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OSI deal was manipulated from the top, some say

The top brass showed a disregard for the will of investors.

By SCOTT BARANCIK
Published June 5, 2007


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Don't be surprised if you hear a lot of hootin' and hollerin' outside the Tampa headquarters of OSI Restaurant Partners today.

After all, $325-million buys a lot of Dom Perignon. That's how much Outback Steakhouse co-founders Chris Sullivan, Bob Basham and Tim Gannon stand to earn this morning if investors finally approve a $3.2-billion deal to take the company private.

The Champagne may not flow so fast at Joe Shareholder's house, however. Sure, the management-led team seeking to acquire OSI recently bumped its offer to $41.15 after three failed votes at $40 per share. But some observers say the company, which declined to comment for this article, has shown contempt for the average investor.

"It's an interesting case study in management buyouts with private equity and how the process can be, for lack of a better word, manipulated," said former Wall Street lawyer Steven Davidoff, now an assistant law professor at Wayne State University Law School.

"It's been our view that the private equity firms and the insiders stand to gain the most from this transaction," Morningstar analyst John Owens recently told the Associated Press.

Because insiders such as board chairman Sullivan and CEO Bill Allen sit on both sides of the deal, OSI tried to distance them from it. Most importantly, the company created a special committee of six independent board members to handle negotiations with the acquirers.

But on a number of occasions, an unsettling zeal for the deal emerged:

  • When half of OSI's six-member special committee voted against the $40-a-share offer, Sullivan and Allen separately contacted committee members and lawyers to warn that a crucial executive and one or more co-founders might quit. Such departures would make the company less desirable to other acquirers and could hurt its stock price. When committee members stood their ground, it was suddenly announced that OSI would have to restate some prior financial reports and postpone its next quarterly statement to deal with a series of minor accounting errors.
  • Instead of conducting a pre-agreement market check to determine if the $40-per-share offer was sufficient, OSI elected to solicit higher offers during a 50-day period after the deal was signed. In a recent study of 30 such "go shop" solicitations, Delaware lawyer Mark Morton found that only one company received a higher bid.
  • In the weeks prior to OSI's Nov. 6 merger announcement, when the company still had an interest in seeing its stock price rise, its presentations to Wall Street analysts were cautiously optimistic about the future. But in "road show" visits with top shareholders after the deal was signed, the company painted a more pessimistic picture and suggested that $40-per-share was a fair offer.
  • Early drafts of a how-the-deal-was-done narrative in OSI's proxy were not as forthcoming. Rather than say that three of the six special committee members had opposed the deal and identify each by name, which it eventually did under pressure from plaintiffs' lawyers, OSI said only that "more than one director" had opposed the deal.
  • Minutes after it began, OSI postponed a May 8 shareholder vote on the deal when it realized there weren't enough "yes" votes for approval. Meetings rescheduled for May 15 and May 22 were postponed for the same reason. Had the "yes" votes prevailed at any of these meetings, it's likely OSI would have accepted the will of the shareholders. Barbara Black, director of the corporate law center at the University of Cincinnati College of Law, said she was "troubled" by the three postponements and the very limited disclosure about them.
  • After one failed tally, general counsel Joe Kadow urged staffers who hadn't yet voted their shares to mail their attached proxy card to the company, a move that arguably could stifle dissent.
  • When OSI postponed the May 22 meeting, it announced that the acquirers had agreed to bump their offer to $41.15 per share. Not until several days later did the company quietly disclose, in almost indecipherable prose, a much more consequential amendment: the decision to reduce by 4.4-million the number of "yes" votes needed to secure the deal, from 37.8-million to just over 34.4-million.

How hot is Wall Street on this deal? Consider this tepid endorsement from Institutional Shareholder Services, whose support OSI cites in its proxy statement:

"We recognize the shortcomings in the process and the conflicts of interest of management and founders," ISS wrote May 29, "but given the downside of a failed transaction resulting in a loss of premium and likely continued deterioration of fundamentals, support for the transaction is warranted."

Scott Barancik can be reached at barancik@sptimes.com or (727) 893-8751.

[Last modified June 5, 2007, 00:47:48]


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