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Fortune buyout would help exec out of financial jam

June 9, 2012

Carter Fortune carries one of the most storied surnames in Indianapolis business. His great-grandfather was legendary civic leader William Fortune, a founder of the Indianapolis Chamber of Commerce who amassed a fortune as an early investor in Eli Lilly and Co.

But these days, Carter Fortune is pretty banged up. His decade-long quest to turn locally based Fortune Industries Inc. into a publicly traded powerhouse didn’t pan out, sucking up millions of dollars along the way.

The bleak news has been piling up in recent months. In April, Carter Fortune went into technical default on a maturing loan with Columbus-based Indiana Bank & Trust Co., which holds his Fortune Industries stock as collateral. And, according to Securities and Exchange Commission filings, he has been diagnosed with a potentially terminal disease.

All of this serves as a backdrop for a management-led buyout proposed in March that would provide the 70-year-old with financial breathing room at a difficult time.

If the deal closes, Fortune Industries—which, after an ill-fated diversification spree in the 2000s, now focuses on providing personnel services—would end up as a private business led by its current executives, CEO Tena Mayberry and Chief Financial Officer Randy Butler.

Under the deal, their holding company would buy out investors who own 500 or fewer shares for 61 cents apiece—a 22-percent premium over the 200-day moving average share price as of March 20, just before the deal was announced. Investors who own more than 500 shares would receive an equal number of shares in the new company, which would retain the Fortune Industries name.

But where things really get interesting is in the treatment of Chairman Carter Fortune, the majority shareholder. He’s converting dividend-paying preferred stock he owns into common shares, then selling shares to the new holding company. In return, he’s getting $6 million in cash and a $6.3 million promissory note. And his overall ownership stake in the business would shrink from 60 percent to 20 percent.

That cash apparently would go to the bank, resolving his loan default. But he’s giving up a lot in return—including control of the company and the right to collect well over a million dollars a year in preferred stock dividends.

Through the conversions, he also is giving up the preferred shares’ so-called liquidation preference, which gave him the right to get back what he put into them—more than $20 million—ahead of common shareholders. (He’d likely never have gotten the full sum, since it exceeds the value of the business.)

Fortune’s independent board members had plenty of incentive to do a deal as well. Under the status quo, the company faced the prospect of having Indiana Bank & Trust seize Carter Fortune’s collateral and take control of the business. Or if Carter Fortune remained in control and died, Fortune Industries could have faced an abrupt change of control over which board members had no say.

“Some transaction needs to get done for the protection of everybody,” said one observer tracking the buyout effort.

But transactions like this—where some insiders’ interests don’t completely align with those of other shareholders—automatically get the scrutiny of class action attorneys. So it’s no surprise that the board and company brass already are facing one lawsuit seeking to block the deal.

That case was filed by the New York law firm Brower Piven in early April, before Fortune Industries had publicly disclosed some of the details of the going-private transaction.

It charges that the buyout price for small stockholders of 61 cents a share is insufficient, given CEO Mayberry’s upbeat public comments about the company’s growth opportunities. Excluding preferred stock dividends, the company earned $1.7 million on revenue of $46.7 million in the fiscal nine months ending in March. That compares with earnings of $1.3 million on revenue of $48.2 million in the same period a year earlier.

“The buyout is timed to take advantage of a temporarily depressed price for Fortune’s stock, just as the company is poised for significant growth,” according to the lawsuit, which was filed on behalf of shareholder Mark Haagen.

Fortune Industries has asked Marion County Judge David Shaheed to dismiss the case, and in filings with the SEC the company says it followed all the necessary steps to ensure the deal is fair. Rodefer Moss & Co. of Knoxville, Tenn., conducted a valuation of the preferred stock, and Kraft Analytics LLC of Nashville, Tenn., provided a fairness opinion.

Carter Fortune could not be reached for comment. But it’s clear that, even if the deal goes through, he’ll have little to celebrate. Fortune’s odyssey began in 2000, when he and partners bought the shell of a public company, renamed it WOW Entertainment Inc., and began producing “Women of Wrestling” for television.

After that flopped, he picked himself up off the mat and began buying far less flashy companies in fields like personnel services, manufacturing and distribution. But his ambitious hopes for growth and profits never materialized, and the company cast off everything but the personnel business three years ago. Now, Carter Fortune is just trying to make the best of a bad situation.•

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