A Familiar Playbook With a Lowball Opening Bid

Recent precedents point clearly toward a higher offer.

This is a new addition to what has been a very successful theme for SSI. The playbook is always the same. First, management makes an opportunistic lowball takeover offer. The bid is made at little to no premium over pre-announcement trading levels and typically follows a temporary dividend reduction. The dividend cut suppresses the share price and helps to set up the cheap offer. After a few months of negotiations with a special committee, the buyer raises the initial bid and both sides sign binding papers.

This new setup hits every page of the standard playbook as well:

• The offer comes at only 11% premium to pre-announcement levels;
• The company’s dividend was cut by over 90% two years ago and stayed flat, even as the conditions that drove the cut have largely eased. Many investors were expecting a meaningful increase in the distribution this year, and analysts had been pressing management on it as well. Instead, management has moved to take the company private.
• The offer is significantly below pre-dividend cut levels. Management isn’t even paying a fair price for the company’s current earnings power and is essentially getting free upside from the potential full normalization.
• The closest peer was acquired earlier this year. The company was private, but some of the reported deal estimates suggest a valuation well above what we have in the current situation.

In short, the offer is opportunistic and lowballed. Since every recent similar setup has resulted in a bumped offer, it’s reasonable to expect a similar outcome here.

Importantly, the transaction also requires unitholders’ approval, which increases the odds that management will be more willing to play along and appease the minority investors. Based on historical precedents, I anticipate a definitive agreement to be reached within 2 to 4 months.

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