Lawsuits, Letters & Loathing at EGL

Update: Shareholder lawsuits are commonplace in public-to-private buyouts, as someone is always convinced that they’re getting short shrift. But I don’t believe I’ve ever seen a buyout firm sue its acquisition target for choosing the other guy.

But that’s what happened yesterday in Texas, when Apollo Management sued EGL Inc. (Nasdaq: EAGL) and its chairman Jim Crane to block a $38 per share buyout by Crane, Centerbridge Partners and The Woodbridge Company. As previously mentioned in this space, Apollo believes that it was improperly cut out of the auction process, even though it was willing to offer $40 per share (which the WSJ has now been raised to $41 per share). Crane responded in a statement by basically calling Apollo liars about being denied access to information. He also said that Apollo was unwilling to make a signed offer, although such a claim wouldn’t much matter if Apollo is correct in its contention that EGL accepted the Crane-led deal prior to when formal bids were due.

Originally posted on 3/20/07
It’s not just hedge and mutual funds that are beginning to take issue with the cozy nature of management-led buyouts. Apollo Management yesterday fired off a letter that essentially accused freight forwarding company EGL (Nasdaq: EAGL) of running a sham auction that undervalues shareholder interests for the benefit of company chairman and CEO Jim Crane.

Crane originally bid $36 per share for EGL back in December, with the backing of General Atlantic. That offer valued the company at around $1.2 billion, but GA soon pulled out “due to an expected shortfall in EGL’s fourth quarter 2006 results, as compared to amounts previously anticipated by analysts and by General Atlantic.” Crane then regrouped for another $36 per share offer, with GA replaced by Centerbridge Partners and The Woodbridge Company.

EGL announced yesterday that it had signed a definitive agreement to sell to Crane’s new group — at an increased bid of $38 per share. It also said that it would recommend that shareholders ratify the deal at an upcoming meeting. Some analysts had suggested that the company actually could have gotten between $40 and $45 per share, but many seemed satisfied with the current deal. After all, hadn’t General Atlantic just said that $36 per share was too high?

Such satisfaction, it seems, would have been understandable but wrong. Apollo Management yesterday claimed in a letter that it would have offered $40 per share, if only someone at EGL would pick up the phone. EGL advisor Deutsche Bank allegedly told Apollo that “best and final” bids were due on March 26, but that it did not warn them that EGL had opted to scrap that deadline in order to preemptively sign a deal with Crane. When Apollo tried contacting EGL’s special committee, it got no response. The not-too-subtle suggestion is that EGL was bending over backward to accommodate Crane (who not only is CEO, but also owns 18% of EGL’s stock). Either Crane would get a bargain, or he’d get a $30 million breakup fee. Win-win for Crane. Lose-lose for EGL shareholders.

Apollo said that its $40 per share offer will stand until this Friday, and also noted that some of its requests for company information had been summarily ignored. If this latter claim is true, then it raises some questions for Apollo in addition to EGL. Specifically: If Apollo couldn’t access the necessarily financial records during due diligence, then how can it be confident that $40 per share is a reasonable price?

I’ve got a feeling that all of these questions are going to be answered in short answer…