Reps question controversial 'minitenders'

Although legal, the low-ball tenders can deceive investors

Feb 4, 2008 @ 12:01 am

By Dan Jamieson

Investors are still receiving "minitender" offers that try to get them to sell shares at below-market prices.

The small-scale tenders first arose years ago as a way to acquire illiquid limited-partnership units, but then spread to actively traded stocks.

Efforts by regulators in the United States and Canada to im-prove disclosure have reduced the number of such deals, but brokers say their clients still re-ceive the offers.

Bidders can be "very aggressive," said Herbert Wander, a partner in the corporate law department of Katten Muchin Rosenman LLP in Chicago. He said owners of a private placement issued by a real estate client of his have re-ceived multiple letters and even phone calls.

"It's a mystery" where a bidder gets names and phone numbers, Mr. Wander said. And "they did not tell [investors] what the [tax] recapture would be" if they sold, he said.

There are no figures kept on the number of minitender offers that occur each year.

Among actively traded companies, just this month, Silver Wheaton Corp., Marathon Oil Corp. and Fording Canadian Coal Trust were the subjects of minitenders priced at 3.5% to 5% below the market price of their shares.

In December, a minitender for Cummins Inc. was offered at 2.7% under market price, and a November tender for Rio Tinto PLC was priced at a 2.2% discount.

The offerer on these deals was TRC Capital Corp. of Toronto, the most active bidder for liquid shares.

Lorne Albaum, TRC chief executive and an attorney by trade, said his intent is to pick up odd lots from shareholders who couldn't otherwise sell without a large cost. He said he retains the tendered shares for his own account.

"The price discount is not that severe," Mr. Albaum said. "We're not trying to hide that [the tender offer is] at a discount." Mr. Albaum, who declined to specify how many shares he's picked up on recent deals, said he likes resource stocks right now. In November, K&N Value Select Corp. of Zurich, Switzerland, an investment holding company, offered Atlanta-based Coca-Cola Co. shareholders four shares of K&N Value Select for five shares of Coke. The offer represented about a 7% premium for Coca-Cola shareholders, said Andreas Kuehnert, a K&N board member. Coca-Cola told shareholders to exercise "extreme caution" before tendering, saying there was limited publicly available information about K&N, whose Frankfurt Stock Exchange-listed shares are not U.S. registered. Mr. Kuehnert said Coke shareholders who tendered got a diversified portfolio of bonds, stocks and real estate that has since done better than Coca-Cola shares. He said K&N has also made share-exchange offers, at premiums, to holders of Schering-Plough Corp., Eastman Kodak Co., Mattel Inc., and Bombardier Recreational Products Inc. But advisers don't like clients getting minitender offers. Offerers may "comply with the law, but they're just taking advantage of people," said Carl Busch, an Oklahoma City-based rep and branch manager at WFG Investments Inc. of Dallas, who says his clients frequently receive offers. "How the SEC allows this, I don't have any idea," said a rep with St. Louis-based A.G. Edwards & Sons Inc., who asked not to be identified. The Edwards broker has clients who own several non-traded real estate investment trusts that are perennial targets of Madison Liquidity Investors LLC of Overland Park, Kan., which buys bankruptcy creditor claims and other illiquid assets. Madison did not make an executive available for comment.

REPS DON'T LIKE THEM

"With illiquid securities, [investors may] not be able to monetize shares, so they may take [a low price]," said Trevor Norwitz, a partner at Wachtel Lipton Rosen & Katz in New York. "But even then, the holder should be entitled to full and fair information ... These minitender guys often don't do that."

Regulators have warned that investors can be fooled into believing that a minitender offers a premium price, as would a conventional tender offer.

In 2000, the Ontario Securities Commission suggested that offerers disclose that their offer price was less than the market price — a practice designed to cut down on the number of tenders, said Stan Magidson, a Calgary-based partner with Osler Hoskin & Harcourt LLP of Toronto and a former head of the mergers-and-acquisitions group at the OSC.

The Securities and Exchange Commission issued similar guidelines that same year.

"But [minitenders] seem to be out there still," Mr. Magidson said. "That tells me it's sufficiently profitable [for bidders] to carry on the business."

Offerers of minitenders take advantage of investors who fail to pay close attention to their investments.

"The game is that [offerers] hope that a handful of people are still asleep," Mr. Norwitz said.

U.S. rules allow offerers of 5% or less of a company's shares to make a tender with limited investor protections. Shareholders don't receive detailed offering documents, and they cannot withdraw their shares before a deal closes; bidders can extend offers and even lower the price.

Mr. Albaum said his offers include withdrawal rights.

To trigger the "regulatory regime" for takeover bids in Canada, a buyer has to bid for more than 20% of shares outstanding, Mr. Magidson said.

Minitenders are below that amount, "so they're under the radar."

The one benefit that proponents of minitenders claim is that they help small investors unload odd lots, Mr. Magidson said.

That's why the OSC didn't prohibit minitenders, he said. "But we felt minimum requirements were needed," Mr. Magidson said.

John Nester, SEC spokesman, declined to comment other than to refer to the SEC's July 2000 guidance, which says offerers should disclose clearly if the offer price is below the market price.

The SEC undertook several enforcement actions around that time over failures to make adequate disclosures.

If an offer is "uncoerced, and if people are told the price is less than they can get in the market, then I suppose the theory is that no one is being defrauded," Mr. Norwitz said. "There's no rule [that] I can't offer to buy [shares of Armonk, N.Y.-based IBM Corp.] at a penny."

Critics say that since the costs for these faux bids are minimal, the practice continues.

"Even if they take in a couple hundred shares, they can still make a profit," Mr. Norwitz said."It's like junk mail — you don't need a big response," Mr. Busch said.

ANNOUNCING A DEAL

Bidders typically announce a deal via a press release, forward the offer to a share depository such as Depository Trust Co. of New York and hope that some brokerage firms forward the material to shareholders.

Bidders "take advantage of the whole depository systems ... that push [the offers] through to brokers and ultimately out to retail" investors, Mr. Magidson said.

Brokers say most of their clients rely on them for advice on tendering shares. But since the offers go directly to shareholders, brokers aren't always aware of them."I never see them," said the Edwards broker about an offer.

If clients tender shares, "they just disappear out of the account," the broker said. Adding to the confusion is that many small tender notices "are legitimate offers [from issuers] to round up" shareholders who hold less than 100 shares, Mr. Busch said.

Dan Jamieson can be reached at djamieson@crain.com.

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