Private equity giant Cerberus Capital Management and the founders of Dorel Industries Inc. have pulled the plug on their effort to take the Canadian consumer products company private following what appears to be insurmountable opposition to the proposal from shareholders.
The outcome thrusts the spotlight back onto Dorel chief executive Martin Schwartz and other founders, who now face increased investor expectations to build on COVID-19 sales gains and bring the company’s three different business lines back to steady profit growth. It also raises questions about whether Mr. Schwartz and his family, who control Dorel through multivoting shares, still harbour a desire to pursue a similar transaction in the future.
A deal between Dorel and the Cerberus-led buying group to purchase the maker of Schwinn bikes and Maxi-Cosi baby strollers for $16 a share in cash and take it private has been terminated by mutual agreement, Montreal-based Dorel said in a statement Monday. A vote on the transaction that was to take place Tuesday has been cancelled.
The decision to end the deal, valued at $1-billion including debt, was unanimously approved by Dorel’s board, with directors party to the transaction recusing themselves from the deliberations, the company said. It comes after exchanges and discussions with many of its investors and a review of proxy votes submitted before a deadline of end of day last Friday.
“Independent shareholders have clearly expressed their confidence in Dorel’s future and the greater potential for Dorel as a public entity,” Mr. Schwartz said in the statement. “Shareholder value enhancement remains our top priority and we look forward to continued growth with our excellent brands, worldwide consumer recognition and strong customer relations.”
The development brings to an end a drive over many months by Mr. Schwartz and his family to find a financial partner willing to help privatize Dorel in a transaction in which they aimed to roll over their controlling equity. The family told the Dorel board they weren’t interested in any alternative transaction such as a breakup.
Dorel announced last November that it had reached an agreement in principle with its founders to go private in a buyout led by Cerberus. The proposed takeover ran into opposition from almost the get-go.
Two large Dorel shareholders, Montreal-based investment management company Letko, Brosseau & Associates and San Francisco-based Brandes Investment Partners, which together hold about 19 per cent of Dorel shares, had said they intended to vote against the proposal on the grounds that it undervalues the company. Two major proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, recommended shareholders reject the plan.
Barely four years ago, Dorel enjoyed a share price near $40. But stagnant sales, declining profit from competition and operational issues, and a high debt burden have been a near-constant fixture since, sending the stock on a downward spiral.
Under different circumstances a privatization effort might have succeeded. But the Cerberus proposal was partly sunk because of poor timing.
Investors were asked to sell their shares just as the company reported record sales for the 12 months leading up to Sept. 30, 2020, the result of a boom in demand for its home furnishings and bicycles during the coronavirus pandemic. In its most recent quarter, the company reported the highest operating profit of any three-month period since 2012, according to ISS.
Dorel advised its investors to get out, saying the business isn’t going to get better in the near term. It said the offer provides its shareholders with certainty of value and immediate liquidity in a context where the company has continuing “operational challenges” despite a tailwind from COVID-19.
Investors such as Letko, however, expressed confidence in the potential of Dorel to overcome its recent problems. And they said the $16-a-share price offered them no reason to tender.
“We were far away from what we consider a decent price,” Letko vice-president Stéphane Lebrun said in an interview Monday. “We continue to have confidence in the long-term outlook for the company as well as the management.”
Dorel has been hurt in recent years by several external factors over which it had little to no control, including the bankruptcy of key customer Toys “R” Us and a trade war between the United States and China, Mr. Lebrun said. Over a longer period, the company has proved it can grow in many countries as well as buy and develop strong brands, he said.
The danger for Dorel now is that it sinks back into the same kind of “operational mediocrity” described in its own circular in pushing the privatization transaction, Glass Lewis said in a report earlier this month. Mr. Schwartz and other family executives might also “continue to advance comparable or iteratively improved privatization arrangements and eschew other strategic avenues,” the proxy adviser said.
The rejection of the deal could mean a return to the status quo, but by seeking a partner to quick-start a sale a year ago, the CEO and his family have recognized the need for change and for external help, ISS concluded in a separate report. Talks with and feedback from shareholders have likely been beneficial in that process, ISS said.
“The current environment provides some tailwinds to two of the company’s three businesses, which, added to a greater willingness for reform, would seem to point to at least a partially successful turnaround,” ISS said.
Dorel declined to comment beyond its official statement.
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