(Bloomberg Opinion) -- No one likes to be pushed around in M&A — especially if, like activist fund Elliott Management Corp., you’re the normally the one forcing bidders to pay up.
Paul Singer’s Elliott, known for extracting sweeteners from buyers in contested takeovers over the years, isn’t used to getting squeezed. After partnering with Brookfield Asset Management on a deal to buy U.S. TV-ratings business Nielsen Holdings Plc for $28 a share in March, it’s getting a taste of its own medicine. WindAcre Partnership LLC wants a higher price. Led by Snehal Amin, co-founder of London-based activist fund TCI Fund Management, it says Nielsen’s “intrinsic value” is well over $40 a share.
Amin, whose firm has a 27% stake in Nielsen, previously sought a special deal for WindAcre in return for accepting the offer, Bloomberg News reported. The idea, which failed to fly, was that he would reinvest the proceeds in the buyout and receive free equity on top worth $1 billion. Other shareholders would have received the agreed-upon transaction price.
Now Amin is campaigning against the transaction publicly. Some of his arguments are academic, for example the suggestion the stock would be worth $65 if the company borrowed some private equity tricks and took on leverage in excess of what most listed companies could get away with. Analysts were targeting about $22 before bid interest became public.
WindAcre does, however, usefully ask what valuation Nielsen deserves considering the history. Its average five-year trading multiple is nine times expected earnings before interest tax, depreciation and amortization; the deal was struck at 10 times. But recent valuations may have been depressed by excessive fears about the impact that disruptors could have on measuring viewing habits. From 2014 to 2016, Nielsen traded at an about 12-13 times. Financially, the business is in good health. Might an upward re-rating lie ahead if investors decide this grandad of the industry still has a role as viewing habits shift to myriad screen-based devices?
Either way, Elliot and Brookfield clearly stand to make good returns. The deal would cost $16 billion including assumed net debt. The plan is to invest $5.7 billion of equity, borrowing the rest and doubling leverage to over six times Ebitda. Assuming Nielsen revenue grows at more than 4% per annum, sales could be about $4.5 billion in 2027. On reasonable margin assumptions, Ebitda would then be around $2 billion. At the current deal valuation multiple, Nielsen would be worth nearly $5 billion more than its purchase price after five years.
Now assume a further $3 billion gain from debt reduction (bringing leverage back to current levels). Elliott and Brookfield would then take out almost $14 billion on a sale — easily doubling their investment. A sweetener is clearly affordable.
The snag for WindAcre is that whatever its arguments, the bird in the hand represents an offer at a premium for a stock that’s been going nowhere. Nielsen’s board says the price is acceptable. The shares are trading just below the offer. No counter bid has emerged. This is where the rubber hits the road.
With its blocking minority stake, WindAcre can deny Elliott and Brookfield the 75% support they need to force holdouts to sell. But the bidders could still make an offer to other shareholders, gain a large controlling stake and delist the stock, letting WindAcre continue as a minority shareholder with an illiquid holding.
This would be a smaller and more complicated deal, but the economics might not be radically different. The key question is whether it would be so easy to apply leverage in such a structure. But WindAcre is clearly not opposed to putting more debt on this business — it’s calling for it. And it’s far from clear WindAcre and the Elliott-Brookfield consortium have opposing visions for Nielsen. Still, Elliott and Brookfield would have to get to at least 50% — and that battle is far from won.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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