ADESA, Inc. (NYSE:KAR) shares moved up $0.76, or 2.69%, to $29.00 today after Royce Associates LLC voiced their concerns about the company's current merger plans in a Schedule 13D filing with the SEC. The company recently agreed to be acquired for $27.85 per share in a multi-sided deal worth approximately $3 billion. Royce Associates, however, believes that the company's shares are worth more than the buyout price and questioned the company's accountability to shareholders. This notion was then supported today by Gabelli & Company, Inc., who said in a press release that they agreed with Royce Associates' analysis of the company. With shares currently trading around $29.00, investors are betting that this opposition will be enough for the company to reconsider its plans.

Just how much are KAR shares worth? Well, Royce Associates provided us with an excellent analysis in their Schedule 13D filing with the SEC:

On a valuation basis (Enterprise Value/TTM EBIT), the company is being acquired at a 24% discount to a "peer group" of publicly-traded comparables (including Copart [CPRT] and Ritchie Brothers [RBA]), and a 37.5% discount to the private equity purchase multiple of Insurance Auto Auction, Inc (IAAI) which was announced in February 2005. Using another valuation methodology (EV/TTM EBITDA), a similar disparity results, with the company being acquired at a 26% discount to the same group of comparables, and a 13.7% discount to the IAAI deal. More distressing is the fact that IAAI's EBIT margins and returns were well below KAR's, yet IAAI still commanded a higher take-out valuation from private equity investors.

On a Sum-of-the-Parts basis, if you apply the public company comparable multiple average (15.8x TTM EBIT) to KAR's Auction Services TTM EBIT (of $164.7m = $2,602m) and 8x TTM EBIT to the Dealer Services segment EBIT (of $86.1m = $689m), subtract SG&A ($23.4m), add back Cash ($211m) and subtract Long Term Debt ($330m), divided by shares outstanding (90.2m), we arrive at a target price of $35.00.

Royce Associates also brought up some other major problems with the transaction. Why, for example, didn't an auction process begin with strategic buyers, as opposed to financial buyers? Furthermore, why was the one strategic buyer, which had expressed an interest earlier, not included in the bidding process? These concerns are supplemented by a host of other issues brought up by the hedge fund, including:

1. Adesa, Inc has agreed to indemnify officers and directors against "any personal liability that may result from this transaction "
2. Adesa, Inc entered into Change of Control agreements with members of senior management as recently as 12/21/06, to pay lump sums in cash of up to 3x the base pay and annual bonus, if these employees are terminated after this deal. We already know (press release dated 1/16/07) that several members of existing management are likely to be terminated. Are these recent Change of Control agreements a meaningful incentive to enter into this sub-par transaction?
3. One of the acquiring private equity investors also happens to be one of the largest public shareholders at 9/06. Common sense suggests that one would only go to the trouble of "taking private" an existing holding, if he believed it was meaningfully undervalued.

Adesa shares have significantly underperformed its peers since going public, rising only 7.1% annualized. Now, management wants to hand over the business to financial buyers at a mere 16% premium to its IPO price, instead of extracting maximum value by either breaking up the company into its three components or making the investment decisions that should have been made years ago to help the stock's price reach that of its peers. Royce Associates' said it best: "We urge the board, as part of its fiduciary duty, to revisit the price as well as the process by which Adesa will be acquired, in order to obtain a more equitable price for all current shareholders. Based on our calculations outlined above, using a sum-of-the-parts methodology, a price of $35.00 per share would be more in line with industry comparables, excluding any strategic acquisition premium." If the company decides to listen to this advice, it could mean significant share appreciation for savvy investors - this is definitely a stock worth watching!

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Cost-U-Less, Inc. (NDAQ:CULS) responded to requests made by two activist hedge funds yesterday in an 8-K filing with the SEC. The two hedge funds had pointed out the many problems with Cost-U-Less operations and suggested that the company consider putting itself up for sale in order to unlock shareholder value. They suggested that shares of CULS could be worth in excess of $12 per share in the event of a buyout. After not receiving any communication from the company, they threatened a proxy contest in order to more actively generate a response or action.

This worked today as the company finally issued a press release explaining its position. The company explained that its board of directors had contacted investment banks and other advisers in several instances in order to help them evaluate strategic alternatives and increase shareholder value/liquidity. Clearly, most of these evaluations did not result in anything material; however, their most recent financial adviser proves to be quite interesting. The company revealed that in November 2006, it engaged its current financial adviser, Cascadia Capital, LLC, to assist the board in exploring a range of strategic alternatives.

This could prove to be interesting because Cascadia Capital is a Seattle-based investment bank is a nationally recognized M&A advisory practice, which suggests that they may be exploring an M&A transaction. This could include a possible sale of the company or perhaps an acquisition or merger of their own. Unfortunately, the company has a policy in place that prevents it from commenting publicly on the nature or content of their ongoing deliberations, so it's impossible to tell which options they are exploring. However, given Delafield's offer to purchase the company and other interest, we can hope that a sale of the company is at least being considered. This makes CULS a stock that is worth following over the next few months!

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Feldman Mall Properties, Inc. (NYSE:FMP) shares moved down $0.14, or 1.18%, to $11.69 in today's trading after Mercury Real Estate Advisors LLC again demanded that the company immediately hire an investment banker and put itself up for sale in a Schedule 13D/A filing with the SEC. In December, the hedge fund filed their initial Schedule 13D with the SEC requesting inclusion in the company's next proxy statement and recommending that the company's consider putting itself up for sale. They supported this request with the following:

1. The corporation has failed to match returns reflected by certain industry benchmarks. Since going public on December 15, 2004, the corporation has posted a total return of negative 4.79%. The MSCI US REIT Index has achieved a total return of positive 55.77% over this same period. This reflects substantial underperformance of 60.53%.
2. The corporation lacks the sufficient size required to operate as a public company. In our view, shareholders’ equity is being wasted on general and administrative expenses that are not commensurate with the size of the company. General and administrative expenses at the corporation totaled 13.6% of revenues during fiscal 2005 while the ratio of G&A to revenues in the Corporation’s Peer Group average 4.3%.
3. The corporation has suffered a series of earnings misses and downward revisions to guidance. The first downward revision of guidance came in November 2005 with regards to third quarter 2005 results. The corporation lowered FFO/share guidance 17% from a range of $0.28-$0.30 to $0.23-$0.25. Fourth quarter 2005 FFO/share guidance was also lowered from a range of $0.25-$0.27 to $0.17-$0.18. This is a 32% decrease from the guidance that was offered just a few months prior. In our view, management has lost credibility with investors as a result of being overly optimistic and not realistic on a number of occasions.
4. The corporation is an attractive acquisition candidate for a national or regional mall owner/operator. While we believe that the corporation is too small to generate economies of scale with its widely dispersed portfolio, several of the national or regional owner/operators could achieve operating synergies through an acquisition of the corporation. Further, we believe the corporation is trading at a significant discount to its intrinsic or liquidation value.
   

Since then, the hedge fund said that it had received numerous inquiries from well known and established, national and regional mall owners and operations interested in exploring a purchase of the company and its assets. Given that the company trades at a significant discount to its liquidation value, Mercury Real Estate Advisors continues to insist that a sale of company is the best course of action to maximize shareholder value. Moreover, Mercury Real Estate Advisors' willingness to put itself on the next proxy statement illustrates their motivation to make this happen. Combined, these factors make this a great stock to watch for opportunistic investors!

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