Target seeks support in proxy fight; Validus seen as third wheel; SumTotal sparks bidding war

By Cristal Cody

Tupelo, Miss., May 20 - Target Corp. shares jumped $1.00 on Wednesday as the pressure of a proxy fight with activist shareholder William Ackman rises ahead of the upcoming shareholders meeting.

In fact, the battle over board seats was the first item Target addressed in its earnings conference call on Wednesday with analysts.

Meanwhile, the tug-of-war between Bermuda insurance providers IPC Holdings, Ltd., Max Capital Group Ltd. and Validus Holdings, Ltd. continues, but Validus is likely to lose, an analyst said Wednesday.

In other deals, the situation with SumTotal Systems, Inc. heated up on Wednesday after Vista Equity Partners Fund III, L.P. increased its offer to beat Accel-KKR, but it's foolish to think the bidding war is over, an analyst told Prospect News.

On Wall Street, stocks slumped on a negative outlook from the Federal Reserve. The Dow Jones Industrial Average fell 52.81 points, or 0.62%, on Wednesday to close at 8,422.04.

The Standard & Poor's 500 index lost 4.66 points, or 0.51%, to end at 903.47, and the Nasdaq Composite index declined by 6.70 points, or 0.39%, to 1,727.84.

Target lobbies investors

Target chairman and chief executive Gregg Steinhafel said on the earnings conference call on Wednesday that Pershing Square Capital Management LP has "no plan to create value for Target shareholders over time."

Ackman heads Pershing Square, which owns 7.80% of Target's outstanding stock, and had proposed that Target spin off its assets into a real estate investment trust, which was rejected by the company.

Ackman now is underway in a battle for five seats on Target's board and to expand the 12-member board to 13 directors.

Target urged shareholders to vote for its four nominees up for re-election at the company's annual shareholders meeting on May 28.

"We strongly maintain our current board including these four current nominees is the right board," Steinhafel said on the call. "We believe Pershing Square presents a risky and speculative real estate proposal" that "clearly reflects a lack of understanding of our strategy."

The Minneapolis-based retailer on Wednesday reported earnings of $522 million, or 69 cents a share, for the fiscal first quarter ended May 2, compared with $602 million, or 74 cents a share, in the same period a year ago.

Target shares closed up $1.00, or 2.38%, at $42.94 on Wednesday.

Validus' chances wane

Validus revised its hostile takeover bid for IPC Holdings earlier this week to include $3.00 in cash and 1.1234 Validus shares for each IPC share.

The $1.69 billion bid values IPC at $30.14 a share but only represents a 21.90% premium based on Validus' and IPC's closing stock prices on March 30, the last day of trading before the first offer was announced.

"IPC's board is likely to reject the improved offer from Validus, as the value of the improved offer is only 4.00% higher than Validus' initial offer, which was rejected," an analyst said Wednesday.

Validus' first bid included no cash and 1.2037 shares for each IPC share.

"IPC shareholders would need a compelling reason to vote against IPC's management, in our view," the analyst said. "We do not regard Validus' revised offer as particularly compelling from a financial point of view, and there is significant uncertainty surrounding its ability to complete the offer."

IPC, which provides property catastrophe reinsurance, has said that it will review the revised offer.

Validus also wants IPC shareholders to vote against IPC's stock amalgamation with specialty insurance and reinsurance company Max Capital.

The deal is expected to close shortly after IPC's and Max's annual shareholder meetings on June 12.

IPC shares fell by 74 cents, or 2.80%, to $25.69 Wednesday.

Max Capital's stock lost 38 cents, or 2.30%, to close at $16.13.

Shares of Validus dropped $1.08, or 4.61%, to close at $22.35.

Vista sticks around

Vista said the price it would pay for SumTotal depends on whether the increased $6.67 million, or 10 cents a share, breakup fee inserted into SumTotal's revised takeover agreement with Accel-KKR is reduced or eliminated.

Vista said it will offer $4.95 a share in cash if the breakup fee is invalidated or reduced to the original $3.1 million fee listed in the agreement. If the breakup fee stands, Vista said it will pay $4.85 a share in cash for SumTotal.

"Vista is surprised and disappointed to learn that, in the midst of an active auction, SumTotal chose to sign an amended merger agreement containing an increased breakup fee without first giving Vista notice or any opportunity to raise its bid," Robert F. Smith, managing principal of Vista Equity Partners, said in a statement.

Vista, which owns approximately 13.00% of SumTotal's outstanding stock, is the company's largest stockholder.

SumTotal said in a statement Wednesday that the board will review the revised proposal.

On Tuesday, SumTotal said it had accepted a revised offer from Accel-KKR for $4.80 a share in cash, a nickel higher than Vista's earlier bid of $4.75 a share.

Private equity firm Accel-KKR first struck a buyout deal with SumTotal for $3.80 a share on April 24.

"You've got two well-funded equity shops competing for the same asset here," Eric Martinuzzi, a senior research analyst with Craig-Hallum Capital Group LLC, said in an interview Wednesday.

"You have to argue the folks from Accel-KKR have the inside track because they're the only ones with a signed merger agreement with the company," he said. "But, Vista Equity is a well-known player in technology transactions and they certainly are not looking for go-away money."

Martinuzzi has a $5.00 price target on SumTotal's stock.

"We're going into nickel and dime territory, so it would be foolish to say it's over, especially when there's not a financing issue for either entity," he said. "You've got nothing but upside if you're a current owner."

SumTotal shares rose 7 cents, or 1.46%, to close Wednesday at $4.88.

Mentioned in this article:

IPC Holdings, Ltd. Nasdaq: IPCR

Max Capital Group Ltd. Nasdaq: MXGL

SumTotal Systems, Inc. Nasdaq: SUMT

Target Corp. NYSE: TGT

Validus Holdings, Ltd. NYSE: VR

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