Vertrue Inc.
(NDAQ:VTRU) share rose today after Brencourt Advisors disclosed a 28%
stake in the company and expressed their concerns over the company's
proposed buyout. The hedge fund believes that the marketing company's
current $48.50/share buyout price is insufficient and demanded that the
board immediately reject the proposed offer. Shareholders are hoping that this effort will lead to a higher buyout offer.
Vertrue appears to
be banking on a growing trend in the investment community -
under-priced buyouts build to transfer wealth from shareholders to
management and private equity interests. Addicted to quick gains from
buyouts, many investors fail to take into account the long-term value
of the company when considering buyout offers. Brencourt is hoping to
bring the facts to light in order to convince investors that they can
hold out for much more.
So, what's wrong with the $48.50/share buyout proposal? Well, Brencourt pointed out four different flaws in the bid:
- Use
of a size opinion in the WACC calculation - Broadview applied a "size
premium" in order to boost the company's cost of equity and thereby
lower the valuation. Investors were baffled by this as it is not
accepted financial theory to include such a premium.
- Incorrect
cost of debt- Broadview used 9.25% as its cost of debt which is the
coupon to the senior notes due 2014. The problem is that the cost of
debt is actually the companies yield on its fixed securities, not its
coupon!
- Incorrect market premium - Broadview used a market
premium of 7.8% to calculate the cost of equity. If anyone else used
this market premium, there would be no leveraged buyout today that
could be justified on a DFC basis. It simply doesn't make sense.
- Absurdly low terminal value - Broadview used a terminal value of 6-7x EBITDA, which is an absurdly lower range.
Overall,
the buyout process was flawed and led to a bid that is substantially
below the true value of the company. Investors are hoping that
Brencourt can force the company to seek a higher bid or maybe even hire
another investment banking company to conduct a whole new sale process.
If successful, it could mean significant upside for shareholders!
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