Two institutional shareholders have contacted infoGroup’s board of directors, challenging its recent decision to sell the company to CCMP Capital for $8 per share.
In an April 6 letter to infoGroup’s board, Stonerise Capital Partners alleged the board “was more interested in resolving its own relationship with [former chairman and CEO Vinod] Gupta through a low-price sale rather than creating value for all the shareholders of the Company.”
A day earlier, Hotchkis and Wiley Capital Management sent a letter to the board. Details of the Hotchkis and Wiley letter were not immediately available. At deadline, there was no indication infoGroup’s board had responded to either letter.
Combined, the two companies hold just under 8.5% of infoGroup’s stock, according to the Associated Press.
According to the Stonerise letter, the push for the $8-per-share sale was the result of Gupta wanting “desperately needed liquidity for the wrong ways of his past.”
It goes on to claim “The current board of directors, cracking under pressure or simply tired from the relationship with Mr. Gupta as a board member and stockholder, sells the Company to put an end to its own involvement with Mr. Gupta and in doing so the board abdicated its fiduciary duties by choosing not to run the company as a stand-alone business for all the wrong reasons”.
It also alleges that other shareholders “get their investment asset sold at a low price to a leveraged financial buyer at the worst possible time for transactions of this type when credit is tight and the macroeconomic environment dictates low exit values.”
At the time the sale was announced, the company’s stock had been trading at $8.16 per share. Since the announcement of the sale, the per-share price has stayed below $8.
Stonerise’s letter, which was written by managing partner Jose S. Medeiros, makes claims about Gupta’s liquidity based on a press statement Gupta issued which stated, in part “I believe that InfoGroup stockholders would benefit from a cash or liquid stock proposal for their shares.”
“In December 2008, when the whole financial system was melting down, he puts out this statement,” Medeiros told Direct Newsline. “In March of ’09, the stock market bottomed out, and he threatened to sue the board if it didn’t sell the company. If you are going to the board as a board member and asking to sell at what was, in hindsight, the bottom, to us that smells of someone who had to sell. Not a lot of people in March ’09 were looking to sell unless they had to or were panicking.”
When Gupta resigned as infoGroup’s CEO in August 2008, he was granted $10 million in severance payments. But he also agreed to pay the company $9 million over a four-year period.
In March of this year, Gupta settled the SEC investigation by agreeing to never again serve as an officer or executive of a public company, and to pay $7.4 million in disgorgement, penalties and prejudgment interest.
According to Stonerise’s letter, infoGroup’s “decision to cease paying dividends further deprived Mr. Gupta of another $7 million in annual income.”
Gupta’s stake in infoGroup is reportedly just under 14.8 million shares, which at the $8 price would be worth around $118 million.
While an infoGroup spokesperson was not available at deadline, the company had addressed the stock price in documents filed in early March with the Securities and Exchange Commission. An internal memo made public by the company raised the question of the stock price, asking “…wouldn’t Infogroup have reached or exceeded this threshold in the near future anyway? Wasn’t the analyst target of $10 attainable?”
The company’s response, in full, read: “We have a fiduciary duty to consider all alternatives for the Company that delivers [sic] a fair return for our shareholders and the CCMP offer meets that requirement, providing an attractive, immediate and certain cash value of their shares.
Stonerise’s Medeiros said his company purchased its infoGroup shares late in the first quarter of 2009. While he would not specify what his firm paid, at the time at $5 or less.
“At eight, this is a profitable investment [for Stonerise].” Medeiros said. “We are not trying to recoup a bad investment. We don’t think eight dollars comes close to what it’s worth,” he added, saying that he considered a fair price to be “well north of $10, in the mid-teens.”
The letter Stonerise sent to infoGroup’s board speculates better days for infoGroup – and therefore more value – are ahead. “With the early signs of stabilization in the macro environment, it is likely that the Company has already reached the bottom of this period of weak demand as is evidenced by IUSA’s two consecutive quarters of revenue growth.” Additionally, cuts in operating costs made by management, combined by revenue growth, would lead to higher margins and therefore more perceived value by potential suitors.
“In this regard, a sale now of the Company is a disrespect to [current CEO] Bill Fairfield and his team for all the hard work they have put in to fix and reposition the Company over the last 18-24 months,” according to the Stonerise letter.
If all this is obvious to Stonerise, why wouldn’t it be similarly apparent to the many suitors for infoGroup who either declined to make bids, or made less-attractive bids than CCMP?
Here, the macroeconomic situation came into play, according to Medeiros. “All those [potentially acquiring] companies are licking their wounds coming out of a difficult 2009,” Medeiros told Direct Newsline. As for Dun & Bradstreet, which was rumored to be one of the last runner-up bidder, “D&B has a new management team, and it is unusual for a new management team to embark on a sizable merger and acquisition program,” Medeiros added.
