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Apr-19-2008Alliance Data Ends Deal for Its Takeover by Blackstone(topic overview)
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Alliance Data had originally sought specific performance of Blackstone'''s obligations in Delaware Chancery Court. Because the Office of the Comptroller of the Currency demanded that the Blackstone private equity fund provide a guarantee on Alliance Data's bank liabilities, this demand was a nonstarter. This Blackstone fund is not a party to the acquisition agreement, and so cannot be forced to perform under that agreement. Since the Office of the Comptroller's demand was something outside the scope of the obligations of the Blackstone shell entities that were actually a party to the acquisition agreement, Blackstone is arguably not in breach of its obligation to use '''reasonable best efforts''' to obtain regulatory approvals. This likely means there is no breach of the merger agreement. Blackstone thus has a very good case that it should not have to pay this fee and can terminate the agreement upon arrival of the drop-dead date. If Blackstone takes this route, Alliance Data has threatened to sue. This leads to a second possible outcome. This would be a settlement akin to what happened in the terminated transactions in Acxiom, PHH and Reddy Ice. Blackstone would pay a measure of the $170 million reverse termination fee and be reimbursed for its expenses on the transaction as a guess, maybe $10 million or so. The problem with this endgame is that, in these other deals, the target companies had strong arguments that the reverse termination fee was payable. This was reflected in the fact that each of the private equity firms paid close to the full amount of the reverse termination fee. [1] The notice of termination was ineffective because the merger agreement cannot be terminated under the relevant termination provision by a party that is in breach. The Blackstone affiliates breached their contractual obligations by, among other things, refusing to accept reasonable and customary regulatory requirements and prolonging negotiations with regulators. For these reasons, Alliance Data today terminated the merger agreement. The merger agreement provides for the payment to Alliance Data of a $170 million business interruption fee in the event of such a breach by the Blackstone affiliates. Because the Blackstone affiliates deny being in breach, Alliance Data has commenced litigation seeking full and timely payment of this fee by Blackstone Capital Partners V L.P., the guarantor of the fee, in the New York State Supreme Court. Robert A. Minicucci, Chairman of the Special Committee of the Board of Directors of Alliance Data, said, "We are disappointed that Blackstone's affiliates chose not to satisfy their obligations to consummate this transaction.[2] As per the terms of the merger agreement, Blackstone affiliates are liable to pay a sum of $170 million as business interruption fee in the event of breach of contract by Blackstone affiliates. Since Blackstone affiliates have refused to accept that they are in breach of contract, Alliance Data Systems have decided to commence litigation in the New York State Supreme Court seeking full and timely payment of the business interruption fee by Blackstone affiliates. Commenting on the developments, Chairman of the Special Committee of the Board of Directors of Alliance Data Systems, Robert Minicucci, has said, 'We are disappointed that Blackstone's affiliates chose not to satisfy their obligations to consummate this transaction.[3]
For the purpose of the acquisition, Blackstone had formed two affiliates, Aladdin Solutions and Aladdin Merger Sub. On January 25, 2008 Blackstone notified Alliance Data that it believed the regulatory approval condition to completing the transaction would not be satisfied and later confirmed that they did not intend to pursue the matter further with the OCC. In response, Alliance Data filed suit in the Delaware Court of Chancery on January 30, 2008, seeking to cause the Blackstone entities to perform their obligations under the merger agreement. Following the court filings, Blackstone and its affiliates acknowledged their contractual obligations and committed to work to consummate the acquisition of the Company, including working with Alliance Data on proposals to resolve the regulatory issues. Based on these assurances, on February 8, 2008, Alliance Data withdrew without prejudice its litigation. Last month, Alliance Data Systems had notified the Blackstone affiliates, Aladdin Solutions, Inc. and Aladdin Merger Sub, Inc. that they are in breach of the May 17, 2007 merger deal.[3]
Alliance Data said last month that Blackstone was using the regulatory hurdle as an excuse in order to "run out the clock'' on the transaction. It said Blackstone breached the merger agreement, which requires the firm to work with regulators to try to win approval. Under the agreement, Alliance Data is entitled to a $170 million fee if Blackstone doesn't live up to its end of the deal. Blackstone said at the time that it has fully complied with all of its obligations.[4]
The contract requires Blackstone's affiliates to pay to Alliance Data a business interruption fee. Given their repudiation of the merger agreement and continued refusal to fulfill their contractual obligations, and in order to protect the interests of Alliance Data's stockholders, we are compelled to litigate this issue to obtain payment in a full and timely manner. Despite the distraction caused by Blackstone, Alliance Data has continued to focus on delivering value to its clients and stockholders. The Company's strong performance and liquidity demonstrate Alliance Data's continued commitment to this goal."[2]
Alliance Data's brands include AIR MILES(R), North America's premier coalition loyalty program, and Epsilon(R), a leading provider of multi-channel, data-driven technologies and marketing services. For more information about the company, visit its website, www.AllianceData.com. Such statements may use words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project" and similar expressions as they relate to us or our management. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. These risks, uncertainties and assumptions include those made with respect to and any developments related to the termination of the proposed merger with an affiliate of The Blackstone Group, including risks and uncertainties arising from actions that the respective parties to the merger agreement may take in connection therewith.[5] DALLAS, April 18 /PRNewswire-FirstCall/ -- Alliance Data Systems Corporation NYSE: ADS, a leading provider of transaction-based loyalty and marketing services, today announced that it has terminated the May 17, 2007 merger agreement providing for the acquisition of Alliance Data by affiliates of The Blackstone Group.[5]
DALLAS -- Alliance Data Systems Corp. said Friday that it has terminated the 2007 merger with the Blackstone Group. ADS said last month that affiliates of Blackstone were in breach of their acquisition agreement.[6]
Once the date arrives, and as long as a party is not in breach of the agreement, the deal can be terminated. Blackstone Group has been quietly waiting for this date for the last few months, biding its time until it can terminate its pending acquisition of Alliance Data, which provides credit-card processing services. In the meantime, Alliance Data has, inter alia, sued Blackstone for specific performance, withdrawn that suit citing Blackstone'''s statements "committing" itself to renegotiate a deal, and then threatened to sue Blackstone again when Blackstone allegedly failed to live up to its statements.[1]
DealBook's Deal Professor argued in a post yesterday that the most likely course for Blackstone will be to unilaterally terminate the agreement and refuse to pay the reverse termination fee. He also suggested tat the wisest course for Alliance Data under such a scenario would be to let the lawsuit drop, given that fresh litigation could distract from a rebound that the credit-card processor is currently enjoying. Alliance Data said Wednesday it expects its first-quarter profit to range between 98 cents and $1 per share, citing strong business growth.[7] Blackstone originally offered $81.75 per share for Alliance Data Systems but in January said it couldn't close the deal because of objections from the U.S. comptroller of the currency, which regulates a bank owned by ADS.[6]
Because of Blackstone'''s case and its continuing refusal to negotiate, I think the first option is the most likely one. The real question is whether or not Alliance Data sues if Blackstone attempts to go this route. I hope they don'''t. At this point, their stock is making a comeback, trading at more than $50 a share, and the distraction of reliving this failed transaction is likely not worth the money. If they can leverage the threat of a lawsuit into a settlement at this point for a smaller amount (probably much smaller), then great.[1] The stock price of Alliance Data closed the regular trading session on Friday at $52.84, up 5.51%, or $2.76 a share, on a volume of 2.1 million shares. In the after-hours trading, the stock shed some of its gains and is currently quoted at $51.74, down 2.08% or $1.10 a share.[3]
Alliance Data rose $1.23, or 2.5 percent, to $51.31 at 10:35 a.m. in New York Stock Exchange composite trading, a 37 percent discount to Blackstone's $81.75 purchase price.[4] Alliance Data late Friday sued Blackstone in New York state court, seeking to recover a $170 million breakup fee.[8] Blackstone declined to comment. Alliance said it filed suit on Friday in New York state court to try to force Blackstone "to make full and timely payment of this fee" that was provided for in their May 17, 2007, agreement. Alliance accused the Blackstone affiliates of breaching their obligations under the agreement in part by refusing to accept "reasonable and customary regulatory requirements" and by prolonging talks with regulators.[9] ADS turned around and said it was terminating the agreement, and it filed suit in New York State Supreme Court seeking the $170 million fee for the contractual violations. It's actually the second time ADS has filed suit against Blackstone during the back-and-forth drama.[10]
The troubled $6.4 billion buyout bid for Dallas-based ADS finally collapsed late Friday, with ADS officially calling off the purchase and going to court to try to get a $170 million "business interruption fee" from onetime suitor Blackstone.[10]
LOS ANGELES (Reuters) - Alliance Data Systems Corp (ADS.N: Quote, Profile, Research ) said on Friday it terminated a $6.76 billion sale to Blackstone Group LP (BX.N: Quote, Profile, Research ) affiliates and has sued to win a $170 million business interruption payment.[9] On May 17, 2007, Alliance Data Systems agreed to be acquired by Blackstone Capital Partners V L.P., an affiliate of Blackstone Group, for about $7.8 billion or $81.75 per share in cash, which represented a premium of about 30% over Alliance Data's May 16 closing share price of $62.96.[3]
The Blackstone Group's deadline to buy credit-card processor Alliance Data Systems passed with nary a word from either side on what will happen to the stalled $6.6 billion transaction.[7]
Alliance Data Systems, citing the delay on the part of Blackstone Affiliates to consummate the transaction, have terminated the merger agreement.[3] The Blackstone affiliates that are parties to the merger agreement today repudiated the agreement by sending the Company a notice purporting to terminate the contract.[2] The ADS statement said Blackstone affiliates that are parties to the merger sent the company a notice "purporting to terminate the contract." ADS said the Blackstone notice was ineffective and issued their own termination statement.[6]
Reacting strongly to the decision, Blackstone affiliates have sent a notice to Alliance Data System purporting to terminate the contract.[3] Alliance said the Blackstone affiliates tried to cancel the contract on Friday. That attempt at cancellation was void because Blackstone was already in breach of the contract, Alliance said.[9]
In January, Alliance Data filed a lawsuit against Blackstone seeking to force the private equity firm to complete the proposed $6.76 billion acquisition. [9] Blackstone could do the same, investing an amount equivalent to the reverse termination fee in convertible notes or warrants, preferred equity or some other security with a guaranteed minimum return. In conjunction with this settlement, Blackstone might receive a board seat on Alliance Data. I am going to go out on a limb and bet against this third option. In Harman, the private equity firms had a good-but-not-certain claim that a material adverse change had occurred and a claim that Harman had breached their covenants related to capital expenditures.[1] The parties settle, and Blackstone invests a sum approximating the reverse termination fee in Alliance Data. This is a settlement akin to what happened in the Harman International settlement.[1]
One trading day has passed since the Blackstone Group's deal for Alliance Data Systems expired late Thursday.[8] Alliance Data Systems Corp. and the Blackstone Group are apparently going to skip the marriage and go straight to divorce court.[10]
Alliance Data then sued Blackstone to force it to close the deal. It subsequently withdrew the suit, citing Blackstone'''s statements '''committing''' itself to renegotiate a deal, and then threatened to sue Blackstone again when Blackstone allegedly failed to live up to its statements.[7] Blackstone said in January that it may not close the purchase because federal regulators want it to provide open- ended funding support to an Alliance Data bank unit. Ed Heffernan, Alliance Data's chief financial officer, told investors at an April 16 conference in Atlanta that the company is now outlining its prospects and strategies to shareholders rather than focusing on the buyout plan, which was announced 11 months ago. "We're right now in what we call deal purgatory, and hopefully that will pass, as we begin to start getting out and educating folks on the company, and what we do and how we do it,'' he said.[4] The key question is whether Alliance Data will pursue that avenue and declare the private equity firm in breach of the deal agreement. As of 5 p.m. Friday, the company has made no such declaration. (The Deal Professor previously outlined the possible outcomes.) Though Alliance Data has yet to respond, investors have certainly showed their feelings about the situation.[8] Alliance Data yet again reminds transactional lawyers that private equity agreements are reached with thinly capitalized shell companies. A requirement that they use '''best efforts''' or some variation thereof to complete a deal only goes so far, since these shells have no assets.[1]
At 11:59 p.m. Thursday night, the '''drop-dead''' date in the Alliance Data Systems acquisition agreement will finally arrive.[1]
Alliance Data NYSE: ADS is a leading provider of marketing, loyalty and transaction services, managing over 120 million consumer relationships for some of North America's most recognizable companies. Using transaction-rich data, Alliance Data creates and manages customized solutions that change consumer behavior and that enable its clients to create and enhance customer loyalty to build stronger, mutually beneficial relationships with their customers.[5] Alliance Data's brands include AIR MILES(R), North America's premier coalition loyalty program, and Epsilon(R), a leading provider of multi-channel, data-driven technologies and marketing services. For more information about the company, visit its website, www.AllianceData.com.[2]
The Dallas-based provider of transaction-based loyalty and marketing services has alleged that the affiliates of the Blackstone Group have breached their contractual obligations by refusing to accept reasonable and customary regulatory requirements. It has also been stated that Blackstone had been prolonging negotiations with the regulators.[3]
The breakup announced Friday is almost certainly permanent, though. "We are disappointed that Blackstone's affiliates chose not to satisfy their obligations to consummate this transaction," Robert Minicucci, chairman of the committee of board members at ADS in charge of negotiating the buyout, said in the news release.[10]
I don'''t think Blackstone will be amenable to paying an amount even close to the reverse termination fee. There are larger lessons in this failed transaction on what seems to be our continuing learning cycle in private equity.[1] Blackstone unilaterally terminates the agreement and refuses to pay the reverse termination fee.[1] Here, Blackstone has a good case. It is unlikely that they will agree to pay anywhere near the full amount of the reverse termination fee. They may pay a smaller amount to avoid litigation costs and in exchange for a reimbursement of their expenses.[1]
Any dispute now is not over whether the deal will complete, but over the $170 million reverse termination fee.[1] Past that point, Blackstone can walk away from the deal without even paying the $170 million breakup fee stipulated in the contract.[8]
The contract allows New York-based Blackstone, manager of the world's largest leveraged-buyout fund, to end the deal if it wasn't completed by 11:59 p.m. New York time yesterday, according to a U.S. Securities and Exchange Commission filing last year.[4]
The LBO may be the latest to fail since the global credit markets melted down last year, boosting borrowing costs and slowing the U.S. economy. In September, New York-based Kohlberg Kravis Roberts & Co. pulled out of its agreement to buy Harman International Industries Inc., the Washington-based maker of Infinity and JBL audio equipment, for $8 billion, citing a decline in the business. Cerberus Capital Management LP, also based in New York, dropped its $4 billion takeover of Greenwich, Connecticut-based United Rentals Inc., the largest U.S. construction-equipment rental company, in November. Piper Jaffray analyst Robert Napoli raised his rating on Alliance shares to "buy'' from "neutral'' today and set a price target of $74 a share.[4] Shares in the company rose 5.5 percent on Friday, closing at $52.84. The price may be a far cry from the $81.75 a share that Blackstone had offered for the company, but it is at its highest point since late February, a few weeks after Alliance Data withdrew a lawsuit against its onetime buyer.[8] In that notification, Alliance Data Systems stated that Blackstone and its affiliates have continued to prolong negotiations with the Office of the Comptroller of the Currency, or OCC and the Federal Deposit Insurance Corporation, or FDIC, refusing to accept reasonable and customary requirements relating to the provision of "source of strength" and other assurances in support of Alliance Data's banks.[3] In Alliance Data, Blackstone has a pretty clear-cut case. This is only an educated guess, but I think that if there is a settlement, it will not be on a Harman-like basis, given Blackstone's better negotiating position. In my opinion, the only thing that might bring this option about is Blackstone'''s desire for some reputational protection and a need to cover expenses.[1] In any event, I am not sure that a continuing relationship between Alliance Data and Blackstone is a good thing.[1] Blackstone said in January that it may not close the purchase because federal regulators want it to provide open-ended funding support to an Alliance Data bank unit.[7] Blackstone said in January that the U.S. Office of the Comptroller of the Currency was imposing unworkable conditions on the takeover of Alliance Data, which owns the OCC-regulated World Financial Network Bank.[4]
Shelley Whiddon, a spokeswoman for Dallas-based Alliance Data, didn't return a phone message yesterday.[4] Better for Alliance Data to move on and rebuild rather than salvaging a bad egg.[1] Headquartered in Dallas, Alliance Data employs over 9,000 associates at more than 60 locations worldwide.[2]
Alliance said at the time the buyout was in jeopardy and that it did not expect to win regulatory approval from the U.S. Office of the Comptroller of the Currency for the deal. [9] The company accused Blackstone of breaching the deal agreement by refusing to make all attempts to win regulatory approval.[8] Any regulatory demands for actions by the private equity funds will not be secured by the agreement but rather at the whim of the private equity funds. In the future, if there is any doubt about whether the shell acquiring entities can obtain regulatory approvals or otherwise need a real party or funds to act, targets should, if possible, bind the private equity funds themselves to the agreement or enlarge the fund'''s guarantee to contemplate these actions.[1]
ADS said that it received a notice from Blackstone earlier Friday that the private equity firm was terminating the purchase proposal drawn up last May.[10] ADS claimed in a news release that the termination notice from Blackstone was invalid because Blackstone was already in violation of the terms of the contract.[10] The notice of termination served by Blackstone was ineffective, as the party in breach of contract cannot serve the notice of termination, as per the terms of the contract.[3]
The shares of Blackstone Group closed the regular trading session at $19.02, up 39 cents, on a volume of 3.1 million shares. [3] As of April 18, only $1.6 million in letters of credit were outstanding under that agreement, which provides solely for the issuance of letters of credit and does not provide for direct borrowings, the Hoffman Estates, Illinois-based company said in the filing. Sears, which operates Kmart and Sears stores, said most of its outstanding letters of credit are issued under its $4.0 billion, five-year revolving credit facility, expiring March 2010, which has a $1.5 billion letter of credit sublimit. The company said it is now using its $4.0 billion revolving credit facility, and hence the termination of the letter of credit agreement will not have any effect on its liquidity. Sears said it is evaluating whether or not to replace the letter of credit agreement at this time.[3] The $6.4 billion offer for the credit card processor expired at 11:59 p.m. Thursday night, per the merger agreement that was filed last May.[8]
The Dallas-based credit-card services provider said then that the affiliates must cure the breach and complete the $6.5 billion deal, reached in Maylast year. [6] In that transaction, Kohlberg Kravis Roberts and an affiliate of Goldman Sachs purchased $400 million of 1.25 percent senior notes convertible into Harman common stock and a Kohlberg Kravis member received a seat on Harman's board.[1] Not surprisingly, the $400 million approximated the reverse termination fee.[1]
ADS called off that suit when Blackstone agreed to give the merger another try. [10] The failed deal is the latest leveraged buyout to buckle amid the global credit crunch, which has made it more difficult for private equity firms to obtain financing.[9]
SOURCES
1. How to Terminate a Private Equity Agreement - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times
2. SunHerald.com : Alliance Data Terminates Merger Agreement with Blackstone Affiliates
3. RTTNews - Breaking News, financial breaking News, Positive EPS Surprises, Stock research .
4. Bloomberg.com: U.S.
5. Alliance Data Systems Corporation :: Alliance Data Terminates Merger Agreement with Blackstone Affiliates
6. Merger between Alliance Data and Blackstone terminated | Chron.com - Houston Chronicle
7. Deadline Passes in Alliance Data Deal - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times
8. Alliance Data Sues Blackstone, Again - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times
9. Alliance Data ends $6.76 bln deal with Blackstone | Reuters
10. ADS suing Blackstone again over failed buyout | Dallas Morning News | News for Dallas, Texas | Dallas Business News
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