Apollo Global Management is sprinting to acquire Chuck E. Cheese.
The parent company of Chuck E. Cheese, CEC Entertainment, announced on Thursday that it would be acquired for $1.3 billion by Apollo, the private equity firm. The deal contains a number of unusual provisions which seem to suggest that Apollo is concerned about a competing bid or a challenge.
Apollo’s acquisition of the restaurant chain â€" known to many parents for its combination of food, games and arcade-like entertainment â€" is structured as a tender offer instead of a merger. This creates timing advantages since a tender offer can be completed 20 business days after its commencement. A merger requires a shareholder vote and therefore a proxy statement to be prepared and circulated and a shareholder meeting held, which typically takes two to three months.
Chuck E. Cheese’s parent company said that this merger was the best result for shareholders, and that it and its advisers carefully evaluated other options. “This transaction represents the successful conclusion of our extensive review of strategic alternatives,†Richard M. Frank, executive chairman of CEC, said in the news release.
Plenty of deals are done as tender offers, but Apollo started its tender offer on Thursday, the same day the deal was announced. In similar situations, the bidder usually lets a few days to a week elapse, as the lawyers rest up from the rush to get the deal signed and then turn to the tender offer papers.
This wasn’t the case here, no doubt to the chagrin of Wachtell, Lipton, Rosen & Katz and Paul, Weiss, Rifkind, Wharton & Garrison, the lawyers representing Apollo. They probably had more than the normal share of sleepless nights on this deal (Chuck E. Cheese’s parent company is represented by Weil, Gotshal & Manges).
Unfortunately, rushing does create some errors. Chuck E. Cheese’s parent is a Kansas corporation and Apollo is required under the tender offer documents to describe shareholders’ appraisal rights. In the middle of describing Kansas appraisal rights in the tender offer to purchase, Apollo suddenly switches to discussing the text of the Delaware appraisal statutes and describes the Kansas statute as the “Delaware General Corporation Law.†Can we say oops?
The deal also has a top-up option, which allows Apollo to acquire approximately 50 percent of the company in a tender offer and close at the same time, even if it does not reach the squeeze-out threshold of 90 percent.
In addition, the deal contains a so-called Burger King provision, termed thus because it was first used in 3G Capital’s 2010 acquisition of the parent company of Burger King. This provision allows Apollo to switch to a merger if the tender offer is not closed 45 days after its commencement.
Chuck E. Cheese must prepare the proxy for the merger and file it “promptly.†If the bid is delayed â€" perhaps because of a competing bid or more likely because of someone who agitates for a higher price â€" Apollo has the right to switch to a merger, which may make getting the deal done easier. Yes, I agree this seems like overkill, but why not when it is only lawyer time?
Other attributes of the deal also provide evidence that Apollo is worried about competition. The transaction has a go-shop provision, which permits Chuck E. Cheese to solicit other, superior bids. However, the go-shop is limited, mimicking a structure that Kirkland & Ellis first negotiated in Vista’s 2013 acquisition of Websense.
The go-shop in the Chuck E. Cheese deal is shorter than normal, lasting only 14 days instead of the normal 30-60 days. In addition, the go-shop is limited and applies only to unidentified bidders who were invited to make a proposal in the second round of Chuck E. Cheese’s sale process. These parties are not specifically named. The termination fee is reduced to about $22.75 million if a deal is signed with one of these parties by Feb. 4.
But the cost of doing so was limiting the go-shop period, which probably coincides with what would have been the end date of the auction. There is also the lower termination fee if other parties still decide to bid.
The end result is that Apollo has forced any competing bidders to move very fast if they want to come back into this process. But the bidders in the auction are already likely up to speed with the process.
It is not just other bidders Chuck E. Cheese and Apollo appear to be worried about. Chuck E. Cheese also announced on Thursday that it had adopted a low-threshold poison pill, which is triggered at the 10 percent level. The pill is likely not aimed at any competing bidders, but a hedge fund or other shareholder activist that may try and accumulate a stake to block the deal and agitate for a higher price.
This is an unusual step that seems at odds with Chuck E. Cheese’s obligations to its shareholders, but the issue has yet to be addressed by the Delaware courts. It should be noted here that this appears to be something Apollo demanded. The merger agreement provides that if Chuck E. Cheese waives a provision of the poison pill or redeems it, Apollo can terminate the deal and receive the full termination fee.
Finally, the termination fee is high here outside the go-shop process. The break-up fee is described in the merger agreement as 3.5 percent of the equity value plus the company’s debt of $385 million. That’s about $45 million.
It is unclear under Delaware law whether the starting point to evaluate if the break fee is too high is the deal’s enterprise value (debt plus equity) or equity value (just equity). If you calculate the fee based on equity value, it is a high figure of approximately 5 percent. But remember, Chuck E. Cheese is incorporated in Kansas, so who knows what is right?
As a kicker, there is also a $7 million expense reimbursement to be paid to Apollo, in addition to the termination fee, pushing the payout any competing bidder must make even higher.
Will this all work? Chuck E. Cheese’s shares closed on Thursday at $54.75 a share, higher than the offer price of $54 a share, so the market is not sure who will capture the chain and its mouse-like mascot.
