The deal was set. The vote was scheduled, and all the required proxy materials already had been mailed to shareholders.
So why would Mod-Pac Corp.’s two top executives suddenly agree to sweeten their bid to take the Buffalo specialty printing company private by almost $3 million just a few weeks before shareholders were set to vote?
All signs point to one answer: The Keane family was worried they wouldn’t get enough support from shareholders for their acquisition bid to be approved when the votes were finally counted at a special shareholders meeting Sept. 27.
“I do not think they are getting the return,” said Edward K. Duch, a former Buffalo banker and Mod-Pac shareholder who for years has been pushing the Keanes to take the company private. “If it was in the bag, I doubt they would raise the price.”
So the Keanes – led by Mod-Pac chief executive Daniel G. Keane and his father, Kevin, the company’s chairman – struck a deal.
They reached out to disgruntled shareholders who had launched four class-action lawsuits opposing the acquisition, all claiming the purchase price was too low.
In exchange for upping their bid by about 10 percent – from an already sweetened offer of $8.40 per share in cash to $9.25 – the suing shareholders would pledge to vote their shares in favor of the deal.
That’s not an inconsequential thing. The lead shareholder in the class action suits, Minerva Group, a suburban Philadelphia money management company headed by investor David P. Cohen, owns a little more than 6 percent of Mod-Pac’s common stock and is the second-biggest shareholder outside the company’s management.
The settlement switches Minerva’s votes – and those of the other investors that were part of the class action suits – from the “no” column to the “yes” side.
“I think they’ve had sufficient feedback to indicate to them that a price of $8.40 would not fly,” said suburban Philadelphia investor Brendan J. Walsh, a deal opponent.
“I do not think they had the votes,” said Walsh, a longtime shareholder in Mod-Pac and its former parent company, Astronics Corp.
The Keanes, after all, are no strangers to sweetening their deal. After their initial offer to buy the company for $7.20 per share in cash last October drew howls from investors like Duch and Walsh, who argued that the price was too low given the company’s rapidly improving finances, the Keanes upped their offer by 17 percent, to $8.40, in late January.
Still, that didn’t quiet the dissidents, who continued to complain loudly that the Keanes were trying to snatch up the company on the cheap. Even at the sweetened $8.40 per share price, the offer was for less than the book value of Mod-Pac’s assets, and nearly 50 percent less than its annual sales
What’s more, the dissidents argued that the offer didn’t take into account Mod-Pac’s improving performance. After foundering with losses following the departure of its biggest customer, Vista Print, in the mid-2000s, the company has been solidly profitable for more than three years, earning $2.3 million over the 12 months that ended in June. Its $3.8 million in operating profits during that 12-month period were only a little bit less than the $4.1 million in operating profits that it had earned during the previous 24 months.
And Mod-Pac’s sales growth, which has averaged around 8 percent during the last three years, has been, as Dan Keane frequently points out, more than double the industry’s growth rate, which tends to run in lockstep with gains in the national economy.
At the same time, Mod-Pac is hardly the type of stock that will catch the fancy of investors. It’s tiny, with just $60 million in annual sales. Its sales growth, while good for the printing industry, isn’t eye-catching, and the company’s in an old-world industry.
The $9.25 offer still gives investors a 68 percent gain from the $5.49 Mod-Pac’s stock traded for before the Keanes made their bid. And the $500,000 to $1 million it costs Mod-Pac to be a public company are a heavy drain.
So it makes tremendous sense for the company to go private, especially at a time when interest rates are at rock-bottom levels. If you need to borrow $18 million – as the Keanes do to finance their $28.3 million takeover bid – there’s never been a better time to do it.
Of course, interest rates have been inching higher, so it’s in the Keanes’ best interests to wrap up a deal that already has been lingering for nearly 11 months. And settling the class action lawsuits removes a potential court challenge that also could have held up the deal.
“It’s always a crapshoot. You don’t know what the outcome will be,” said Christopher Carosa, who runs the Bullfinch family of mutual funds and has a small stake in Mod-Pac. “Why go into an event with any uncertainty when you can have a settlement and eliminate that uncertainty?”
The price: About $2.8 million.
If Mod-Pac’s business can continue on its recent upswing, it will be money well-spent for the Keanes.
“You’re buying certainty,” Carosa said.
And if you’re convinced you’ve got a good deal going, that’s priceless.