” Cravath’s Hall said.
Bridges explained that if Semco finds a better offer, Cap Rock can match it. If Semco chooses another bidder, Cap Rock will be paid a termination fee of $7 million. But if Semco takes a higher offer after the 35-day shopping period expires, the breakup fee would rise to $15.5 million.
While a go-shop provision primarily benefits the company being bought, it does have one advantage for the buyer, Bridges said. Because the target company looked for a higher offer after reaching its initial agreement, that extra level of due diligence likely would be successful in fending off litigation by shareholders challenging the deal.
The duty of Semco’s officers and directors “is to find for shareholders the highest price under the circumstances,” Bridges said.
Cap Rock’s $867 million offer “places the floor,” Bridges said. “Everyone knows the price they need to beat.”
Cap Rock and Semco’s businesses have little overlap. Cap Rock distributes electricity in western and central Texas, while Semco distributes natural gas in Michigan and Alaska. Semco also operates gas pipelines and storage facilities.
Other Troutman Sanders lawyers who are working on the Semco transaction include: partner Kevin C. Fitzgerald of Washington, who serves as Troutman’s relationship partner for Semco; partners R. Mason Bayler Jr. and Jill M. Webb of Richmond, Va., and associates Lori H. Jones and Allison C. Cardwell of Atlanta, who worked on corporate issues; partner M. Travis DeHaven and associate Mauricia J. Allen, both of Atlanta, on employee benefits; partner Hazen H. Dempster on banking and finance; partner Hollister “Holly” A. Hill of Atlanta on environmental issues; and partner June Ann Sauntry of Atlanta on antitrust matters.
Dykema Gossett of Detroit is advising a special committee of Semco directors.