News & Our Thinking

Argent in the News

Wallets open wide

06 August 2010

(St. Louis Business Journal)

“We’re beyond the stage where we thought the end of the world was going to happen and companies were sitting on cash due to paranoia,” said Scott Harrison, a senior analyst with Argent Capital Management LLC in Clayton. “Fundamentals are improving, financing costs are near a record low and very attractive, and companies are looking for higher return places to put their cash rather than a savings account earning 2 percent interest.”

 July 2, 2010

On the lookout for strategic acquisitions, Ralcorp Holdings Inc.’s eye first landed on the country’s largest private-label pasta maker in August last year. Chairman Bill Stiritz and Co-Chief Executive Kevin Hunt sent letters that month to their counterparts at Kansas City-based American Italian Pasta Co. suggesting they discuss a potential merger

Rebuffed but not deterred, Ralcorp’s board and management renewed their efforts in March and extended an initial offer of $47 a share for AIPC. That price was rejected as
too low, but it was enough to get both sides talking. Executives and advisers of both companies negotiated at frequent meetings during the next three months, and Ralcorp raised its bid to $53 a share to secure the $1.2 billion deal June 21. The deal is Ralcorp’s largest since buying the branded Post cereal business from Kraft for $2.6 billion in 2008.

Ralcorp, which also acquired Canada-based cracker companies North American Baking Ltd. and J.T. Bakeries Inc. in separate transactions May 31 and Canadian frozen breakfast foods maker Sepp’s Gourmet Foods Ltd. on June 26 for undisclosed amounts, is one of several large companies across St. Louis to begin loosening its purse strings after months spent cutting costs and hoarding cash.

Brown Shoe Co., Emerson Electric Co., Peabody Energy Corp., Stifel Financial Corp., Angelica Corp. and RehabCare Group Inc. also bid for or made strategic acquisitions in recent months.

That is welcome news for outside lawyers, accountants and others who help orchestrate such transactions.

Lawyer Bill Seabaugh and his colleagues in Bryan Cave LLP’s mergers and acquisitions practice, for example, must be experiencing pre-recession flashbacks. Seabaugh, who leads his firm’s global transactions group, and partners Stephanie Hosler and Randy Wang are busy working with Ralcorp Co-CEOs Hunt and David Skarie, Treasurer Scott Monette and General Counsel Gregory Billhartz to steer Ralcorp’s AIPC deal behind the scenes. Local accountants with PricewaterhouseCoopers are also assisting Ralcorp. Jim Ash, a lawyer with Husch Blackwell Sanders LLP’s mergers and acquisitions practice in Kansas City, represented AIPC in the transaction.
That buyout follows on the heels of Brown Shoe Co.’s $39.6 million agreement June 7 to purchase the 50 percent of New York-based Edelman Shoe Inc. it did not already own. Bryan Cave’s Robert Newmark helped execute that deal for Brown Shoe along with counsel Brian Feezel and partner Daniel White.

And in late April, Stifel Financial Corp. reached a deal to buy San Francisco investment bank Thomas Weisel Partners for more than $300 million in stock. The acquisition followed Stifel’s purchase of investment advisory firm Missouri Valley Partners from Clayton based First Banks for an undisclosed amount earlier that month and created a company with combined revenue of $1.6 billion. Bryan Cave attorneys Jay Nouss and Robert Endicott served as the primary legal architects of the Thomas Weisel deal.

“We’ve definitely seen a pickup in merger and acquisition activity in the past few months,” Seabaugh said.

Such deal making slowed to a crawl in late 2008 after Wall Street faltered, credit markets froze and forecasts stirred fears of economic doomsday scenarios. Companies big and small responded by reducing expenses and building up cash reserves.

As of March 31, S&P 500 “Industrial” companies held $836.8 billion in cash and other readily available liquid assets on hand, 26 percent more than they held a year earlier and 36 percent more than they held on the same date in 2008, according to Standard & Poor’s.

But analysts and observers say things are beginning to change.

“We’re beyond the stage where we thought the end of the world was going to happen and companies were sitting on cash due to paranoia,” said Scott Harrison, a senior analyst with Argent Capital Management LLC in Clayton. “Fundamentals are improving, financing costs are near a record low and very attractive, and companies are looking for higher return places to put their cash rather than a savings account earning 2 percent interest.”

Michael Lissner, a partner at Acropolis Investment Management LLC in Chesterfield, said it is a buyer’s market because many private companies for sale are owned by baby boomers. Many of them have been looking for opportunities to sell and retire but have been waiting while buyers stashed cash under mattresses.

“There is a ton of pent-up demand by sellers,” Lissner said. That is giving acquirers an edge in negotiations.

In many cases, private equity firms also are looking for ways to liquidate investments in companies they have held for several years. That willingness to sell, coupled with the improving availability of debt financing for borrowers with good credit and healthy balance sheets, is helping some buyers.
“The maximum amounts of debt that can be borrowed for transactions are lower, and the restrictive covenants are tougher (than before the recession), but at least the banks are resuming this kind of lending,” said Jim Snowden, executive vice president of Huntleigh Securities Co. in Clayton.Seabaugh similarly pointed to banks’ increasing willingness to lend as a driver of recent acquisition activity. “Deal financing is clearly available for quality deals and quality borrowers,” he said. “Financing helps not only corporate strategic buyers but also helps private equity folks who have been on the sidelines since the second half of 2008 and all of 2009.”
Emerson is in the hunt for Chloride Group Plc., a London-based manufacturer of back-up power supply systems. Emerson’s initial bid of $1.1 billion was rejected in April and surpassed by a $1.3 billion offer from ABB Ltd. of Zurich, Switzerland on June 9. But Emerson responded June 29 with a sweetened $1.51 billion takeover proposal. Emerson is another Bryan Cave client, but the law firm is not assisting on those bids in the United Kingdom.
Emerson also announced June 30 it bought Innovative Control Systems Inc.for an undisclosed amount. The Clifton Park, N.Y.-based company makes turbine control retrofits for the power generation industry.
Peabody Energy, the world’s largest private-sector coal company, has made an aggressive run at Australian coal miner Macarthur Coal Ltd. in recent months. Its latest $3.4 billion offer was spurned in mid-May, but it has not ruled out a follow-up bid. Peabody wants to buy Macarthur, the world’s biggest exporter of the metallurgical coal that is used in making steel, so it can go after two of the most lucrative coal markets in the world, China and India. Peabody’s legal and other work on the Macarthur bid is not being handled in St. Louis but by experts in Austrailia.
In February, privately held Angelica Corp. closed on the $4 million acquisition of a full-service linen laundry plant in Gilroy, Calif., that was part of the bankruptcy estate of former competitor West Coast Linen. The deal gives Angelica more convenient access to several customers in northern California. Angelica worked with lawyers John Granda and Chip Misko in the St. Louis office of Stinson Morrison Hecker LLP.
St. Louis-based RehabCare Group Inc. acquired Triumph HealthCare Holdings, a Houston-based operator of long-term acute care hospitals, for $570 million in November and remains on the lookout for additional purchases.
Jay Shreiner, RehabCare’s chief financial officer, said the business of acute care and rehabilitation hospitals was not impacted by the downturn as much as other industries. But the recession set the stage for acquisitions. Most of Triumph was owned by a private equity firm that had put money in the company five years earlier and was looking for a way to cash out, he said.
“We used weakness in the market to acquire some very good assets at a reasonable price,” Shreiner said.
RehabCare Group’s deal for Triumph included $450 million in debt financing and nearly $150 million in equity, Shreiner said. He declined to name the outside firms that assisted RehabCare with the purchase but said all were national firms. RehabCare’s financial commitments came from Bank of America, Royal Bank of Canada and BNP Paribas, according to company filings made Nov. 4 with the U.S. Securities and Exchange Commission.
Industry sources said they expect the merger rebound to continue. Concerns that the federal capital gains tax rate will rise next year could prompt sellers to cash out now, while concerns about inflation could provide buyers with additional motivation to make moves in the coming months. With the government pumping the economy with extra liquidity and keeping interest rates low, some fear their buying power could begin to erode in the next few years, Lissner said.
“A lot of companies are saying, ‘I have a ton of cash sitting in the bank. This is a good time to put it to work so that when inflation comes we will have more revenue coming in,’” Lissner said. “Before, people weren’t even making the effort, but we’ll continue to see activity pick up.”