Is Apollo PE’s Only Go-Shopper?

Over the weekend we learned that the mystery bidder for CKE Restaurants was Apollo Management (as had been alluded to in prior reports). The reveal was surprising since it came out of a go-shop period — something PE pros seem to avoid like the plague.

Go-shop provisions have become a standard way to protect corporate boards from angry shareholders, proving management did everything they could to get the best price. But rarely do they go anywhere.

THL Partners originally had agreed to acquire the company for $649 million (alongside $309 million in debt). The price was a 25% premium to the fast food chain’s stock price, yet at 5.6x Ebitda, it was essentially a steal. One Raymond James equities analyst, for example, estimated CKE’s real estate to carry a sale-leaseback value of $200 million to $250 million.

So even though THL was poised to buy CKE at a bargain, a rival bid was not expected. The more likely “positive” outcome of a go-shop period happened recently, when the original buyers of Skillsoft, Berkshire Partners, Advent International, and Bain Capital, raised their own bid after no outside bids emerged in the go-shop. The same happened with Apollo Management’s recent proposed buyout of Cedar Fair-no other bidders stepped up during the go-shop period. The difference here was that Apollo refused to sweeten the bid and ultimately lost the deal.

Most firms avoid go-shop bids, sometimes out of good will to a competitor’s deal. Institutional Investor quoted a Wall Street banker in the height of the buyout boom saying “You don’t want to get caught fishing around in someone else’s deal.”

Beyond that, go-shop bidder faces diligence challenges. It’s especially difficult when a company’s management is on board for the buyout. If management is arranged to be paid out in equity in the new company, the team is not going to help a new bidder, which has a new, uncertain plan for the company, do its diligence.

Furthermore, the lenders behind the agreed-upon deal aren’t usually keen to lose their deal to another firm, which will line up its own financing. THL Partners’ debt providers for CKE-BofA, Merrill Lynch and Barclays Capital-can kiss those fees goodbye. For Apollo’s $1 billion offer, the firm lined up $700 million in debt from three different lenders: Morgan Stanley, Citi and RBC Capital Markets. That deal represents a 6.3x Ebitda multiple, which is still lower than the average of 6.6x Ebitda multiples garnered from recent restaurant buyouts.

(To be clear: Apollo *may* not have been CKE’s only go-shopper. At one point NY Post reported that Nelson Peltz, who owns fast food chains Arby’s and Wendy’s, was maybe considering a bid. He apparently backed out after attempting diligence. This is information I’m including solely to use the brilliant word “Arbytrage,” which I unfortunately cannot take credit for.)

Do we think go-shop will play a more promiment role in deals going forward? With PE firms desperate to do proprietary deals on the cheap, and lenders willing to take on increasingly risky capital structures, the market for good take-private targets may become fierce, and PE firms’ willingness to top a rival’s bid, even without proper diligence, may grow.