Owners of stock in Focus Financial Partners say they aren’t happy with the price at which the company is considering a sale to Clayton, Dubilier & Rice. If agreed upon by a majority of “disinterested” shareholders, the deal would take the company private and cash out all but potentially its largest existing investor, Stone Point Capital.
Multiple sources have told WealthManagement.com that the “best and final” offer of $53 a share seems too low, voicing doubts on background about how hard Focus tried to find a higher bidder and whether shareholder interests were adequately represented at the negotiating table.
At a 15% premium over stock price at the time the offer became public, one portfolio manager said it falls below what he considers an average take-private premium and expressed frustration with Stone Point’s opportunity to remain invested.
“If CD&R works its magic and decides to re-IPO at a much higher valuation in five years,” he said, “Stone Point will be able to participate in that. For the rest of us, it’s $53 and you’re out.”
If Stone Point decides to roll over its shares, as most expect, it would likely be unable to vote on the decision to sell, but a partner at a top-20 shareholder said a deal could still be struck at the proposed price—even if smaller investors end up disappointed.
“I've heard from other large shareholders who are frustrated, so I think there will certainly be a fair amount of no votes,” he said. “But in the end, it's hard to say. You also have BlackRock and Vanguard, these big index funds that are probably going to vote with whatever [Institutional Shareholders Services] recommends—they tend to vote with the man and support management."
BlackRock and Vanguard collectively own 13.3% of the company's shares, according to recent disclosures.
“I'm not hopeful that ISS will recommend voting against the deal,” the asset manager added, “but that will be an important variable, I think.”
At the end of the day, he said he doesn’t feel Focus’ interests are aligned with his and other shareholders because management will be able to roll equity into the new company or negotiate new compensation packages and therefore aren't effectively selling at $53/share.
“I don’t think, frankly, that the price is very important to them,” he said. “I don't think [the special committee] has bad intentions, but I also just wonder how motivated they are to actually get the best deal.”
Focus leadership has declined comment while negotiations are ongoing, and a former executive refused to discuss the topic due to a comprehensive nondisparagement agreement with the company.
Investors will be looking for indications during Thursday's quarterly earnings announcement that there is more wiggle room than the terms “best” and “final”—which are nonbinding in the U.S.—would suggest. And, while no one that spoke with this publication expects to see a proxy statement as early as this week, all are withholding final judgment until they see the due diligence process outlined in that document.
“If they spoke to enough other potential bidders and everyone else was below $53, then it's sort of hard to argue that’s the wrong price,” said one stakeholder. “If you go to sell your house and the highest bid you get is $500,000, well that's probably what your house is worth. So, we’ll be looking closely at the proxy statement if and when they release that.”
At close Monday, stock markets valued Focus at $50.01 per share, just a 5.8% discount from the negotiated price of $53 and 11% less than Morningstar’s most recent "fair value" estimate of $55.96. (Morningstar's fair value estimate is the research firm's best guess at the intrinsic value of a company based on how much cash the firm is likely to generate in the future.)
With interest rates high and stock markets jittery, investors acknowledged that taking Focus private is worth exploring. But many Wealthmanagement.com spoke with said they would still prefer to see the company's voting shareholders hold out for a better price or remain publicly traded. More than one large shareholder said their firm would like to be offered an opportunity to roll over their shares into the deal.
“This is frustrating,” said an institutional investor, who would like the option to remain invested. “We feel like the price should be considerably higher, but we may have no choice. We can vote against the deal, of course, but it'll depend a lot on what other shareholders do.”
"We like the business and I think there's a lot of opportunity in the private wealth space going forward," said Macrae Sykes, who manages Gabelli Funds' Financial Services Opportunities ETF, trading on the New York Stock Exchange under GABF. "It's a faster growing part of the market."
The active, semitransparent fund has more than 4% of its portfolio invested in Focus and would also like to retain its position. Commending Focus CEO Rudy Adolf for his management of the business and decision to refinance the firm's debt, Sykes declined to comment on the sale price but said CD&R's interest is a good sign for the firm's current and future value.
"The market's been in a dynamic phase and so there's still risk," he said. "You do have higher interest rates, which would impact financing for deals going forward. But we still want to see the formal proposal and, at each chance, we'd like to own this business."