CD&R mollifies Focus Financial 'FOMO' with non-monetary sweetener to ease the shareholder pain of dumping the company in a sour market

A New York City buyout firm with a lock on the acquisition of Focus Financial has offered a cheap sweetener to convince Focus executives to cut loose about half the cash flow of 90 wealth managers at a very opportunistic price.

Clayton, Dubilier & Rice (CDR) essentially asked executives to sign a more definitive agreement to firm up its previously announced informal offer at a take-it-or-leave-it, $53-a-share. See: Focus Financial is pushing shareholders to take a take-it-or-leave-it private equity offer worth about $6 billion -- including $2 billion debt assumption -- despite a break-up value near $10 billion

CDR got a wet-ink Focus Financial signature by satisfying its most nagging concern, namely the question of whether a better offer might materialize as the ink dried.

The question hung pregnantly over the Focus Financial earnings call on Feb. 16 when Focus rejected all questions out of hand. See: Rudy Adolf dodges questions on Focus Financial earnings call, possibly because one inconvenient question overhangs a PE firm's $53 share price offer

The solution was for CD&R to write in a "knock-yourself-out" clause – to satisfy both a fear-of-missing-out (FOMO) and tort lawyers, says ECHELON Partners managing director Mike Wunderli.

"When a company makes a significant and surprising move like this, they need to make sure to cover their bases from a liability standpoint." See: Focus Financial CFO admits firm needs to 'de-lever' and assures analyst $14-million splurge for posh new offices won't soon repeat

Sour market

Focus CEO Rudy Adolf now has 40 days to do a roadshow – or private jet show –  to shop the company in search of competitive bids.

Focus Financial, however, has already indicated that virtually every conceivable buyer had been approached and CD&R's take-or-leave bid – valued at about $7 billion – was as good as it gets in this market.

CD&R's willingness for its deal to be shopped suggests it sees no looming threat of being unseated, says Matt Crow, CEO of Mercer Capital in Memphis, Tenn.

“I think they know there aren’t other buyers,” he says.

Focus shares (FOCS) closed today (Feb. 27) at $51.75, up $1.55, or 3.09% in a generally up market. 

Pacifying shareholders

Shareholders may be less than convinced that all avenues are exhausted, says Wunderli.

“[A shop-the-offer clause] is generally utilized for two reasons: 

One, as a final enticement for a buyer to convince the seller to engage with them,” he says. “This gives the seller the peace of mind of having a solid offer in their pocket, with the added benefit of seeing if they can get a better offer. It’s essentially a 40-day call option with downside protection.”

"Two, to pacify the shareholders of the seller that management isn’t just accepting the offered price, which could be viewed by those shareholders as less-than-optimal.

“Given Focus’ history and the spotlight they’ve had on them as a public company in this industry, my guess is that while both reasons above might apply, they are more focused on reason No. 2. "

Seeking alternatives

The "go-shop" period expires at 11:59 PM ET, April 8,  allowing the special committee and its advisers to solicit and consider alternative acquisition proposals from other parties. 

Focus Financial may feel compelled to dump the company and at least recoup investments made by most shareholders. 

 It has accumulated billions in debt, making its future look like a bigger gamble, analysts say. See: Focus Financial CEO pumps brakes hard on M&A market, waiting for a return to 'normal' -- and buyers of Focus stock bid up price as debt ratio improves