SAN FRANCISCO – (COMMERCIAL THREAD) – Indaba Capital Management LP (together with its affiliates, âIndabaâ or âweâ), which is the largest unaffiliated shareholder of MDC Partners Inc. (NASDAQ: MDCA) (âMDCâ or the âCompanyâ) , today commented on additional proxy materials issued by the Company in connection with its potential merger with Stagwell Media LP (âStagwellâ). Based on its analysis of MDC’s disclosures, Indaba concluded that the additional information released only reinforces the fact that the recently revised terms of the transaction continue to deprive unaffiliated shareholders of significant value. In particular, Indaba points out the following:
- Massive Stagwell dividend before the combination closes – A special dividend of $ 139 to current Stagwell shareholders, funded by a new term loan and on-balance sheet cash, is to be withdrawn from Stagwell immediately prior to closing. This dividend gradually leverages the new combined entity rather than facilitating the deleveraging which Mr. Penn has touted as a key benefit of the transaction.
Massively dilutive grant of shares to Stagwell âbrand employeesâ– An adjustment of 12 million shares, or $ 60 million, is noted on page 19 of the proxy supplement. This is recognized as a non-recurring compensation expense in 2020 for “Employees of the Stagwell brand” which will be issued at the close of the transaction. We would like to know who these “Brand employees” are and if Mr. Penn is one of them. How do we know there won’t be another such award in 2021, once the potential merger is complete and Mr. Penn has full control?
In addition, we would like to know why MDC shareholders are apparently paying part of the bill for Stagwell minority interest acquisitions, with around seven million more shares to be issued to Stagwell executives upon closing of the transaction.
It appears that Stagwell as a whole is not getting 180 million shares as part of its blatantly unfair offer, but worse yet, 199 million shares. Why did Mr. Penn not discuss this aspect of the transaction with MDC shareholders? These 19 million additional shares (“FAF” shares) to be issued to the Stagwell parties are now equivalent to a value of nearly $ 100 million and almost 25% of the consideration that MDC shareholders will receive for capital. own their business!
- Discounted Cash Flow (“DCF”) Valuation Suggests Higher Valuation for MDC– MDC’s stand-alone DCF valuation developed by its investment banker, Moelis & Co., suggests that the company’s shares are worth between $ 7.21 and $ 12.96, over $ 10 at the midpoint. Despite this, the market still values ââMDC shares and this trade is around half that price, as the shares closed at $ 5.11 today.
- DCF’s relative valuation suggests insufficient ownership share for MDC shareholders – Moelis & Co.’s analysis of MDC valuation versus Stagwell valuation suggests 29% pro forma ownership of the combined new entity in the middle of the range and more than 39% at the high end of the fork. Certainly, considering Stagwell’s pro forma stake in the combined entity (nearly 77% including FAF shares and Stagwell shares in MDC), this transaction should not be viewed as a merger, but rather like a takeover that requires a mid-term bonus.
- Comparable business analysis suggests higher valuation for MDC– The comparables analysis prepared by Moelis & Co. suggests a median pro forma property of the combined entity of 30% and an upper limit of 39%. Again, the currently offered 31% deal does not offer a sufficient premium given the highly confrontational nature of this transaction.
- Rising Company Forecasts and Growth Projections Warrants Higher Valuation for MDC – Based on updated projections provided by both companies, MDC is expected to grow revenues faster than its advertising counterparts over the next three years and beyond. Based on the projections provided by MDC, the Company has increased its 2021 Adjusted EBITDA forecast by $ 10 million. Based on a multiple of 8.0, this equates to $ 80 million or an increase in value of about $ 1 per share. Stagwell, on the other hand, did not increase its 2021 EBITDA forecast.
- Issue of FAF shares – The issue of FAF units of 19 million would bring the number of pro forma shares held by Stagwell to 199 million against 180 million or 71% of the total shares outstanding pro forma for the consolidation and allocation of shares, and would leave MDC shareholders only 29%.
- Non-controlling interest – We also noted in the 520-page proxy that approximately $ 95 million of the redeemable non-controlling interest, which represents “the fair value of the non-controlling interest redeemable under the minority shareholders put option forcing Stagwell to acquire the non-controlling interest in a subsidiary that was not previously owned â illustrates the balance sheet adjustments related to the closing of the transaction. These amounts were not shown on Stagwell’s March 31st balance sheet. We would like to have an explanation of this considerable sum. Again, this appears to be a leverage event, and not the type of deleveraging event Mr. Penn has touted as a key benefit of the deal. We are concerned that there are others that we are not aware of or that Stagwell did not disclose.
- Insufficient governance – As noted above, the majority of directors identified for the new merged entity appear to have a direct personal or professional overlap with Mr. Penn. This composition is of concern, as we fear that conflicts will escalate and persist in the management of a combined entity under Mr. Penn.
In light of these preliminary findings, we intend to VOTE AGAINST the transaction on its current terms.
About Indaba Capital
Indaba was founded in 2010 to invest in corporate equity and debt. San Francisco-based Indaba currently manages more than $ 1.5 billion in assets. Learn more at www.IndabaCapital.com.