The tightened credit markets and the economic downturn were center stage in the bidding for Industrial Distribution Group Inc., Atlanta, GA, according to a proxy statement recently filed by IDG with the SEC about its plan to be acquired by Luther King Capital Management.
In fact, Platinum Equity, which was originally the winning bidder for the industrial distributor, had first bid $12 a share in December 2007 but reduced its offer to $10 a share in mid-January. The private equity firm cited risk in improving IDG’s MROP and integrated supply business due to an overall decline in the industrial economy.
This prompted investment banking firm Robert W. Baird &Co. to go back to five bidders for new written proposals. Among the five bidders was WESCO, who showed an interest in IDG but whose bid was contingent on finding $30 million or more of sustainable SG&A savings and sales synergies”after acquiring the distributor.
This time around, the bidders were offering “significantly reduced purchase prices.”According to the proxy statement, the lower offers were likely due to a deteriorating lending environment and general economic conditions, the general decline in stock prices of IDG’s competitors, and the overall decline in broader market indices.
Platinum eventually raised its bid to $10.30 in mid-February, after which IDG’s board voted to recommend its offer.
But the process did not end there. On March 31, WESCO was the first to come back to IDG and offer an increased bid of $11 a share. Under the Platinum merger agreement, IDG could consider “bona fide and credible acquisition proposal that could reasonably lead to a superior proposal.”
On April 4, Luther King Capital Management, which had become IDG’s largest shareholder by a series of recent purchases of common stock (at 14.9 percent), offered $11.70 per share.
LKCM and WESCO’s proposals were announced in a press release by IDG on April 7. Both companies started due diligence.
On April 15, WESCO increased its bid to $11.75 a share and provided documentation from a third-party lender to support its ability to pay. As reported, Platinum then increased its bid to $11.80, and on April 22, WESCO bowed out of the bidding war.
The same day LKCM submitted a definitive offer to acquire IDG for $12.10 a share along with an equity commitment letter.
Three days later, Platinum said it would not match LKCM’s offer. On April 28, IDG paid the $3 million merger agreement termination fee to Platinum Equity.
IDG outlined its reasons for selling in the proxy statement:
Illiquidity of Common Stock. IDG also considered what it called the “historically consistent ‘thin’trading profile”of its common stock, which resulted in widely fluctuating trading prices due to a small number of shares and the unavailability of the public trading market as a source of liquidity for stockholders.
Costs of Remaining Public. The “significant costs”of continuing as a public company and the implications of those on future profitability. According to the statement, the merger will allow IDG to save about $2 million annually in administrative, accounting and legal expenses associated with requirements by the SEC, including Sarbanes-Oxley.
Uncertainties of General Economic Conditions. IDG says it considered the potential risks and implications of the decline in the economy and prospects in the industry exacerbated by the increasingly negative lending environment.
Premium on Trading Price. The LKCM represents a premium of 32.2 percent to IDG’s common stock closing trading price of $9.15 on July 27, 2007, the last trading day before announcing IDG was considering strategic alternatives. The Board of Directors considered this premium in light of a general decline in stock prices of its publicly traded competitors.
According to the statement, between July 27, 2007, and Feb. 15, 2008, there was a 20.6 percent decline in the stock prices of the group of IDG’s publicly held competitors being used as an “industrial distribution index”for the strategic review process. There was also a 7.5 percent decline in the Standard &Poor’s 500 Index during that time.
IDG reported sales for 2007 were $537.5 million, compared with $547.9 million in 2006, down 1.9 percent. Profit was $4.1 million, compared with $6.8 million last year.
IDG Board Chairman Richard Seigel said in August 2007, that “IDG needs to consistently grow revenues at a higher level while also seeking a strategic way to reduce its cost profile, both of which have been a source of concern.”