Ben Stein won’t like it, but the board of directors of global logistics company EGL, Inc. approved a $1.7 billion private equity buyout of the company by a group headed by chief executive officer Jim Crane, who is also the largest shareholder of the company. Previous posts on the private equity plays for EGL are here, here and here.
Crane will have 51% of the privatize company and the other 49% will be owned by private-equity firm Centerbridge Partners LP and Canada’s Woodbridge Co., which is the investment vehicle of the Thomson family, one of Canada’s wealthy Canadian family. The price of $38 a share represents over a 25% premium over the $29.75 price of EGL’s shares in late December. Crane’s previous buyout offer, which tanked after the release of less-than-stellar fourth quarter numbers, was based on a $36 per share price. EGL’s shares closed at $34.96 in Nasdaq Stock Market composite trading this past Friday.
Meanwhile, the Chronicle’s Bill Hensel is reporting today that a letter from New York-based Apollo Management has surfaced stating that it had put together a group that had offered an all-cash deal for EGL worth $2 a share more than the management-led buyout. No word yet on whether EGL’s board, in approving the management-led offer, had considered the competing bid, which will remain open until this Friday. The NY Times/Reuters story on the Apollo bid is here.
In its letter, Apollo claims to have left several voicemails and e-mails with the boardís special committee, its financial advisers at Deutsche Bank and its counsel at Andrew & Kurth. Also, Apollo claims that EGL refused to open its books to allow Apollo to conduct due diligence. Finally, Apollo asserts that the last written communication from the company was last Thursday, when EGL advised that ìbest and finalî bids were due March 26. As late as last Sunday, Deutsche had told Apollo that no deal was imminent. The following is from the letter:

We wonder what urgency the company saw in cutting this process short (without informing us or giving us a chance to exceed the C.E.O.ís bid) or in suddenly negotiating a deal at an inferior price and with, we suspect, breakup fees and other deal protections for the benefit of the CEO. That would not seem in the best interests of your shareholders, other than Mr. Crane personally.

So, even if Crane’s group is the winning bidder for EGL, he and the board will likely have to endure a shareholder’s lawsuit that they favored Crane’s lower bid over the non-insider, higher bid. Public equity is not looking all that attractive these days. Frankly, is anyone surprised?

The New York Times (see here and here) is not the only major metropolitan newspaper that employs a business columnist who doesn’t appreciate the benefits of a robust market in mortgage financing.
Channeling the Times’ Gretchen Morgenson, the Chronicle’s Loren Steffy decries the irresponsibility of those involved in the overheated subprime mortgage market. In so doing, he passes along an anecdote on how he resisted the temptation to take out a subprime mortgage to finance a home in Houston before he had sold his home in Dallas. Steffy suggests that he has financial discipline that both the subprime lending industry and most of the subprime borrowers lack. Maybe so, but what is clearer is that he doesn’t appreciate the benefit to him and other consumers of risk-taking in the subprime mortgage financing market.
Sure, there were a substantial number of people who took out subprime mortgages who didn’t have the financial capacity to pay them. A large number of those folks will default on their mortgages and lose their homes, which is unfortunate. However, the bigger losers will be the holders of the equity tranches of mortgage-backed securities (“MBS’s”) and subprime originators who are now left holding the bag with mortgages that they can’t sell. Don’t feel too sorry for them, though. Given that those investors made a lot of hay during the boom years, they are now simply enduring the risk of relaxing underwriting standards too much in an attempt to sustain the hot market. These are sophisticated investors and financial institutions that are willing and able to take the risks of these investments and to bear the losses associated with such risks.
Going forward, the number of subprime mortgages originated will go down, as will the number of subprime MSB’s sold into the market. Yields on the subprime MBS’s will likely rise and the underwriting standards will get stricter, so the supply of subprime mortgages will constrict to meet the reduced demand. The MBS’s and other financial products that have been developed to hedge risk in the subprime market are valuable tools to facilitate such a correction.
Which brings us back to Steffy. Perhaps he is more financially disciplined than those involved in the subprime mortgage market. Or perhaps he is has the same aversion to risk as Suze Orman. Whatever the reason, he decided not to take the risk of carrying two mortgages, which is fine. But another homeowner in the same position as he was might decide that taking on the subprime mortgage was worth the risk, which is fine, too.
The point is that the financing market for subprime mortgages gave Steffy a choice to engage in what could have been wealth-creating risk-taking. Nothing is wrong with electing not to take that risk. But it is wrong not to acknowledge that it is a good thing to have the opportunity to make that choice, which is what the subprime mortgage financing market provided.