Corel odyssey leaves investors scratching their heads
It wasn’t that long ago that Corel Corp. (CRE:TSX) was an independent public company with a broad shareholder base. In 2003, it was taken private by U.S.-based Vector Capital for $97.5 million, plus $27.5 million of convertible debs that had to be retired. Call it a $124 million deal for 100% of the company.
In 2004, Vector took on $64.8 million of debt, with another $83.9 million added in 2005. Debt stood at $148.7 million in December 2005. Shareholder’s equity dropped by about $87 million that year. Aggregate EBITDA for 2004 and 2005 was $68 million – banks love EBTIDA. The debt increase has the hallmarks of a dividend recap transaction, where Vector appears to have taken out most of their entire original investment. The sweetest deal that can you can do in the PE world.
In April 2006, Vector took Corel public again.
The company raised $80 million at $16 a share on the Morgan Stanley-led IPO. Vector sold 1.5 million shares via a secondary deal, to take $24 million more off the table. As part of the IPO, Corel acquired WinZip, another Vector portfolio company; the purchase price was 4.3 million shares ($68.8 million of value at the IPO price) plus $19 million of the $80 million of gross IPO proceeds were used to retire debt that was outstanding at WinZip prior to the acquisition.
For their $104 million, the new public investors owned 6.5 million shares of the company, and Vector would own the balance, or about 73%. This suggests the equity was worth at least $400 million at that point. Add the $148.7 million of debt, and the entire business was valued at $550 million – a sweet paper gain from the $124 million valuation just three years earlier.
As part of the IPO, Corel arranged for a new $165 million debt facility ($90 million 6 year term loan and a $75 million revolver) to replace the existing facilities.
Fast forward to March 28, 2008, when Vector advised the Corel board that this whole “being public” idea was clearly a bad one. Vector offers $11 a share if the Board would like to take it private again. Think: “we’re sellers at $16 but buyers at $11”. (Or, they could also have been thinking: let’s put a bid in and see if someone else will top our low-ball offer and get us a few hundred million out of this thing!)
Corel struck a special committee of independent members of the Corel Board of Directors, hired Genuity Capital Markets to help as financial advisor, and went out in search of higher offers. It appears as though the special committee may have found one after a healthy 5 months of effort:
Since the original announcement of the CHLP Proposal on March 28, 2008, Corel’s Board of Directors announced the formation of a special committee of the Board (the “Special Committee”) to assist the Board in evaluating and responding to the CHLP Proposal. The Special Committee was also charged with identifying other potential strategic alternatives with a view to maximizing value for all of Corel’s shareholders, which the Special Committee has identified. As a result, CHLP has advised Corel that it has withdrawn the CHLP Proposal in the interest of facilitating Corel’s pursuit of these third-party strategic alternatives.
In light of the withdrawal of the CHLP Proposal and the Board’s desire to oversee evaluation of the potential strategic alternatives directly, the Board has unanimously determined that there is no longer a need for the Special Committee. As such, going forward the Board as a whole will supervise the evaluation of the strategic alternatives and the Special Committee has been dissolved.
One can only assume that the Corel Board has a better deal to do, that will surpass the $11 offered by Vector. And that despite the committee’s best attempts, Vector chose not to raise their offer to keep pace with this prospective new takeover bid.
The dissollution of the Special Committee means that the entire Board will now manage the process from here, which will include the two Vector partners who are also Corel Directors. As Vector holds 70% of the votes, it makes some sense to have them working on the deal now that they are no longer (sort of) on the buyside themselves. Perhaps it would be too much to have them lead the negotiations given the perceived conflict, but their input will be important nonetheless.
I don’t doubt that the independent members of the Corel Board had a terrible dilemma before them. All those natural questions about the “bird in the hand”. But, if the anticipated higher proposal goes away, it’ll be fascinating to see if Vector comes back with a fresh $11 offer. The economic outlook has only turned more bleak since they first launched their $11 offer back in March. My guess if the expected new offer craters, you’ll see something closer to the current C$10 quote – if that. If anything.
In the meantime, Corel shareholders are left scratching their heads. Does Vector want the deal or not? The answer appears to be “yes, but at a certain price. Otherwise, get us a better offer and we’ll be glad to take our $200MM plus of profit and call it a day.”
Can you blame them?
(over at Seeking Alpha: http://seekingalpha.com/article/91519-who-if-anyone-wants-to-take-corel-private-again)