Has Chicago-based private-equity giant Madison Dearborn Partners swung and missed on one of its planned deals?
The answer depends on the outcome of a tussle that has broken out for control of Topps Co., the New York-based maker of baseball cards and Bazooka brand bubble gum, and turned what once looked like a cakewalk for Madison into a late-inning nail-biter.
Topps has received a higher offer from an industry archrival, and a number of Topps’ shareholders appear inclined to go with that bid. Meanwhile, a Topps shareholder vote on the offer Madison is backing has been temporarily stalled by legal maneuvers, and a Delaware court has made a number of unflattering observations about the way Topps’ board has conducted itself.
Madison is known as a savvy dealmaker with a solid investment history and a big-league cash trove. Recent deals include a plan to take Vernon Hills-based computer reseller CDW Corp. private through a $7.3 billion buyout, as well as a 9 percent participation in the $48.5 billion buyout of Canadian telecommunications giant BCE Inc.
The Topps deal is tiny in comparison with those high-profile transactions, but the fight surrounding it hinges on a theme that’s of broad interest to investors: the issue of just what companies going private are obliged to disclose to their shareholders. In an era when private-equity money is helping so many public companies go private, such questions loom large.
The situation doesn’t seem promising for Madison. Its deal calls for Topps to be acquired for $9.75 a share, but with the unsolicited $10.75-a-share tender offer from baseball-card rival Upper Deck Co. in the works, Topps’ shares are trading well above the price Madison is planning to pay. Topps closed Friday at $10.59 a share, indicating that investors consider the deal Madison is backing to be a dead issue.
Representatives from Madison and Topps declined to comment. Upper Deck representatives did not return a call seeking comment.
The deal has been plagued with controversy since it was originally announced in March, but the roots of the tiff date to 2005.
Back then, some shareholders were growing increasingly unhappy with Arthur Shorin, the son of a Topps founder who has held the chief executive post at Topps since 1980. His son-in-law, Scott Silverstein, is the president and chief operating officer.
Investors pressured Shorin to put the company’s gum business on the block, but nothing came of the sale effort. In 2006, the dissident investors put forward a three-person slate of director nominees, and Topps, in a negotiated deal, expanded its board to include them without ousting Shorin.
Once the insurgents were seated, Topps began to explore strategic options. The strongest overtures, according to Delaware court documents, came from investment company Tornante Co., run by former Disney Co. CEO Michael Eisner, who later brought in Madison.
Topps’ board approved their offer by a 7-3 vote, and the deal was announced in early March.
Critics, including the dissident members of Topps’ own board, quickly complained the price was low. The accord provided Topps’ investment bankers several weeks to contact other potential bidders, and Upper Deck, which had been signaling its interest intermittently since 1999, entered into serious talks. The fight would soon be under way.
Because it is the only other company to hold a license from Major League Baseball to sell cards featuring big-league players, Upper Deck is Topps’ only serious competitor in the U.S. baseball card industry.
That matters. For one thing, federal antitrust regulators will probably want to take a hard look at a combination of the two principal players in that tiny niche market. If Topps agreed to a bid from Upper Deck, the government might well step in months later and void the deal as damaging to market competition.
But Upper Deck and Topps were wary of each other for another reason. Before one company plunks down hundreds of millions of dollars to acquire another, it naturally demands an in-depth look at the target company’s books, to make sure there aren’t any internal problems that could affect the value of the assets. That scrutiny, known as due diligence, is generally a prerequisite to any merger.
On the other hand, in the world of mergers and acquisition, it’s not unheard of for a competitor to assert that it is a prospective buyer, when in fact its real interest lies in having a look at the competitor’s cost structure, customer list and other non-public data.
When Upper Deck asked for a look at its books, Topps demanded a standard confidentiality agreement that allowed Upper Deck access to internal information but prohibited the potential suitor from disclosing what it had learned during the review.
It also made Upper Deck agree only to buy Topps through a friendly deal reached between the two companies, and in what’s known as a standstill agreement, it specifically prohibited Upper Deck from disclosing publicly that it had made an acquisition proposal.
Although Upper Deck agreed and talks were held, Topps ultimately opted to go with the Madison/Eisner deal.
Meanwhile, Topps shareholders were scheduled to vote in late June on that bid. Topps mailed out proxy materials in May, in which it indicated it had received an expression of interest from Upper Deck, but suggested that the suitor had not provided adequate evidence of its ability to finance the deal. Topps also pointed out the possibility that antitrust regulators would not sign off on a combination with Upper Deck.
A few days later, Topps amended its proxy materials, disclosing that Upper Deck had provided a letter from its financial adviser stating that the potential lender was “highly confident” Upper Deck could obtain the financing it needed to close its $425 million deal for Topps, roughly $40 million more than the Eisner/Madison bid. But it reiterated its reservations about Upper Deck’s viability as a bidder, and its board continued to back the deal with Eisner and Madison.
All this time, while Topps was deciding just what it ought to disclose about the rival bid, Upper Deck was effectively handcuffed. Terms of the standstill agreement it had signed barred the company from presenting its case to Topps shareholders or from bypassing the Topps board and making a tender offer directly to the shareholders.
When frustrated Upper Deck officials asked Topps to release the company from those restrictions, Topps refused.
Finally, Upper Deck and a group of unhappy Topps shareholders filed suit in Delaware Chancery Court, asking the court to stop the June 28 shareholder vote on the Eisner/Madison transaction and to force Topps to correct some of the statements in the proxy material Topps had sent out. The complaint also asked the court to order Topps to release Upper Deck from the standstill agreement.
In mid-June, Judge Leo Strine issued a 69-page ruling that did just that. Topps must postpone the vote, he ruled, until the company has provided shareholders with additional information about the Eisner/Madison group’s plans to retain Shorin and other managers.
Upper Deck, which has made it clear that it won’t retain top-level Topps executives, has contended that Topps management has been leaning toward the Eisner/Madison bid in part because it would allow them to keep their jobs.
“Standstills serve legitimate purposes,” Strine noted, because companies that are up for sale have a responsibility to make sure key information doesn’t get made public. “But,” he added, “standstills are also subject to abuse.”
A target company can improperly favor one bidder over another “because managers prefer one bidder for their own motives,” he said.
Upper Deck, the judge wrote in issuing his injunction, “has shown a reasonable probability of success on its claim that the Topps board is misusing the standstill.”
By refusing to release Upper Deck, the board “not only keeps the stockholders from having the chance to accept a potentially more attractive higher-priced deal, it keeps them in the dark about Upper Deck’s version of important events,” Strine said.
If Upper Deck were to make a tender offer at $10.75 a share, the judge continued, “Topps stockholders will still be free to reject that offer if the Topps board convinces them it is too conditional.”
Since then, Topps has released Upper Deck from the standstill restrictions and reopened talks with the rival on a potentially friendly deal, even as its board officially continues to support the deal with Eisner and Madison.
Upper Deck, meanwhile, has bypassed Topps’ board altogether and launched a $10.75-a-share tender offer for Topps.
In the wake of Strine’s ruling, Topps canceled the June 28 vote and hasn’t yet rescheduled it.
Topps said Monday that it wanted to make sure shareholders have an opportunity to weigh the Eisner/Madison deal against Upper Deck’s unsolicited offer before it sets a new date. Topps’ board, the company said, “remains committed to obtaining the best possible outcome for all of its stockholders.”
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jpmiller@tribune.com
