Case Study: Art of the Deal
aka "The Price is Wrong" - Happy Gilmore - CEO Anant Bhalla
This post is the latest in a series of educational case studies designed to provide valuable insights for both retail investors and professional analysts.
Hopefully it makes for good weekend reading.
A known takeout candidate issued price-hurdle grants to its CEO prior to the business being acquired. The takeout price reached the third of four hurdles, with the fourth hurdle serving as a moonshot target. The background of the merger indicates that the grant was likely issued as a response to prior bids on the business.
This case study illustrates how price-hurdle PSUs can be used as simple price targets in a takeout scenario. This provides a helpful intuition for fundamental analysts: if a known takeout candidate starts issuing price vesting hurdles, it’s probably done with prior bids in mind, which should inform one’s understanding of the game being played (i.e. update your priors).
Summary
American Equity Life (AEL) was a $4b market-cap insurer offering annuity products that was purchased by Brookfield for $56.50 a share in early 2024.
The situation revolves around a grant to CEO Anant Bhalla on 11/29/22:
In case of an AEL change in control on or prior to the End Date, continued service requirements would be waived and Mr. Bhalla would earn compensation using the change in control per share price against any previously-unmet Share Value Objective. In case of a change-in-control without achieving any Share Value Objective, Mr. Bhalla would earn the number of shares associated with the $45 Share Value Objective. In either case, the Company would reduce the compensation to the extent more net-after-tax-efficient for Mr. Bhalla under the “golden parachute excise tax” provisions of the Internal Revenue Code; no excise tax “gross-up” applies.
The business had been a takeout target for a while, with a rejected bid coming in at $36 in 2020.
The background of the merger might be interesting to read if you have the time, but I’ll highlight relevant portions, beginning in early 2020.
Important Events Timeline
Summer 2019: AEL begins CEO succession planning
Jan–Mar 2020: Anant Bhalla becomes President & CEO
Mar 2020: AEL launches "AEL 2.0" and initiates talks with Brookfield
Sep 2020: Athene/MassMutual offer $36/share at 46% premium to closing price (rejected later)
Oct 2020: AEL enters partnership with Brookfield (9.9% stake @ $37/share) and launches $500M buyback
Feb 2021: Brookfield reorganizes, transferring AEL stake to "Parent" (Brookfield Reinsurance)
Jan 2022: Parent increases stake to ~16% via "Subsequent Investment"
Sep 2022: Parent floats potential buyout interest at $48–$50/share (AEL declines)
Nov 2022: Grant issued to CEO Bhalla with price-vesting hurdles ranging from $45 to $60
Dec 2022: Prosperity/Elliott make a $39/share bid, later upped to $45 (rejected); Parent prepares to reengage
Feb–May 2023: AEL explores strategic alternatives and Board internally expresses a desire for a price in the mid-$50s; Brookfield representative suggests $50 as a takeout price in separate conversation
June 26, 2023: Parent submits formal offer of $55/share
July 4, 2023: AEL Board approves merger; definitive agreements signed
July 5, 2023: Deal announced publicly
With the information inside the merger background document, one can observe that the November 2022 grants were issued knowing that there would be a prospective bid at $48, minimum. So, the lowest hurdle of $45 is very informative, and should be something to pay attention to as an analyst.
Post-Mortem
This case study also serves as a personal post-mortem because we did NOT trade this very well. While we spotted the grant and identified the prior takeout interest, we were ignorant to the corporate dynamics under the surface. Part of this was a lack of familiarity with the insurance space. We sold it into the leaked Prosperity bid, but didn’t re-engage with the name as the stock fell back into the $30s.
In retrospect, we should have done more digging into the Board. It should have been clear that Brookfield would have wanted to buy this because Mr. Shah, the Brookfield representative on the AEL Board, was and is intimately involved across the industry to the point where the Department of Justice started investigating for board interlocks in January 2023.
Shah was very insistent in suggesting offering potential prices at which Brookfield would be interested in buying AEL, despite the existence of a standstill agreement. I counted five separate instances in my readthrough of the merger background where Mr. Shah floated the idea of deepening the strategic relationship or outright buying the whole business.
As such, the governance turmoil was actually an indication of the quality of the underlying business, not an indictment of it.
The existing ownership by Brookfield, the repeated bids from third parties, the Board presence, and the equity grant should have given us conviction that there would be a bid in that range.
Also, the grant itself was more favorable than initially thought. Many grants require management to stay on past any acquisition, but this grant simply has a timer based on when the price is achieved. In other words, the higher the takeout price, the less time CEO Bhalla would need to continue serving as an officer. This aligns with the typical expected price appreciation of a given stock, but it is an especially good incentive to negotiate a higher acquisition price.
So, we made a little money on the trade, but the real winner here was CEO Anant Bhalla, who walked off with a cool $55M. The value of the delta between the $50 and $55 strikes?
$21.7M.
Below are some of the notes I’ve jotted down on the background of the merger. You don’t have to read past this, but it may be interesting.
Notes on the Timeline 2020-2022
The summary starts with the appointment of CEO Bhalla in 2020, which is important because he clearly drove the whole process. An immediate strategic evaluation concluded that Brookfield would be a good strategic partner. The two key principals here are Mr. Anant Bhalla and Mr. Sachin Shah.
In connection with the upcoming retirement of AEL’s then Chief Executive Officer, the AEL Board, through a special committee, commenced a search for a successor in the summer of 2019. On January 9, 2020, the AEL Board announced the appointment of Mr. Anant Bhalla to the positions of President and a member of the AEL Board, effective as of January 27, 2020, and Chief Executive Officer, effective as of March 1, 2020. The closing price of a share of AEL Common Stock on January 24, 2020 was $27.72.
The AEL Board and senior management of AEL began to evaluate the strategic landscape and opportunities available to AEL on a regular basis, consistent with the AEL 2.0 strategic plan. A key component of the AEL 2.0 strategic plan was to identify one or more strategic partners that had complementary capabilities in investment management and long-term permanent capital raising. Starting in the spring of 2020, AEL engaged in potential strategic partnership discussions with numerous asset managers and potential insurance capital providers, to capitalize on the scarcity value of AEL’s annuity origination and pair it with an “open architecture” investment management platform for investing AEL’s annuity assets. From the outset of this undertaking, AEL had identified BN (then known as Brookfield Asset Management Inc.) as a leading strategic partnership candidate.
On March 6, 2020, Mr. Bhalla initiated exploratory discussions with BN in order to gauge BN’s potential interest in exploring mutually beneficial partnership opportunities in private asset investing and reinsurance. On March 11, 2020, AEL and BN entered into a non-disclosure agreement and began exploring a possible negotiated transaction that would align with the AEL 2.0 strategic plan.
In mid-May 2020, Mr. Bhalla met with Mr. Sachin Shah, then a senior executive of BN. They agreed to a set of core principles and objectives to guide discussions relating to a potential strategic partnership between AEL and BN. Such principles included: (i) establishing an insurance special purpose vehicle that would leverage BN’s private asset capabilities, (ii) leveraging AEL’s insurance liability origination, (iii) raising capital for a reinsurance special purpose vehicle, including through capital contributions by AEL and BN, and (iv) aligning on the AEL 2.0 strategic plan through a potential equity investment by BN in AEL. Mr. Bhalla and Mr. Shah and their respective teams continued their discussions with respect to such potential strategic partnership over the course of the next few months.
1H20: As the year continues, AEL and BN principals met to discuss the terms of their strategic partnership. This would include a cash infusion through equity. Presumably, word of this got out, which led to an unsolicited bid from a third party.
September 2020: $36 offer from Athene and MassMutual, 46% premium to closing price.
On September 8, 2020, AEL received an unsolicited joint written proposal from Athene Holding Ltd. (“Athene”) and Massachusetts Mutual Life Insurance Company (“MassMutual”) to acquire AEL at a price of $36.00 per share (the “Athene/MassMutual Proposal”), which represented a 46% premium to the closing price of a share of AEL Common Stock as of September 4, 2020, the last trading day prior to delivery of the proposal. Following receipt of the Athene/MassMutual Proposal, AEL retained J.P. Morgan as a strategic financial advisor, in addition to an existing financial advisor.
October 2020: The deal was rejected and a $500m repo program authorized. The Board made the decision to pursue the strategic partnership over the acquisition.
The deal gives BN a board seat (Mr. Shah is appointed) and comes with a standstill agreement, which means that that BN cannot make an offer for AEL as a whole. As we find later on, this doesn’t mean they can’t talk about an acquisition privately. A standstill agreement isn’t a particularly large hurdle when the relationship is cordial rather than antagonistic, as evidenced by activist engagements.
The investment would be structured in two tranches. The first investment gives BN (through Burgundy) 10% of the business, and the second would increase that to somewhere between 15% and 20%.
During the first half of October 2020, the AEL Board met several times, with members of management and legal and financial advisors present, to discuss the AEL 2.0 strategic plan, management projections, industry trends, the Athene/MassMutual Proposal, a potential strategic partnership with BN, and other potential strategic alternatives. The AEL Board also discussed a potential AEL Common Stock repurchase program that would be funded in part by proceeds from the potential strategic partnership transaction under discussion with BN. The purpose of the share repurchase program would be both to offset dilution from the issuance of shares to BN in connection with the potential strategic partnership transaction and to institute an ongoing capital return program for AEL shareholders.
…
The Investment Agreement contains standstill obligations that, among other things, restrict BN Parties and certain of its affiliates from, for a period of five years, (i) purchasing additional shares of AEL Common Stock, (ii) making any offer or proposal, either publicly or in a manner that would require public disclosure, with respect to any merger, acquisition, business combination or similar transaction involving AEL, (iii) selling shares of AEL Common Stock to activists or AEL competitors, and (iv) taking or supporting certain AEL shareholder actions, subject to certain limited exceptions. The Investment Agreement also entitles BN to appoint an individual to the AEL Board, for so long as BN Parties own more than 9.0% of the issued and outstanding shares of AEL Common Stock.
…
AEL issued a press release on October 18, 2020, announcing the entry into a strategic partnership with BN and the Investment Agreement, as well as the AEL Board’s authorization of a $500 million AEL Common Stock repurchase program. The press release also announced the AEL Board’s rejection of the Athene/MassMutual Proposal, and the AEL Board’s determination that such proposal was opportunistic, significantly undervalued AEL, and was not in the best interests of AEL and its shareholders and other stakeholders. Additionally, the press release reaffirmed the AEL Board’s belief at that time that the AEL 2.0 strategic plan was the right course of action for maximizing long-term value for AEL’s shareholders and other stakeholders. The closing price of a share of AEL Common Stock on the next trading day, October 19, 2020, was $27.49, a decline from the closing price of a share of AEL Common Stock on the prior trading day, October 16, 2020, of $32.30.
…
AEL executed the Investment Agreement with BN and Burgundy Acquisitions I Ltd. (“Burgundy”, and together with BN, the “BN Parties”). Under the terms of the Investment Agreement, AEL agreed to issue to Burgundy 9,106,042 shares of AEL Common Stock, equal to 9.9% of the then-issued and outstanding shares of AEL Common Stock without giving effect to the issuance of such shares, at a price of $37.00 per share (the “Initial Investment”). AEL also agreed to issue to Burgundy at a future time (the “Subsequent Investment”) additional shares of AEL Common Stock representing up to 19.9%, but no less than 15.0%, of the issued and outstanding shares of AEL Common Stock at such time (including the shares issued in the Initial Investment and giving effect to the shares issued in the Subsequent Investment), at a price per share equal to the greater of $37.00 and the most recently announced adjusted book value per share of AEL Common Stock
2021: BN continued to make acquisitions in the space.
On August 9, 2021, Parent announced its entry into a definitive merger agreement to acquire American National Group, Inc. (“American National”) in an all-cash transaction valued at approximately $5.1 billion.
1H22: The second investment is made, taking ownership up to 15%. The ownership % starts ticking up due to the share repurchase program.
The purchase of American National means that Mr. Shah is the party with the most information given his director or officer roles at AEL, American National, and Brookfield.
So, the continued suggestions by Mr. Shah to deepen the strategic relationship is done with a significant informational edge. The AEL Board can sense that too and knows they’re operating with an informational disadvantage.
Conversations between the two groups continue apace.
On January 7, 2022, AEL and Parent closed the Subsequent Investment, resulting in Parent owning approximately 16% of the then-issued and outstanding shares of AEL Common Stock.
…
On February 24, 2022, at a meeting of the AEL Board, Mr. Shah discussed the possibility of expanding the relationship between Parent and AEL. Subsequently, at the AEL Board’s request, Mr. Shah recused himself from the remainder of the AEL Board’s discussion on such topic. The AEL Board discussed potential concerns related to the American National transaction, including how AEL’s and Brookfield’s strategic agendas may diverge as a result of such transaction.
On March 2, 2022, at Mr. Shah’s request, Mr. Bhalla attended a meeting of the Parent Board in order to discuss the AEL 2.0 strategic plan and the status of the strategic partnership between AEL and Parent. Following that meeting, Mr. Shah and Mr. Bhalla agreed to have periodic meetings regarding the existing strategic partnership between the two companies and to explore potential avenues for expanding the relationship between AEL and Parent.
…
On May 25, 2022, Parent closed its acquisition of American National. Upon the closing, Mr. Shah became a director of American National.
On June 9 and 10, 2022, Mr. Shah and Mr. Bhalla met to discuss the status of the strategic partnership between AEL and Parent in light of Parent’s acquisition of American National, the status of the execution of the AEL 2.0 strategic plan and potential scenarios of strategic convergence or divergence for AEL and Parent.
2H22: Mr. Shah suggests that Brookfield might be interested in acquiring AEL and later basically makes an offer between $48 - $50. Again, he is the person in the room with the most information.
The Board is clearly concerned by potential corporate governance shenanigans that may occur after the transfer restrictions expire.
AEL CEO Mr. Bhalla is also working with a separate asset manager on a strategic transaction.
In mid-August 2022, Mr. Shah and Mr. Bhalla met to discuss a number of matters, including the status of the relationship between AEL and Parent, the continued progress of the AEL 2.0 strategic plan by AEL on a standalone basis and the economic outlook and risks associated with the execution of the AEL 2.0 strategic plan. During such discussion, Mr. Bhalla advised Mr. Shah that the Nominating & Corporate Governance Committee was reviewing certain considerations related to Mr. Shah’s service as a director of American National, a director and the Chief Executive Officer of Parent and a director of AEL. Messrs. Bhalla and Shah agreed to direct their respective legal counsels to continue such discussions. Promptly following this meeting, Mr. Bhalla updated Mr. David Mulcahy, Non-Executive Chairman of the AEL Board, regarding his discussions with Mr. Shah.
On September 7, 2022, Mr. Shah met with Mr. Bhalla. During this meeting, Mr. Bhalla and Mr. Shah discussed ongoing execution of the AEL 2.0 strategic plan, and Mr. Bhalla disclosed that AEL was in discussions with a third-party asset manager regarding a potential strategic transaction referred to as Project Ithaca. Mr. Shah indicated that Parent would potentially be interested in making an offer to acquire AEL. Messrs. Bhalla and Shah agreed to continue such discussion, along with Mr. Mulcahy, at an appropriate future date. Later that day, Mr. Bhalla conferred with representatives of J.P. Morgan and Ardea about his discussions with Mr. Shah.
On September 8, 2022, the AEL Board met, with members of management and representatives of J.P. Morgan and Ardea present, to review industry and market trends, including alternative asset manager strategies for insurance, the strategic landscape, the performance of AEL under the AEL 2.0 strategic plan, as well as updated three-year management projections. After Mr. Shah recused himself from the meeting at the AEL Board’s request, the AEL Board discussed the status of, and plausible future scenarios with respect to, AEL’s relationship with Parent in the context of each party’s execution of its business strategies on a standalone basis and the upcoming expiration of the transfer restrictions under the Investment Agreement with respect to the shares of AEL Common Stock held by the Parent Group Shareholders that were acquired in connection with the Initial Investment. Mr. Bhalla also updated the AEL Board on the discussions he had with Mr. Shah on September 7, 2022.
I find the following highlighted passage rather entertaining:
After the September 8, 2022 AEL Board meeting, Mr. Shah and Mr. Bhalla continued their discussion from the prior day, along with Mr. Mulcahy. Mr. Shah expressed his opinion that the execution of the AEL 2.0 strategic plan was not without risk, given the current economic climate, and suggested that AEL may be able to achieve value for its shareholders on a shorter timeframe and with reduced risk by exploring potential strategic alternatives, including a sale of AEL. Mr. Shah also conveyed Parent’s interest in opening a dialogue to gauge AEL’s and Parent’s respective interests in a possible acquisition of AEL by Parent at a price per share of AEL Common Stock between $48.00 and $50.00. Mr. Shah noted that he had not discussed any proposal with the Parent Board, that the Parent Board had not approved any proposal and that Parent would not pursue its interest further unless the AEL Board was receptive to receiving such a proposal and willing to waive the standstill provisions in the Investment Agreement.
Let’s merge! Haha, just kidding… unless?
The rest of the directors take the offer seriously and express concern with Mr. Shah’s roles and potential conflicts of interest. They ultimately decide to continue pursuing the AEL 2.0 Strategic plan and also kick him off the Board.
On September 22, 2022, the AEL Board met, with members of management and outside legal advisors present and without Mr. Shah in attendance. The AEL Board discussed Parent’s potential interest in acquiring AEL, the terms of the Investment Agreement (including the standstill provisions therein), the status of the execution of the AEL 2.0 strategic plan (including the status of negotiations related to a reinsurance transaction as part of Project Ithaca) and the Nominating & Corporate Governance Committee’s ongoing review of considerations arising from Mr. Shah’s service as a director of AEL, a director of American National and a director and the Chief Executive Officer of Parent. The AEL Board delegated to the Nominating & Corporate Governance Committee the authority to interpret and apply AEL’s Code of Business Conduct and Ethics Director Conflict of Interest Policy, to make a determination regarding the potential issues relating to Mr. Shah and his ability to continue serving on the AEL Board and requested that the committee report its determination to the AEL Board. The AEL Board also reviewed management projections contemplating continued standalone execution of the AEL 2.0 strategic plan and extended to cover a five-year period. The AEL Board also discussed additional potential strategic transactions for AEL. After discussion, the AEL Board determined that it was confident in the AEL 2.0 strategic plan and not to pursue Mr. Shah’s request to consider a potential sale of AEL to Parent at that time.
On September 26, 2022, in consultation with AEL’s outside legal counsel, Mr. Bhalla sent a letter to Mr. Shah summarizing the AEL Board’s determination not to pursue discussions regarding a potential sale of AEL at such time.
…
Also on September 29, 2022, the AEL Board reconvened its prior meeting, without Mr. Shah in attendance. The AEL Board ratified the determinations and recommendations of the Nominating & Corporate Governance Committee that, based on the Committee’s interpretation of AEL’s Code of Business Conduct and Ethics Director Conflict of Interest Policy, Mr. Shah would no longer be eligible to serve on the AEL Board, given Mr. Shah was responsible for Parent’s reinsurance and insurance businesses. The Nominating & Corporate Governance Committee recommended that Mr. Shah work with AEL management to develop a mutually agreeable plan for an orderly transition of Mr. Shah’s director responsibilities to an alternative BN executive or independent director who did not have an active role in any competing company or line of business (a “Replacement Director”).
The spurned suitor fires back:
On November 8, 2022, prior to coming to an agreement with AEL on a plan for the appointment of a Replacement Director, the Parent Reporting Persons filed an amendment to their previously filed Schedule 13D with the SEC, disclosing that Mr. Shah had resigned from the AEL Board and that Parent did not plan for the time being to nominate another candidate to the AEL Board. In the same amendment, the Parent Reporting Persons disclosed that Parent had sent AEL a letter demanding AEL file a resale shelf registration statement with respect to the AEL Common Stock held by the Parent Group Shareholders in accordance with the Investment Agreement (the “Registration Demand”). The closing price of a share of AEL Common Stock on that day was $32.99, a decline from the closing price of $42.00 on the prior day.
The resignation filing likely spooks the broader market (on top of general market conditions). What could possibly be happening behind the scenes? AEL extends the buyback program to defend the stock.
Later on November 8, 2022, AEL issued a press release announcing the details of Project Ithaca, which included both a strategic investment by AEL in a third-party asset manager and a reinsurance transaction between AEL and an affiliate of the asset manager.
On November 11, 2022, the AEL Board authorized the repurchase of an additional $400 million of shares of AEL Common Stock.
The Grant and its Consequences
Let’s sum up the situation so far: AEL and BN have a strategic alliance to do business. BN is clearly trying to roll up more companies in this space, but AEL management and directors want to continue operating by themselves and they rebuff all advances. The stock is trading in the $30s after the Brookfield director (Mr. Shah) resigns.
The background of the merger doesn’t mention the grant, but CEO Anant Bhalla’s grant on on 11/29/22 was given with all this in mind:
In case of an AEL change in control on or prior to the End Date, continued service requirements would be waived and Mr. Bhalla would earn compensation using the change in control per share price against any previously-unmet Share Value Objective. In case of a change-in-control without achieving any Share Value Objective, Mr. Bhalla would earn the number of shares associated with the $45 Share Value Objective.
It’s a pretty good deal for CEO Bhalla, as any takeout gives him the lowest takeout bonus. This information is also quickly absorbed by potential buyers. We also know that the earlier Mr. Shah ‘this-is-definitely-not-an-offer’ offer came in between $48 and $50, just enough to meet the second hurdle.
Another unsolicited bid from Prosperity/Elliott comes through at $39 in early December, which is upgraded soon after to $45, the lowest hurdle.
This offer is fully rejected by the board, and later leaked to the press. Prosperity suggests they would be open to a higher price if they were allowed to take a look at the books. AEL flatly refuses.
On December 7, 2022, Mr. Bhalla received a request for a call from representatives of Prosperity Group Holdings LP (“Prosperity”), and Elliott Investment Management L.P. (“Elliott”), Prosperity’s principal shareholder. The closing price of a share of AEL Common Stock on December 7, 2022 was $39.00.
On December 8, 2022, Mr. Bhalla and Mr. Jim Hamalainen, Chief Investment Officer of AEL, spoke with certain senior executives of Prosperity and Elliott. The Prosperity and Elliott representatives indicated their interest in making an offer to acquire AEL. Also on December 8, 2022, Prosperity, with the support of Elliott, sent to the AEL Board an unsolicited written proposal to acquire AEL at a price of $45.00 per share of AEL Common Stock in cash (the “Prosperity Proposal”).
On December 19, 2022, Prosperity sent a letter to the AEL Board that reiterated the terms of the Prosperity Proposal and noted that, if Prosperity were granted access to non-public information regarding AEL, Prosperity likely could improve its offer.
On December 20, 2022, Mr. Bhalla sent another letter to Prosperity, reiterating the AEL Board’s rejection of the Prosperity Proposal and explaining that AEL was not prepared to permit Prosperity, as an AEL competitor, to review AEL’s confidential, competitively sensitive information at such time.
Later on December 20, 2022, following the indication of a leak of the Prosperity Proposal, AEL issued a press release to disclose its receipt of the Prosperity Proposal and rejections thereof. The press release noted the AEL Board’s determination that the Prosperity Proposal significantly undervalued AEL and the AEL Board’s belief that the continued execution of the AEL 2.0 strategic plan would generate significantly greater value for AEL’s shareholders. The closing price of a share of AEL Common Stock on that day was $43.12, up from the closing price of $40.30 on the prior day.
On December 22, 2022, the Parent Reporting Persons filed an amendment to their previously filed Schedule 13D with the SEC (the “December 22 Schedule 13D/A”), disclosing that Parent intended to nominate a Replacement Director to assist the AEL Board in its evaluation of the Prosperity Proposal and any other credible strategic alternatives that had surfaced or may in the future surface. The closing price of a share of AEL Common Stock on that day was $45.79.
On December 23, 2022, Mr. Bhalla updated the AEL Board regarding the Prosperity Proposal and the December 22 Schedule 13D/A. Later that day, in response to the December 22 Schedule 13D/A, AEL sent a letter to Parent cautioning Parent about the standstill provisions of the Investment Agreement.
On December 28, 2022, at the request of Prosperity, Mr. Bhalla and a representative of Prosperity discussed the Prosperity Proposal. Mr. Bhalla conveyed the reasons for the AEL Board’s decision not to engage, including the offer price being inadequate. Two days following this discussion, the representative of Prosperity corresponded with Mr. Bhalla, reiterating that with access to non-public information, Prosperity likely could improve its offer.
Over the next few months, more suitors line up.
In early January 2023, representatives of Ardea and J.P. Morgan were contacted by representatives of an investment firm and its insurance subsidiary (collectively referred to herein as “Party A”), who expressed interest in being included in the event AEL initiated a process with respect to strategic alternatives. Representatives of J.P. Morgan and Ardea also received inbound inquiries from other investment firms, expressing interest in potentially partnering in strategic transactions with AEL.
The Department of Justice gets involved as they scrutinize suspicious board interlocks, which likely contributes to BN’s decision not to nominate a replacement director.
On January 13, 2023, the Parent Reporting Persons filed an amendment to their previously filed Schedule 13D with the SEC (the “January 13 Schedule 13D/A”), disclosing the fact that Parent had been contacted by the U.S. Department of Justice seeking information regarding any potential board interlocks that may arise under Section 8 of the Clayton Act as a result of Parent’s previously announced intention to nominate a Replacement Director. The January 13 Schedule 13D/A noted that Parent believed Parent’s nomination of a Replacement Director had become a distraction from Parent’s primary objective of maximizing value to the shareholders of AEL and serving the interests of AEL’s other stakeholders, and therefore elected not to proceed with nominating a Replacement Director at such time.
Prosperity tries to get the standstill agreement waived so they can participate in a BN transaction. Again, they are denied. They finally back off in February:
On February 21, 2023, Prosperity issued a press release withdrawing the Prosperity Proposal, citing AEL’s “refusal to engage”.
Mr. Shah comes back with another ‘totally-not-an-offer’ offer:
Also on February 21, 2023, a meeting was held between Mr. Bhalla, a representative of Ardea, Mr. Shah and a representative of BN regarding various alternatives to resolve the ongoing disagreements between AEL and Parent. At this meeting, Mr. Shah stated that Parent could potentially be interested in making an offer to acquire AEL at a price of $50.00 per share of AEL Common Stock in cash, subject to customary public company diligence. Mr. Shah confirmed that Parent was not making a proposal at such time and advised that Parent would not be interested in making a proposal unless the AEL Board were willing to waive the standstill provisions in the Investment Agreement in order to facilitate a such proposal. Mr. Shah noted that no proposal had been discussed with the Parent Board, and further advised that Parent would not be in a position to make a proposal without first receiving approval from the Parent Board to do so. Finally, Mr. Shah noted that Parent would only be interested in making a proposal after first speaking with Parent’s and AEL’s respective insurance regulators.
In late February, AEL directors start to cave:
On February 24, 2023, the AEL Board met, with members of management and representatives of J.P. Morgan, Ardea and S&C present, to discuss governance-related matters, Mr. Bhalla’s recent discussions with Parent and other potential strategic alternatives for AEL. The AEL Board discussed that a value-certain cash offer in the mid-$50s could be attractive given the anticipated timeline for the AEL 2.0 strategic plan to be able to deliver value to AEL’s shareholders. The AEL Board also discussed the sequencing of when, if at all, to invite Parent to make an offer. The AEL Board directed Mr. Bhalla to explore whether a sale of AEL or other strategic business combination involving AEL could be developed with Parent or another third party, thereby further enhancing value for all of the AEL shareholders with greater certainty given the outlook for the economic environment.
A number of different strategic transactions were considered. The Board begins looking for a value >$50 per share. There’s a standstill here as Brookfield isn’t willing to confirm an offer without looking at the books, and AEL side isn’t willing to waive the standstill without a higher offer.
On April 3, 2023, Mr. Bhalla met with a representative of Barclays. They discussed the possibility of Parent making a proposal to acquire AEL that valued AEL above the previously stated price of $50.00 per share of AEL Common Stock. Mr. Bhalla expressed that Parent would need to make a proposal that valued AEL well above the price of $50.00 per share of AEL Common Stock in order for the proposal to be credible. Mr. Bhalla and such representative of Barclays agreed that Mr. Bhalla would discuss the topic further with Mr. Shah at their upcoming meeting on April 19, 2023.
On April 19, 2023, Mr. Bhalla and Mr. Shah met. Mr. Shah inquired whether there was any interest on the part of the AEL Board in negotiating a transaction in which AEL would be acquired by Parent. At this meeting, Mr. Shah affirmed the message previously delivered by a representative of Barclays, that Parent could potentially be interested in making a proposal to acquire AEL that valued AEL slightly above the previously stated price of $50.00 per share of AEL Common Stock if it were granted the opportunity to conduct due diligence that would support such value. However, Mr. Shah reiterated that Parent was not making a proposal at such time for the reasons previously expressed. In response, Mr. Bhalla indicated that the AEL Board would be unlikely to waive the standstill provisions in the Investment Agreement except in connection with an offer price well above $50.00 per share of AEL Common Stock. Mr. Shah informed Mr. Bhalla that Parent would not be willing to make a proposal for a transaction at such price, and advised that proceeding with due diligence in light of such fact would not likely be productive. Mr. Shah and Mr. Bhalla then agreed to reconnect later in the spring to continue their discussion.
The AEL board fully engages in May, and it’s basically a done deal.
On May 24, 2023, the AEL Board met, with representatives of Ardea and J.P. Morgan present, to discuss strategic options that AEL had recently been exploring, including Mr. Bhalla’s discussions with Mr. Shah regarding a potential transaction with Parent. The AEL Board expressed support for exploring a potential acquisition by Parent in the mid-$50s range and authorized Mr. Bhalla to engage with Parent to negotiate a price per share of AEL Common Stock in that range.
Later on May 24, 2023, Mr. Bhalla spoke with Mr. Shah to discuss a potential process for moving forward with discussions. Mr. Bhalla indicated that AEL would be willing to provide limited due diligence materials in the interest of advancing discussions to explore a potential acquisition by Parent at a price no less than $55.00 per share of AEL Common Stock. Mr. Shah indicated that Parent was continuing to consider its strategic options with respect to its investment in AEL, including alternatives to an acquisition of AEL. Mr. Bhalla also indicated that AEL was exploring other strategic alternatives to deliver similar or greater value for AEL shareholders. Mr. Bhalla and Mr. Shah agreed that outside counsel should connect to discuss appropriate next steps.
After a lot of back and forth, they settle on >$55, hitting the exact number necessary for Mr. Bhalla to get to the third hurdle.
Conclusion
If there’s a price hurdle on a stock that has multiple unsolicited bids, you can be damn sure that the Board and management are using them as targets. The $60 hurdle is clearly a stretch goal, especially if you consider the fact that there isn’t even a shares payable is lower, and there isn’t even a requirement to stay on.
The Board of any company generally has good idea of what the business is worth. In this case, the grant was issued after Mr. Shah told them that Brookfield would be interested at $48-$50. This effectively sets a floor in the hurdle they set for the grant.
If you’re analyzing takeout scenarios, you can work backwards from the hurdle prices to back into different fundamental scenarios.
