Russell Corporation last week filed a proxy statement with the SEC related to its merger into a subsidiary of Berkshire Hathaway, revealing that Jack Ward, chairman and CEO of the company, was the sole dissenting vote on the Board of Directors that approved the deal. Mr. Ward was the lone hold out, apparently taking the position that RML was on the right track with its recent re-organization efforts that he expected to bear fruit in the near-term. The balance of the Board and the companys advisors apparently had less optimism that the business was heading the right direction and opted instead to accept an offer that was 10% below the original price they were seeking.
In the filing the company said that the Board “weighed Russell Corporations financial projections against the likelihood of meeting such projections” and discussed the updated base case and upside case projections with the CFO and general counsel in assessing the position taken by Mr. Ward. The Board also apparently took into account the fact RML missed its earnings projections for 2005 and was also advised by the CFO that the company would not meet its 2006 first quarter operating budget. The Board “thus concluded that the base financial plan, the updated base case projection and the upside case projection were subject to significant execution risk” and based on RMLs prior performance, were “unlikely to be achieved.”
The process of the final deal in place started back in September 2005 when Jack Ward was contacted by John Holland, president and CEO of Berkshire Hathaways Fruit of the Loom subsidiary, about BHIs interest in pursuing a strategic transaction with Russell Corp. The filing indicated that there were no “specific discussions” between the two parties during the fall of 2005, but RML did apparently receive some overtures from other third parties concerning a strategic transaction, but the company opted to not pursue those.
In early December at a regularly scheduled meeting of the Board, representatives of Goldman, Sachs & Co. made a presentation to the Board regarding their view of RMLs current defensive profile. It was their recommendation that Russell engage an investment bank to assist it in evaluating potential strategic options.
In January 2006, Goldman Sachs was engaged to act as financial advisor to the company to explore strategic alternatives, including a potential sale of the company. After receiving unsolicited general indications of interest from two financial buyers, the Board met with Goldman Sachs and RMLs outside legal team in mid-February to discuss potential strategic alternatives. It was at that meeting the Board decided to pursue a deal with Berkshire Hathaway to purchase all of the outstanding common stock of Russell Corp. for “at least $20.00 per share in cash.” In early March, the Goldman Sachs team approached Berkshire Hathaway and presented the proposal. BHI suggested they contact Mr. Holland at Fruit of the Loom.
After a short period of discussion about the strategic opportunity of the deal, BHI made an offer in late March that amounted to $18.00 per share in cash. The deal also called for a termination fee of $25 million payable “under certain circumstances,” which was later reduced to $22 million at the request of Russell Corp.
In early April, the RML Board met to review the companys progress against its updated base case projection in which Mr. Ward presented an “upside case projection” based on an acceleration of the timing of the restructuring plan, the implementation of more than 30 six sigma improvement projects, the implementation of the Central America Free Trade Agreement for Honduras and El Salvador, and a commitment from a significant customer for purchases in 2007. After a discussion of this outlook by Mr. Ward and an updated preliminary financial analysis of various potential strategic alternatives by Goldman Sachs, the Board considered and weighed the likelihood of achieving the updated base case projection as compared to the upside case projection, and decided to “pursue the proposed transaction with Berkshire Hathaway” at the $18.00 per share price.
However, the Board advised their legal team to notify BHI that they would not accept the $22 million termination fee portion of the offer. Berkshire Hathaways legal team then advised the RML team that they had been instructed by BHI to “cease reviewing the merger agreement draft and to terminate discussions” regarding the deal. Needless to say, RMLs Strategic Committee of the Board of Directors, which was set up to monitor the negotiations, backed down and accepted the termination fee provision.
On April 17, 2006 the RML Board voted 9-1 in favor of the acquisition after Goldman Sachs offered its review of the deal and the fairness of the $18 per share price. In his dissenting position, Mr. Ward said he believed that it was “an inappropriate time to make a strategic decision about the future of Russell Corporation” due to the progress that was being made with the companys restructuring efforts. The filing said Mr. Ward also believed RMLs earnings per share projections for 2006 were “very achievable.” He also felt that while the company had not provided any external 2007 financial estimates, internal projections for 2007 earnings per share in the base financial plan, the updated base case projection, and the upside case projection were “significantly higher than the Wall Street consensus estimate.” The filing stated that, “Mr. Ward believed that if the updated base case projection were achieved, Russell Corporations stock would be trading above the $18 offer price (not including a takeover premium) in 12-15 months, and therefore, he opposed the sale.”
The SEC filing also made note that once the decision was made by the Board, Mr. Ward has actively worked towards a smooth transition.
>>> With immediate vesting of options, restricted shares and severance programs, Mr. Ward should see in excess of $14 million when the deal closes. It would have been easier to take the money and run. Not everyone would have taken his position
>>> Nice try negotiating with Mr. Buffett…
