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AUTO another day, another new holder

March 24, 2013 | About:

After market close today, Ancora advisors filed a 13-D on AUTO. Ancora is apparently in the business of mercilessly stealing my ideas, as they also recently filed a 13-D on SODI asking for many of the things I wanted in my post on activism on SODI. Ancora’s filing shows they own 6% of shares outstanding, acquired the majority of their shares at $1.10, and have a cost basis of $1.07-1.08. The filing comes on the heels of Rangely’s filing with more than 10% of shares and Peter Kamin’s filing with a bit over 5%. All three of these groups acquired their shares after AUTO announced their deal and were acquired at or above the $1.05 per share deal price.

That they all acquired their shares at or above the deal price has important implications for the deal going forward. These guys did not buy their shares looking to get $1.05 per share. They bought the shares expecting a better bid. And with each share that trades hands above the deal price, a deal at $1.05 gets less and less likely.

To see why, let’s think a bit about the deal. AUTO’s mgmt owns 26% of shares, and before they announced the deal three other groups owned 15-20% of the shares each, for a total of over 50% in those three parties hands. That means no deal could go through without at least two of those three groups agreeing with management on a deal price. There is absolutely no chance AUTO would announce this deal without making sure that at least two of these parties would vote for the deal.

Obviously, one party did not agree with the deal. That party would be Baker Street, and they immediately sold all of their shares when the deal was announced- probably because they figured there was no upside because the other two parties had likely agreed to the deal, and the position was so small to Baker’s street new size it didn’t make sense for them to fight the deal.

That leaves the other two parties, James Martin and Kinderhook, as likely having already agreed to the deal. However, they’re now faced with a bit of a game theory problem. Their votes now represent the swing votes. If they stick with management, the deal could get done at $1.05. If, however, they switch over to Ancora/Rangely/Kaman’s side and vote against the deal, the deal would get voted down and management would be forced to come to the table and raise the price.

The question is: if you were Martin or Kinderhook, would you switch sides? Game theory says you absolutely should if you think management will pay more to take the company private; it just makes too much sense!

That puts the ball in management’s court. The more shares that trade hands above $1.05, the more tempting it is for Kinderhook or Martin to switch sides and jettison this deal. Thus, the more shares that trade hands, the more it makes sense for management to come back to the table and raise the price they’re offering before either party switches. Why would management want to raise their offer before Kinderhook or Martin switches? By doing so, they keep control of the bidding process and don’t get drawn out into lengthy negotiations or legal battles.

What happens if it turns out I’m crazy here? What if Kinderhook and Martin don’t switch and I’m just inventing this whole game theory scenario? The Ancora/Rangeley/Kaman group could still jettison this deal. All three clearly think the company is worth more than $1.05 per share. They could try the Dish/Sprint/Clearwire tactic of introducing a superior tender offer to force management back to the negotiation table or (as a contact pointed out to me) all three of them could demand appraisal rights. If 20%+ of shares outstanding demand appraisal rights, there’s no way the company would go through with the deal, even if a majority of shares voted for the deal. As I pointed out previously, AUTO’s fairness opinion was laughable, and I think the company would be pretty vulnerable in an appraisal situation. A payout of $3 per share, based on publicly traded multiples and mgmt’s projections, wouldn’t be out of the question, and if that came to pass, the acquisition would be a horrific one. To put it more simply: AUTO’s mgmt cannot risk a big shareholder group demanding appraisal. They need to make sure all major shareholders are happy with the price.

Overall, I still think AUTO represents pretty fabulous risk / reward. I’ve got about 8% of my portfolio in it, making it a top five position for me. I actually had more but I (somewhat unfortunately) unloaded a bit of it in the $1.08-1.09 range simply because I like the Outdoor situation more for its much lower downside, though the upside is probably more limited, and have made that a >20% position.

Disclosure: Long OUTD, AUTO

Rating: 2.0/5 (1 vote)


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