Two influential proxy advisers recommended shareholders vote against efforts by Ritchie Bros. Auctioneers Inc. RBA-T for major expansion in the United States, making it more challenging for the Canadian company to pull off its planned US$6-billion takeover of a U.S. auto retailer.
Institutional Shareholder Services and Glass Lewis released their final reports on Ritchie Bros.’s proposed acquisition of IAA Inc. on Monday, and both proxy advisers came to the same conclusion. Proxy advisers hold a lot of weight in merger shareholder votes because fund managers tend to follow their advice.
The Ritchie Bros. shareholder vote is scheduled for March 14.
Burnaby, B.C.-based Ritchie Bros. specializes in heavy equipment auctions and the proposed IAA takeover was designed to add a new business line, considering IAA focused on salvage automobiles. The acquisition announcement caught Ritchie Bros. shareholders by surprise and the company’s shares dropped 17.7 per cent the very first day.
The proposed takeover has remained hotly contested since, and is a rare transaction that initially drew rebukes from some shareholders of both the acquirer and the target.
Because the deal was so contentious, Ritchie Bros. tried to increase shareholder support by revising the terms, including by offering more cash to IAA shareholders. Ritchie Bros. also tried to win over an opposed shareholder by offering what ISS called a “lucrative convertible security.” While it appeased the shareholder in question, it frustrated others who weren’t receiving the same.
In a recommendation report Monday, ISS said “the potential risks associated with this transaction appear to outweigh the potential upside articulated by the board. Credibility is a particularly important consideration in this case, and it has been impaired by the shifting narratives around the long-term strategy and evergreen targets, as well as the miscalculated treatment of shareholders’ concerns during the assessment of revised terms.”
ISS also noted that Ritchie Bros. had been doing well on its own, and the change in strategy resulted in legitimate shareholder concerns. “It appears that RBA’s strong standalone prospects, proven over a period of time through robust performance, offer a better understood and verified path to shareholder value creation,” the proxy adviser wrote.
Ritchie Bros. shares climbed 3 per cent Monday, while IAA’s dropped 7 per cent. Ritchie Bros. shares have gained 22 per cent since their drop after the deal was announced in November, but they remain below where they were trading before the news.
Ritchie Bros. said Monday that its board of directors and management team “strongly disagree with the recommendations” from Glass Lewis and ISS. “The IAA transaction is expected to unlock substantial additional value that neither Ritchie Bros. nor IAA could achieve on its own, and we are confident in our ability to realize it,” the company said in a statement.
When the deal was announced, Ritchie Bros. pitched it as a way to expand beyond its core business of auctioning heavy equipment such as bulldozers and cranes and into auctions for salvaged vehicles.
At the time, Bryan Fast, an analyst with Raymond James, said Ritchie Bros. had “caught a lot of people off guard” with such a large move into a new area.
“The auction process for the companies is the same, but you’re dealing with a completely different set of buyers and sellers,” he said. “A lot of people own Ritchie [stock] because they dominate in the equipment space, and they know that space really well, and now they’re going outside it.”
With a report from Jason Kirby