Forum Home Page [see Broadridge note below]

 The Shareholder ForumTM`

Fair Investor Access

This public program was initiated in collaboration with The Conference Board Task Force on Corporate/Investor Engagement and with Thomson Reuters support of communication technologies. The Forum is providing continuing reports of the issues that concern this program's participants, as summarized  in the January 5, 2015 Forum Report of Conclusions.

"Fair Access" Home Page

"Fair Access" Program Reference

 

Related Projects 2012-2019

For graphed analyses of company and related industry returns, see

Returns on Corporate Capital

See also analyses of

Shareholder Support Rankings

 
 
 

Forum distribution:

More questions about reliance on "fairness opinions"

 

For previous reports of both investor and court concerns about reliance on recently evolved "fairness opinions," see

  • February 24, 2013 New York Times Fair Game: "Dell’s Intentions Get a Hard Look"

  • November 24, 2003 BusinessWeek: "A Fair Deal -- But For Whom? | Fairness opinions in acquisitions are rife with conflicts -- and coming under fire"

 

Source: Wall Street Journal, March 9, 2014 article

THE WALL STREET JOURNAL.  |  MARKETS


Markets

RBC Ruling Strikes a Blow to Deal-Making Banks

 

By Liz Hoffman

March 9, 2014 6:57 p.m. ET

RBC tried to work both sides of ambulance operator Rural/Metro's sale. Zuma Press

One Saturday in March 2011, several bankers at RBC Capital Markets LLC were busy calling executives at Warburg Pincus LLC. The private-equity firm had bid to buy ambulance operator Rural/Metro Corp., and RBC wanted to help finance the deal.

That same day—on the final frenzied weekend of a three-month sales process—another RBC team was preparing a presentation for Rural/Metro's board that by one measure valued the company's shares between $8.19 and $16.71. That range, which made Warburg's $17.25-a-share offer look like a great deal, had been revised down from one, prepared that morning for an internal RBC committee, that topped out at more than $19.

In touch with both teams was a senior RBC banker who didn't tell Rural/Metro that the bank at that moment was trying to get business from Warburg.

That scenario—with one team of a bank wooing the likely buyer while another gives the seller advice that makes the buyer's offer look good—helped land RBC in a legal mess. A Delaware judge on Friday found the bank's hunger for financing fees colored its advice, should have been relayed to Rural/Metro and led its board to accept an unfair offer from Warburg.

RBC "failed to disclose the relevant information to further its own opportunity to close a deal, get paid its contingent fee, and receive additional and far greater fees for buy-side financing work," Vice Chancellor J. Travis Laster said.

RBC, part of Royal Bank of Canada, said in a statement: "We have reviewed the opinion and are considering our options. This process is not yet over."

In court, RBC said it told Rural/Metro early in the sales process that it might seek a role financing the deal, and that any conversations it had later with Warburg about doing so "logically couldn't have posed a conflict or impaired in any way the advice RBC rendered to the board." A Rural/Metro board member in court complimented the sales process that RBC ran.

Mr. Laster hasn't ruled on damages. Plaintiffs, former shareholders of Rural/Metro, are seeking up to $172 million, the difference between the deal price and what they say was fair value.

The decision is the latest courtroom blow for banks, which increasingly are being sued for their roles on mergers, and is likely to rattle Wall Street.

In 2011, Barclays PLC was sharply criticized by Mr. Laster for allegedly manipulating the sales process of Del Monte Foods Co. to reap fees on both sides of the transaction. It paid $23.7 million toward a settlement and lost out on $21 million in fees, while not admitting wrongdoing. The following year, Goldman Sachs Group Inc. Surrendered a $20 million fee from the sale of El Paso Corp. to Kinder Morgan Inc. after another judge said that the bank's potential conflicts of interest—including a 19% stake in Kinder Morgan—likely tainted the process. In a settlement, Goldman didn't admit wrongdoing.

A handful of recent cases, filed on the heels of those incidents, have been testing out a theory: that banks actively helped the boards shortchange investors. Typically, these cases accuse financial advisers of "aiding and abetting" a board's failure to get the best price.

They have targeted Moelis & Co. for its role advising on Epicor Software Corp.'s 2011 buyout, and Jefferies LLC and KeyBanc Capital Markets Inc. over the sale of steakhouse Morton's Restaurant Group Inc. the same year. The Morton's claims were dismissed last summer. The Epicor case has been settled, with $18 million going to former shareholders, though Moelis isn't contributing, according to a person familiar with the matter.

The Rural/Metro case appears to be the first of this type to go to trial, and the outcome is likely to be felt by deal makers, said Kevin Miller, a lawyer who often advises banks on merger assignments. "If the decision is upheld, investment banks will have to change how they do deals," said Mr. Miller, who wasn't involved in the Rural/Metro case.

Arizona-based Rural/Metro hired RBC in late 2010 to consider strategic options such as a sale. When RBC initially pitched the company to serve as an adviseron the matter, it relied on two recent deals, signed at 9.5 times and 9.4 times the targets' earnings before interest, taxes, depreciation and amortization, to show what Rural/Metro might be worth.

RBC's final analysis—delivered after Warburg's bid had been submitted—included a 2004 deal that was struck at a much lower multiple, about 6.3 times Ebitda. That yielded a valuation range less than Warburg's offer. RBC in court defended its valuation, saying there were few comparable companies and transactions to consider.

At the time, Toronto-based RBC was pushing to grow its investment-banking business. In 2007, RBC was ranked 15th in U.S. investment-banking revenue, according to Dealogic. In 2013, it cracked the top 10 for the first time.

RBC hoped to generate up to $27 million from the sale of Rural/Metro, mostly from financing fees, according to court filings. RBC's banker on the deal who had a client relationship with the company, Anthony Munoz, called the deal "the most important fee event opportunity we have in health care" in an email read in court. Mr. Munoz, through an RBC spokeswoman, declined to comment.

RBC's actual payout from advising Rural/Metro was $5 million, according to public filings. RBC didn't get fees for lending to Warburg, which used three other banks for its buyout debt.

Moelis, a second adviser to Rural/Metro, agreed to pay $5 million last year to settle allegations related to its fairness opinion. Rural/Metro's board, which had been accused of selling the company too cheaply, settled for $6.6 million. Neither admitted wrongdoing. RBC at one point was also in talks over a settlement of at least $15 million, according to people familiar with the matter.

Rural/Metro, which provides ambulance and fire-protection services for about 700 communities in 21 states, struggled after Warburg bought it. An ambitious acquisition strategy failed to pan out and payments from insurers declined. The company filed for bankruptcy in August 2013 with $735 million in debt, much of it from the Warburg buyout. In December, a judge approved a reorganization plan that wipes out the private-equity firm's stake.

Write to Liz Hoffman at liz.hoffman@wsj.com

 

Copyright ©2014 Dow Jones & Company, Inc. All Rights Reserved.

 

 

This Forum program was open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the purpose of this public Forum's program was to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant was expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated in 2012 in collaboration with The Conference Board and with Thomson Reuters support of communication technologies to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices. The website is being maintained to provide continuing reports of the issues addressed in the program, as summarized in the January 5, 2015 Forum Report of Conclusions.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to access@shareholderforum.com.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.