Opposition is mounting to an offer by Cerberus Capital Management and the controlling shareholders of Dorel Industries Inc. to take the company private as the clock ticks down to a scheduled vote on the proposed deal next week.
In a report published Monday, proxy advisory firm Institutional Shareholder Services (ISS) urges Dorel investors to vote against the proposed transaction, saying the future prospects for the manufacturer of bicycles and baby products outweigh the $16-a-share price they’re being offered to sell.
It’s the second investor-advisory firm to make such a recommendation, following Glass Lewis’s rejection of the proposed deal in a separate report earlier this month.
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, have said they will vote against the proposal on the grounds that it undervalues the company. The intentions of other major shareholders, including Fidelity Management & Research Co., are unclear.
“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 in its report. “Although shareholders should be mindful that the success of a standalone Dorel is heavily dependent on execution, the current offer does not appear sufficiently compelling versus that potential scenario.”
Dorel announced on Nov. 2, 2020, that it had reached an agreement in principle with its controlling shareholders, the Schwartz and Segal families, to go private in a buyout led by Cerberus. The proposed takeover has run into opposition from almost the get-go, and the initial offer price has been increased by about 10 per cent to the current $16 a share.
The controversy centres on two opposing views about whether Dorel can build on its current momentum and deliver consistent profits after several rocky years in which the Canadian company’s once high-flying shares tumbled to near penny-stock status. Barely four years ago, Dorel enjoyed a share price near $40, but the stock has crashed hard since then as the company struggled with restructuring initiatives.
Dorel advises its investors to get out because the business isn’t going to get better in the near term. It says 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 the COVID-19 pandemic, which has boosted demand for its bicycles and home furnishings.
Investors such as Letko, however, have expressed confidence in the longer-term upside potential of Dorel stock. And they say the $16-a-share price offers them no reason to tender. The total value of the proposed transaction including assumed debt is about US$1-billion.
A spokesman for Dorel did not provide an immediate response to the ISS report Monday.
Dorel executives and its financial advisers have pointed out the company has had limited success in past turnaround efforts and the company’s high leverage, which amplifies the impact of its mistakes, ISS highlights in its report. Leverage is indeed high among similar companies, ISS says, “though it seems the buyer’s consortium’s solution is to increase it, not decrease, as implied in the leveraged structure of the acquisition.”
Dorel went public in 1987 after a merger between children’s gear manufacturer Dorel Co. and furniture maker Ridgewood Industries Ltd. Ridgewood founders Martin Schwartz, Alan Schwartz and Jeff Segel have been heavily involved since then, running Dorel as senior executives and acting as directors. Another family member, Jeffrey Schwartz, is chief financial officer.
Under the proposal, Mr. Schwartz and the other family shareholders would roll over their investment in exchange for an indirect equity interest of about 26.7 per cent in the Cerberus-led acquiring company. They’re expected to stay on as managers and share in a limited portion of future profits at a maximum rate of about 31.5 per cent, contingent on achieving certain performance levels, according to an explanation of their rollover agreement.
A vote on the proposed go-private transaction is now scheduled for Feb. 16. To pass, it needs support from holders of two-thirds of the votes cast and by a simple majority of investors holding the subordinate voting shares.
Proxy advisers offer opinions to their clients, typically big institutional investors, on the measures, including takeover bids, that companies send to their shareholders for a vote. They can carry significant influence because smaller investors without the means to do their own in-depth analyses often vote according to the recommendations.
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Nicolas Van Praet