A Little More Information on Volcom’s Sale to PPR

Often when a deal happens, all you know for sure is what’s in the press release. Typically that press release doesn’t offer a completely objective perspective about the process and motivations that lead to a deal. But if it’s a public company, and you’re willing to dig into mounds of fine print, sometimes you can find out a bit more.

That would be true with PPR’s acquisition of Volcom. Don’t get all excited. I don’t have any deep dark secrets to tell you. There’s nothing that would change my opinion that Volcom made themselves a good deal at the right time for the right reasons (in fact, this reinforces my opinion). But we’ll know a bit more about how and why the deal happened.

When I reviewed Volcom’s last quarterly report, I noted that a law suit had been filed as a result of the deal alleging that Volcom and PPR had done various bad things not in the shareholders’ interest. A second one was also filed but both are now being settled. We don’t know the terms, but one of the conditions was that Volcom amend its Schedule 14D-9 to include some more information on the deal. So we have the plaintiffs in those two lawsuits to thank for some of the additional insight.
From various documents filed as part of the deal, we know that the first contacts between PPR and Volcom management was on February 8th and 9th, 2010 where “…there were initial discussions about the businesses and histories of Volcom and PPR, as well as ways the companies might work together.” On March 11, PPR told Volcom they were interested in a potential strategic transaction. No purchase price was mentioned. There were ongoing meetings and conversations through April, but around April 28, Volcom told PPR that it intended to pursue its strategic plan “…rather than continue talks with regard to any potential strategic transaction…”
There was further contact on July 15 that lead to an informal meeting in Newport Beach, California between PPR CEO Pinault and Volcom CEO Richard Woolcott and President Jason Steris. Nothing happened and there were no further discussions for several months.
Meanwhile, on October 22 another company contacted Volcom and said they were interested in acquiring Volcom. Volcom had conversations with that company between October 25 and the end of December, 2010. Bidder A (as this company is called) signed a confidentiality agreement and proceeded with its evaluation of Volcom. On February 1, Bidder A informed Volcom that its review supported a price from the low $20s up to $25.00 a share.
It was December 16, 2010 when PPR contacted Volcom again about a potential strategic transaction. A confidentiality agreement was signed on February 1, 2011. Due diligence was undertaken for about two months and on March 4, PPR told Wells Fargo Securities (representing Volcom) that their analysis supported a price of $23.00. On March 17, Wells told PPR that Volcom was talking to other potential buyers as well.
PPR formally bid $23.00 a share on April 21. There were some additional meetings. PPR increased its offer to $23.50 on April 29.  The first offer was contingent, among other things, on CEO Wolcott’s “…entry into a new employment arrangement with PPR.” The second offer “…was not conditioned upon Mr. Richard Woolcott’s entry into a new employment agreement.”
I have no idea if that change has any significance at all. But the lawyers thought it was important enough to be included in the narrative so I’m just curious.
Now it gets interesting. On May 1, Wells contacted PPR’s representatives and told them their bid of $23.50 per share was not the highest. Bidder A had bid $24.00 earlier in the day. They recommended that PPR increase its offer before the Volcom Board of Directors started discussing the offer later that day.
Damn! This even gets exciting when you read about it in lawyer speak. It’s what makes doing deals “fun.” Think of the sense of urgency, the impact of different time zones and the fact that there were three companies involved. And three sets of lawyers. And, I assume, three sets of financial advisors. PPR increased its offer to $24.50.
In what I’ll call “dialing for dollars” Volcom’s representatives went back to both PPR and Bidder A and asked them to increase their bids. Both declined.
“Later in the night (Central European Time) of May 1, 2011…” Volcom’s lawyers told PPR’s lawyers “…that if PPR were willing to modify certain terms of the proposed merger agreement, the Volcom Board of Directors was prepared to approve the merger agreement and sign it immediately.” Those modifications obviously happened and “The Merger Agreement and Share and Voting Agreement were executed by the parties in the morning (Central European Time) of May 2, 2011.”
The Schedule 14D-9 lays out this whole process in much more detail on pages 10-22. You might want to take a look at it.
In those pages, we also learn something about the motivation for the deal. In the normal course of business successful companies will be approached by various entities about possible strategic transactions. This was true for Volcom from 2007 through 2009. As a public company, they have a fiduciary responsibility to consider if any of these transactions might be in the best interest of their shareholders. It feels from reading the pages above that it was somewhere around the end of 2009 when Volcom decided to look at the possibility of a transaction more seriously.
Not that they had to do one- but the world had changed enough (financial crisis, great recession, difficulty in growing) that taking a more serious look made sense. Still, in August 2010, Volcom released some financial projections as part of their five year plan that showed the company growing its earnings per share from $0.91 in 2010 to $3.37 in 2015. If they thought they could accomplish that, why sell at $24.50 a share?
I don’t know the answer to that, but I do know that in August of 2010, and prior to that when the projection was being prepared, we were all hoping for an economic recovery that has turned out to be more anemic than expected. People who don’t change their opinions when the facts change probably shouldn’t be running companies. Maybe those projections were part of the negotiations. The documents indicate they were provided to the potential acquirers.
As noted in the Schedule 14D-9, Volcom considered the risks of being independent when evaluating the offers to buy the company. “The Board of Directors considered in its assessment, after discussions with the Company’s management and advisors, the risks of remaining an independent company and pursuing the Company’s strategic plan, including the risks relating to:
               • increasing competition in the branded apparel and eyewear industries; and
               •trends in the branded apparel and eyewear industries, including industry consolidation, input costs and pricing trends.”
They put it a little more strongly in the revised Schedule 14D-9 where they replaced an existing paragraph with the following as they explained the background and justification for exploring a transaction (emphasis added by me):
“…in light of the Company Board’s further review of the recent state of the sports apparel and eyewear industries and the increased competitive challenges for the Company, the Company Board authorized members of Volcom’s executive management team to formally engage Wells Fargo Securities to act as financial advisor to Volcom to explore a potential sale of Volcom and authorized Wells Fargo Securities and members of the Company’s executive management team to continue discussions with Bidder A.”
In a fairly short time, then, Volcom management had gone from a very positive August 2010 projection to thinking they should sell the company for a price that would be way too low if they still thought they could make those projections while staying independent. Good for them. I can’t resist pointing out that I’ve highlighted the same issues Volcom identified in my analysis of their public filings, so I can’t really do anything but congratulate them on their insightfulness.
For those of you who might want to sell a company someday, I’d note again that Volcom negotiated from a position of strength when they did not have to do a deal. Look how long it took, and of course it’s not closed yet. Even when you’re not a public company, doing it well takes a long time and is a lot of work.    



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