The discussions leading to the sale of Adesa Inc. were frenzied and wild. But was the final price-$27.85 a share in cash, or a total of $2.5 billion-as high as it should have been?
A disgruntled individual investor says no, and is suing the Carmel-based autoauction firm in hopes of blocking the deal and collecting damages. The suit, filed in mid-January by the Delaware-based law firm Rosenthal Monhait & Goddess, seeks class-action certification.
Moreover, two other Adesa shareholders-Royce & Associates and Gabelli & Co., both of New York-jumped into the fray in late January, arguing that $27.85 a share was woefully inadequate.
Adesa officials declined to comment on the suit, or the investor dissatisfaction. An attorney for Rosenthal Monhait & Goddess, which represents shareholder Gerald Ortsman, did not return calls.
Rosenthal Monhait notes in the suit, filed in Delaware's Court of Chancery, that the per-share price is a mere 10 percent higher than the closing price for Adesa shares a day before the deal.
The investor unrest is the latest twist in a buyout that's unfolded in a most unique fashion.
Adesa-which operates wholesale auctions and salvage auctions, and provides financing to car dealers-began pursuing a sale in July 2006, after concluding, among other things, that major capital investments under consideration were risky and could depress the company's stock price.
Five months later, on Dec. 22, Adesa agreed to be acquired by four private equity firms-New York-based Kelso & Co., New York-based GS Capital Partners, San Francisco-based ValueAct Capital and Boston-based Parthenon Capital.
The negotiations in between went anything but smoothly, according to papers Adesa filed with the Securities and Exchange Commission in late January.
Adesa's advisers began by contacting 17 potential buyers. While suitors submitted 10 preliminary bids, not one submitted a final bid by the Nov. 8 deadline.
The suitor that ultimately prevailed submitted a bid two days later, but there was no competing suitor to play against it, the SEC filing shows.
That might help explain why the $27.85 purchase price-16 percent higher than the company's initial public offering price in 2004-didn't exactly electrify Wall Street.
"We think the offer may be a little light," Thomas Bacon, an analyst for New Yorkbased Lehman Brothers said in a report the day after Christmas.
"While the premium ... is only 10 percent, we do note that this company has been struggling with topline trends ever since it came public, but generally making numbers through strong expense control," David Magee, an analyst with SunTrust Robinson Humphrey in Atlanta, wrote in a Dec. 22 report. "That said, we've noted recently that industry trends have been slowly improving."
Indeed, the auto-auction business has been sluggish in recent years, driven down, in part, by a decline in the number of vehicles coming off lease. But that trend is turning around, and stronger demand for used vehicles bodes well for auction prices.
"Adesa's long-term market growth potential looks bright," the Rosenthal Monhait lawsuit asserts. It suggests the sale price might have been higher had the buyers not banded together in a "club deal" and instead competed with one another.
The SEC filing, however, leaves the impression that Adesa was fortunate to get a deal done at $27.85 a share.
After other suitors dropped out for various reasons, including price, the private equity group that ultimately prevailed weighed in with $27 a share.
Adesa's adviser in early December persuaded the group to go to $27.85. But two weeks later, the group said it had reconsidered and would pay just $27.
Adesa said $27.85 or nothing. The private equity group stuck with $27, and the parties called off discussions.
Three days later, however, the equity group blinked and agreed to $27.85. The extra 85 cents per share added some $75 million to the purchase price.
It's not clear why more suitors weren't in the fray at the end. But part of it might be that it's difficult to value a company like Adesa, which has no head-to-head competitors that are publicly traded.
As Adesa noted in its SEC filing, "the investment community has had difficulty accurately evaluating our financial condition, business strategy and prospects."
Adesa might have gotten even less were it not for financial benefits the buyers expect to realize by combining Adesa with Illinois-based Insurance Auto Auctions Inc., which is owned by Kelso and Parthenon. Including the contribution of IAAI and the assumption of $700 million in debt, the deal is valued at $3.7 billion.
The combined company's management team, disclosed last month, would have a decidedly IAAI flavor. For example, Brian Clingen, an IAAI investor and board member, would become Adesa's CEO, replacing David Gartzke.
Adesa's headquarters would remain in Carmel, where it employs 380, a spokeswoman said. She said no local job cuts are expected, though plans are not final.