(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Jeffrey Goldfarb
NEW YORK, April 24 (Reuters Breakingviews) - Corporate takeovers tend to be messier than preschoolers at craft time. Even friendly transactions involve a lot of fussing over price and scribbling out contract revisions, while contested ones add sharp elbows and tantrums. It’s ironic, then, that a buyer recently found a way to sidestep such tumult at a company catering to kids. Whether the feat can be replicated elsewhere will be the challenge for grownups in the dealmaking world.
The Children’s Place , a clothing designer with more than 500 stores across North America, inadvertently wrote itself into M&A lore when it issued a dire outlook earlier this year. Contrary to earlier guidance that it would achieve a narrow operating profit for the three months through January, the retailer flagged unanticipated losses. Moreover, it said it was scrambling to “obtain new financing necessary to support ongoing operations,” raising the specter of a cash crunch just as it tried to replenish inventory for the all-important back-to-school season. Bankruptcy looked like a real possibility.
As the company’s stock price went into freefall in the hours after the warning, somebody started buying shares. A lot of them. The somebody would soon reveal itself to be Mithaq Capital, an investment fund managing money for Saudi Arabia’s Al-Rajhi family. By the time the market closed that fateful Friday in February, the firm owned nearly a quarter of The Children’s Place. By the following Tuesday, Mithaq had sewn up a controlling stake. Just like that, without protracted negotiations or signed agreements, an acquisition was all but done.
Although a relatively small deal – the market value of The Children’s Place’s has tumbled to $100 million from a peak of about $2.8 billion in 2018 – it has captivated merger practitioners. Mithaq’s maneuvering raises questions about whether, when and how to deploy anti-takeover tactics. It also spotlights differences between the United States and other markets, where regulations would have forced Mithaq to tender an offer for the rest of the company’s shares. Perhaps most tantalizing to financial and legal consiglieri is that the deal now provides a rough practical outline for what was once only a theoretical exercise: How to buy a public company without permission.
There were plenty of potential complications for Mithaq and its attorneys at Cadwalader, Wickersham & Taft to address in the ensuing weeks, but the campaign was a breeze compared to its previous one. Just days after gaining control of The Children’s Place, Mithaq abandoned a C$310 million hostile takeover attempt of Toronto-based holding company Aimia , in which it had accumulated a 28% stake. The Saudi firm first tried and failed to oust the board. Aimia subsequently thwarted the unwanted advances by unveiling a controversial private share placement that would dilute Mithaq’s stake. The painstaking, year-long fight only magnifies the appeal of Mithaq’s speedy takeover in the United States.
The success owes partly to an obeisant target. The Children’s Place, led by Chief Executive Jane Elfers since 2010, might have been able to dig in its heels, too, or worse. Mithaq informed the company of its presence, and intent to nominate directors, the day after accumulating its initial tranche. At that point, the board could have tried some sort of defensive gambit, including a poison pill that flooded the market with more shares, to prevent Mithaq from increasing its stake when trading resumed. Even after Mithaq owned a majority, before it took control of the board, The Children’s Place had the power to file for bankruptcy protection. It was already in the process of trying to borrow $130 million from restructuring shop Gordon Brothers, a task complicated by a technical default on its existing debt caused by the change of control.
Instead of intervening, however, Elfers and her fellow directors let the situation unfold. That decision allowed shareholders who wanted to sell to do so. Mithaq kept buying, even as the stock’s price rebounded above where it had been trading before The Children’s Place issued its distress signal. Vendors, employees, landlords, creditors and others with a vested interest in the outcome were thrown a lifeline, too. It also helped nix the default worry, which lenders waived temporarily.
Mithaq’s approach was a merciful recasting of a ploy used in other, more hostile, scenarios. British satellite-TV operator Sky, back when it was owned by media mogul Rupert Murdoch, conducted a so-called dawn raid at ITV in 2006, snapping up almost 18% of the UK broadcaster to upend plans by competitors to buy it. Two years later, Chinese state-owned miner Chinalco teamed up with U.S. aluminum producer Alcoa to stealthily acquire 9% of Rio Tinto , effectively stopping rival BHP
from attempting a merger.
There are limits to Mithaq’s methods. In Delaware, where The Children’s Place is incorporated, business law prohibits the firm from increasing its stake any further for three years without approval from two-thirds of the other shareholders. That’s still far less restrictive than many other regimes, including in Britain, where any investor that exceeds a certain ownership threshold, often 30%, is required to offer a similar deal to all other shareholders.
And while the relative ease with which Mithaq took over The Children’s Place may inspire M&A mavens to search for ways to apply a similar approach, the range of scenarios in which it can work is probably limited. For example, it takes a prospective target with a bleak short-term outlook, a suitor sufficiently familiar with the company and a differentiated longer-term strategy, and pockets deep enough to finance a turnaround. Mithaq has now pumped nearly $170 million of unsecured funding into The Children’s Place so it can pay suppliers and shore up its balance sheet.
The real key is a sudden burst of stock available for purchase, as happened when investors rushed out of The Children’s Place’s en masse. This component raises the tantalizing possibility that a crafty buyer could quickly build up a huge position during an event such as a corporate spinoff or a merger transaction, when shares change hands quickly and in chunky volumes. Finding enough to amass majority control while avoiding any forceful pushback, however, will be anything but child’s play.
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CONTEXT NEWS The Children’s Place said on April 17 that it had received an unsecured and subordinated $90 million term loan from its majority shareholder, Mithaq Capital, a Saudi family office. It plans to use the money to pay off an existing loan and reduce its accounts payable to vendors.
Mithaq’s acquisition of about 54% of the retailer’s common stock in February triggered a change of control that caused an event of default with lenders.
The new loan will accrue interest at the Secured Overnight Financing Rate plus 4% a year, with accruing interest payments deferred until April 30, 2025.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic: Active US anti-takeover poison pills are dwindling Graphic: The Children's Place has regressed in the stock market
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(Editing by Jonathan Guilford and Aditya Sriwatsav)
((For previous columns by the author, Reuters customers can click on jeffrey.goldfarb@thomsonreuters.com; Reuters Messaging: jeffrey.goldfarb.thomsonreuters.com@reuters.net))
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