MBO governance – how not to do it

Management buy-outs remain a key area of governance concern; the protection of the minority shareholders is of vital importance and constant vigilance is called for. Companies  with a controlling shareholder in particular require an ever greater level of attention, especially when it comes to scrutinising related party transactions and remuneration paid to the directors. Unfortunately, these will be areas where they have little power other than to read and react.

An interesting case study that we have been monitoring for some time is FTSE Fledgling, OPD Group plc.  As FT columnist, David Blackwell, noted in May, OPD’s share price  had fallen from just below £5.00 to £0.395 in two years. Given that the financial circumstances of the company were not particularly rosy, the market sentiment is hardly surprising. The final results announcement in March 2009 showed:

  • 4.4% reduction in net fee income;
  • 39% fall in pre-tax profit before exceptional items;
  • impairment charge of £9.3m;
  • announcement of the significant impact of deteriorating economic conditions on trading; and
  • decision not to pay a final dividend

If that were not enough to send confidence plummeting, the Remuneration Committee Chairman, Mike Kirkham, resigned in late April – the day before the accounts were signed off.  The remuneration report revealed that Richard Boggis-Rolfe and Virginia Bottomley, directors of a subsidiary of the company, Odgers Berndston, received maximum bonuses of £375,000 and £280,000 respectively. Their respective total remuneration figures exceeded those of the CEO or the Finance Director.

On 27 May, the the Board of Offerco Ltd (‘Offerco’) and the independent directors of OPD announce the terms of a recommended cash offer of £0.57 per share to be made by Offerco (who already held approximately 32.1% of the existing issued ordinary share capital of OPD). Offerco is a company established by Peter Hearn (Chairman and Founder of OPD Group) and Graphite Investment Trust. The offer announcement noted that Offerco would, if the offer was declared unconditional, consider the potential disposal of a majority stake in Odgers to the management of Odgers on terms to be agreed at that time.

The FT noted however that Schroder’s increased its stake from 22% to 25%, with the stated aim of preventing Hearn from taking the company private. On 26 June the offer was declared wholly unconditional as Offerco’s holding (including acceptances) had crossed the 50% threshold to 54.11%. As at 10 July Offerco held 62.46% and on the closing of the offer, it held 62.91%.

The AGM on 30 June, as previously reported on Manifest-I, saw two resolutions fail (the company initially announced three had failed, correcting the announcement 3 weeks later!) to achieve the requisite majority and an average against vote on all resolutions of 36.5%.

On 13 July, in a trading statement, the company said that: “In May and June, net income was down by 30% from the same period the previous year, which compares with a 25% drop in the first four months of the year. Trading conditions remain very challenging; the group continues to reduce costs with headcount falling by 110 since the beginning of the year to 640. The one off costs associated with reducing headcount are expected to give rise to an operating loss for the first six months of the year.”

On 29 July 2009 the company made the following announcement: “OPD announces that Richard Boggis-Rolfe and Baroness Virginia Bottomley have resigned from the Board with immediate effect from 28th July 2009. They remain executive directors of Odgers Berndtson.”

So, in summary, management proposes an opportunisitic offer following downbeat trading updates and the threat of a potentially dilutive fund-raising, despite management having recently paid themselves substantial cash bonuses.

Shareholders are not compelled to sell their shares if an offer is less than they want. However when anMBO team acquires 90% of the shares they can they force the remaining shareholders to sell. There is another option: rather than buying the shares, once the MBO team owns 75% of the shares they can de-list the company. A de-listing saves significant costs for a small cap company but it also significantly reduces the ability to trade shares and obtain a proper valuation for them. It’s hardly surprising then that investors reluctantly accept such offers.

There is a further twist: some management teams, instead of making a straight offer for the shares of other shareholders, use their large holdings to push through a de-listing of the company at the same time as using the company’s funds to offer to buy out the remaining shareholders, thereby capturing the company at a stroke.

Schroder’s stake will block the passing of any special resolution – including the approval of any delisting, however circumstances are clearly far from ideal. Should Odgers Berndtson be sold, the disposal requires only a simple majority vote.

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