Late Monday, Fillmore Capital Partners issued a release lambasting the Genesis HealthCare board of directors for conducting an unfair auction process of the company, which, according to Fillmore’s president, Ron Silva, was “to the detriment of the shareholders, the patients and Fillmore.” While we can understand why Fillmore would be a sore loser, the shareholders have to be thrilled with the outcome, other than those who sold out too early. But to the detriment of patients? That is about as weird and bizarre as they come, and perhaps even desperate.
The Fillmore release, with more tears than a Nicholas Sparks novel, starts by stating that the first time they heard of the winning bid by Formation Capital and JER Partners and, specifically, the $40 million break-up fee, was when they read the May 19 press release (myth number 1). According to the proxy filed by Genesis yesterday, however, Fillmore was told on May 8, 14, 17 and 18 that Formation would have a $40 million break-up fee. Perhaps they were not listening. Fillmore also seems to think it was not given an opportunity to increase its bid (myth number 2). On the morning of May 17, representatives of Fillmore were contacted by Genesis and told that their last offer ($69.25 per share) was assumed to be their best offer, and if they had any changes they should be made that day. Fillmore apparently informed Genesis that it would revise the “ticking fee” (the premium added to the price if the closing occurred after a certain date), presumably upward, but not the per-share price. Later that night Fillmore notified Genesis it would not be changing the ticking fee component of its offer after all, and the price also remained the same.
While we do not know what Genesis and its advisors were thinking, it is likely that this was perceived to be an indication that Fillmore had hit a pricing wall. Perhaps they were influenced by Fillmore’s reluctance, on May 14, to agree to an outside closing date of December 31 with its 8% ticking fee in place, because, according to the proxy, the potential extra $15 million of cost from November 15 through December 31 would “have negative consequences for its existing equity and debt financing commitments.” So, are we to understand that a buyer, who is convinced he can close by September 1, is worried about the extra cost of a ticking fee if he can’t close by November 15? And an extra $15 million would disrupt his financing commitments? As television commentator John Stossel would say, “Give me a break.”
And before “the shareholders and the patients” of Genesis shed too many tears, Fillmore’s May 5 offer had a $50 million break-up fee, so their outrage about Formation’s $40 million break-up fee is a bit misplaced, to put it mildly. The real issue here is that Formation was in the driver’s seat because it was the only buyer that had a signed merger agreement. Certain benefits should accrue to the party with a signed agreement, and let’s not forget that Formation was already half way through the regulatory process (if not further along). As I have stated before, Fillmore’s huge strategic mistake was waiting three months to jump back into the bidding process while letting Formation begin the regulatory approval process and get close to a shareholder vote. If Fillmore could pay $69.25 per share today, compared with the original deal at $63.00 per share, they should have stepped in back in January. Who knows, maybe they didn’t have the financing wrapped up, or just didn’t think Genesis was worth more without additional financial disclosures. Or maybe they were being pushed back in by some shareholders. But it was always up to them to provide a better deal, because there already was a signed agreement with a buyer, with its financing commitment in place. And it looks like Fillmore hit its pricing wall. We assume that after reading the proxy, ISS will come out in favor of the transaction, but there still may be a shareholder or two, despite making a tidy profit, that will continue to complain. All we can guess is that if this happens, their motives may extend beyond their extraordinary return on their Genesis investment.
