Cleveland-based Ancora Holdings Group isn’t giving up on its bid to buy H.B. Fuller’s Building Adhesive Solutions (BAS) business, and Tuesday increased its proposed price to between $1.2 billion and $1.4 billion in cash.
Ancora, an H.B. Fuller shareholder, originally offered between $1.1 billion and $1.2 billion for the business in an Aug. 12 letter. H.B. Fuller rejected that proposal Aug. 24, saying it “materially undervalue[d]” the BAS segment.
In a Sept. 29 letter to H.B. Fuller’s board members, Ancora Chairman and CEO Fredrick DiSanto and James Chadwick, president of Ancora Alternatives, said the new higher offer reflects what they see as both the value of the business and the need to reduce H.B. Fuller’s debt.
“As was the case in August, Ancora remains committed to helping the company address its multitude of challenges and deliver sustainable value creation for H.B. Fuller’s long-suffering shareholders,” the two wrote.
The proposal comes as Ancora and H.B. Fuller remain locked in a broader dispute over the company’s strategy and financial performance. Ancora has argued that H.B. Fuller needs to take steps to reduce its debt and improve shareholder value.
Ancora said H.B. Fuller’s stock price has fallen more than 17 percent since the company rejected its original proposal, and attributed the decline to investor concerns about the company’s debt, financial performance, and valuation.
Ancora argues that selling the BAS business would provide a way to pay down some of H.B. Fuller’s debt, which Ancora described as the “most pressing concern.”
“We estimate that a sale of the BAS segment represents the most efficient way to accelerate the company’s leverage reduction and reduce H.B. Fuller’s balance sheet risk for shareholders,” the executives wrote.
H.B. Fuller also could use the cash from selling the business to reduce what it owes, leaving the company with less debt and less exposure to changes in borrowing costs, according to Ancora.
At the same time, Ancora also disputes H.B. Fuller’s previous concerns about the difficulty and cost of separating the BAS business from the rest of the company.
The activist investor said its advisers and operating partners, including former H.B. Fuller executives, have examined the separation and concluded that the problems cited by the company are overstated.
“We also believe the company’s commentary regarding the dis-synergies and challenges of separating the BAS segment is completely unfounded based on diligence with our advisors and operating partners,” wrote DiSanto and Chadwick.
According to their letter, the updated proposal is also backed by a financing letter from Fortress Investment Group.
“Our revised offer is also strengthened by the backing of Fortress Investment Group, which has provided us with a “highly confident” letter related to its ability to provide the necessary debt financing for this acquisition,” the execs wrote.
Ancora does not expect a final deal to include a financing contingency, meaning it would not expect the purchase agreement to allow the transaction to fall apart simply because the buyer could not obtain financing.
The proposed price would value the BAS business at between 8.5 and 9.9 times its EBITDA based on the last 12 months. Ancora said the offer represents about 50 percent of H.B. Fuller’s current stock-market value while the segment accounts for about 20 percent of the company’s total revenue.
The letter also pointed to comments by H.B. Fuller Chief Financial Officer John Corkrean during the company’s Sept. 23 third-quarter earnings call. Ancora cited Corkrean as saying that concerns about the costs or lost benefits of separating the business could be overcome “depending on the potential valuation of a sale of an asset.”
Ancora said it hopes Corkrean’s comments signal that H.B. Fuller may now be more willing to consider a transaction.
“With this larger and structurally sound revised offer, it is time for the board to rationally engage and work towards a solution for the company’s highly levered capital structure,” the executives wrote.
Larger battle looms
The proposal is the latest development in an ongoing proxy fight between Ancora and H.B. Fuller.
The new offer does not by itself create a deal, according to Ancora, which said any transaction would require approval from H.B. Fuller’s board and, if necessary, shareholders, as well as regulatory and other third-party approvals. The parties would also have to complete additional due diligence and negotiate a definitive purchase agreement.
Ancora said it is prepared to move quickly.
“We are prepared to devote considerable resources to completing this proposed acquisition,” according to DiSanto and Chadwick. “We are confident that with your cooperation, we will be able to execute a definitive transaction agreement without delay.”
The firm also left open the possibility of increasing its offer again if its review of the business uncovers additional value.
“If upon further due diligence, we become aware of some component or aspect of the business and its prospects that evidences additional value inherent in BAS, we are prepared to adjust our proposed price to reflect this new information,” they wrote.
For now, the proposal remains an expression of interest rather than a binding agreement, and Ancora said it can withdraw or modify the offer at any time before a definitive transaction is signed.
The firm is asking H.B. Fuller’s independent directors to engage directly on the revised proposal and said its advisers are prepared to begin discussions about confidentiality arrangements that would allow more detailed examination of the business.
Ancora ended the letter by calling for negotiations rather than ongoing public confrontation.
“We continue to believe a negotiated transaction is a far better path for H.B. Fuller and its shareholders than an ongoing public disagreement,” the executives wrote. “Every shareholder is disappointed right now, but we will put aside our past differences and help you start a new chapter of value creation without the overhang distraction.”