Will the Stagwell/MDC Partners Merger Ever Happen?

At this point, Stagwell Media and Indaba Capital Management should just battle it out via pay-per-view. Once again the two sides are fighting over the proposed combination of Stagwell’s operating business with MDC Partners, with each side entrenched in its own stance. One of MDC Partners Inc.’s largest shareholders, Indaba has been opposed to the deal saying the terms unfairly favor Stagwell’s investors and is “conflict-riddled and poorly-structured,” adding that the group plans to vote against it. Indaba owns about 12% of MDC’s stock. Stagwell alleges Indaba is issuing “false and misleading statements,” according to a statement released by Stagwell’s Partner Jay Leveton on July 14. “Indaba has, in our opinion, become divorced from any reality in its ever more shrill attempts to extract more value in the combination of MDC and Stagwell’s operating businesses. Indaba appears to be following through on its recent threats to Stagwell to sink the deal if Indaba does not get its way.” Vote scheduled for July 26 It remains to be seen if this transaction will or will not be approved. Voting is scheduled for Monday, July 26 at 11 am ET. For its part, Stagwell says this disagreement is increasingly happening within all mergers and transactions and there is no major reason for concern. A company spokesperson cautions against labeling this situation as “typical.” Indaba Capital intends to vote against the transaction on its current terms. Why are they fighting? Indaba's position is this deal is simply to bolster Penn's bank account. “We believe that Mr. Penn has all the incentives to root for Stagwell, not MDC Partners Inc., with regards to terms of the pending transaction,” Indaba wrote in a release. "We are not going to acquiesce to Mr. Penn’s desire to ram through self-serving deal terms that undervalue MDC’s public company structure, lack an appropriate control premium and rely on completely outdated pandemic economics." Indaba has many unanswered questions, including wanting to know who are “brand employees” of Stagwell that are set to receive $60 million at the closing of the transaction. The company also said it seeks further information about why MDC shareholders are “apparently footing” the bill for seven million shares to be issued to Stagwell managers, and claims that most of the governance appears to have direct personal or professional overlap with Penn. Stagwell responded in a statement that Indaba needs to “stick to just the facts." “This transaction is a win-win deal that provides MDC shareholders with a better balance sheet, more scale, greater liquidity and a far better future than MDC can achieve on its own by increasing its stake in fast-growing digital marketing areas," it added. The company also refuted Indaba's claims around governance as "simply untrue", pointing out in the statement that "seven of the nine board members will be independent–independent not only of MDC but, more importantly of Stagwell and its affiliates." Final and best offer Stagwell challenges some of the data released by Indaba, specifically that the 19 million shares are being used to align the interests and reward the success of Stagwell managers, and to purchase outstanding portions of assets, will come entirely out of Stagwell’s 180 million share allocation. Thus, the company states Stagwell, after distributing those shares to its managers—none of which go to Mr. Penn—will receive just 161 million shares. This transaction does significantly deleverage MDC, as indicated in the proxy materials, the company points out. The net debt figures and analyses that have been previously disclosed already include the pre-closing use of cash and credit facilities by Stagwell. There is no change to the deleveraging nature of this deal that has received favorable comments from both major bond rating agencies, the company stated. Stagwell also feels it has negotiated beyond “its best and final offer” to accommodate “reasonable” shareholders. “We both accepted 36.25 million shares less and provided significant added protections for minority shareholders," the company said in a statement. "We have reached the limit of what we can do to facilitate a transaction that has been accepted and praised by virtually everyone other than Indaba as a great way forward for MDC. We simply cannot take any less value for or further risks with Stagwell’s fast-growing, unlevered assets in desirable fields, when taking into account the interests of our investors and the managers who have a stake in those assets.” 'A game of political poker' Indaba counters this stance by claiming, despite including a third increase in consideration from 30.6% to 31.2% of the newly combined entity’s shares, MDC and Stagwell ignored major shareholders’ desire to compromise by not coming close to a 35% consideration. "We hope that Mr. Penn, who seems to have mistaken this process for a game of political poker, comes to understand that he cannot rely on bombastic negotiating threats and non-negotiated, immaterial bumps that lack shareholder support to get this deal done," Indaba said. The money manager also noted in the 520-page proxy that approximately $95 million of the redeemable non-controlling interest illustrates the balance sheet adjustments related to the closing of the transaction. These amounts did not appear on Stagwell’s March 31st balance sheet. "We would like some explanation about this considerable sum," Indaba added in its statement. "Again, this appears to be a leveraging event, not the type of deleveraging event that Mr. Penn has touted as a key benefit of the transaction. We worry there is more that we are not aware of, or that Stagwell has not disclosed." MDC feels like it has extended the olive branch. “This is MDC’s third attempt at a deal after needing two infusions of cash over the last five years," management continued in its statement. "This is a genuine opportunity to obtain the right balance of digital and conventional assets and to compete and win in the marketplace with greater scale, stability, improved capital structure and a set of agencies in the marketplace that is in tune with the needs of the modern marketer.” In its letter, Indaba requests that the committee revisit the determined fair value stock range for MDC’s shares and increase it to reflect recent improvement in the share prices of the ad industry’s large agency holding companies. “Its findings and value range reflect a pandemic-ravaged environment rather than an economy in recovery,” Indaba said.