Cossette sold to Mill Road Capital
Last Updated: Tuesday, November 10, 2009 | 07:15 PM EST
Financial Post
Much like it began, the takeover battle for Cossette Inc. appeared to end quietly Tuesday with the announcement that Canada’s largest independent advertising and communications agency would be sold to a Connecticut investment firm, thwarting a hostile bid from a disenchanted founding partner.
The $131.5-million cash offer from Mill Road Capital LP had been recommended by Cossette’s board of directors and senior management team. They hold about 30% of the company’s shares and say the deal keeps the structure of the business essentially intact, meaning no major changes are expected at the Quebec-based firm.
At $7.87 a share, the offer is a 50% premium to the unsolicited bid last month from Cosmos Capital Inc., a firm headed by Cossette co-founder François Duffar and Jean Monty, former chief executive of BCE Inc.
“This is probably the most positive news we could envision under the circumstances,” said Marcel Barthe, vice-president of corporate strategy at Cossette.
“The board had said very clearly that Cosmos’ [offer] was opportunistic and did not reflect the value of Cossette, and we are proving that today. And it creates value for the shareholders, it keeps the brand and the name and the management and the relationships that employees know.”
Cosmos took a run in July at Cossette -- whose client list includes McDonald’s Restaurants of Canada, Coca-Cola, BMO Financial Group, General Mills and Shoppers Drug Mart -- shortly after the departures of Mr. Duffar as Cossette’s vice-chairman after 35 years with the company, and Georges Morin, a senior vice-president.
Given the history and amid rumours of bad blood between a pro-Duffar camp and a camp supporting Claude Lessard, co-founding partner and current chairman and CEO, there was remarkably little public mudslinging between the former work allies during the takeover battle, with the dealings playing out largely behind the scenes.
It is a matter of debate whether Cossette would fare better with an offer from a strategic buyer such as a major multinational advertising firm, said Ken Wong, marketing professor at Queen’s University’s School of Business and vice-president of knowledge development for Level 5 marketing consultancy.
Often with a private-equity buyer “the emphasis shifts to one of maximizing the earnings flow and that does tend to minimize the amount you can invest in your agency’s brand development activity,” he said. And given the recession and plummeting advertising budgets, that comes at a dangerous time, Mr. Wong said.
“We are on the verge of a major change in how we handle the communication aspect of marketing -- not just social networking, but what is about to happen with mobile marketing, and that is clearly an area where Cossette will need to continue to invest. But the counter-argument is that their alignment to a U.S. equity firm will give them access to a pool of capital that they would not have had otherwise. The proof will be in the pudding.”
John Bradley, president of Oakville, Ont.-based marketing consultancy Yknot Strategic Solutions Inc., said a financial player may indeed work in Cossette’s favour, given the conflicts that often arise under large multinational umbrellas.
“For many years driven by the [London-based ad conglomerate] WPP Group PLC, consolidation has been the name of the game, but on the agency side I am not sure what benefits they gain in the long haul,” he said.
“There are more client conflicts and less scope to build new business because of conflicts with sister agencies -- ‘Oh, no, you can’t go for Nestlé because your sister agency has Cadbury in China or Unilever in Korea.’ There is much more potential on the client side for a problem. And for an outside investor, advertising agencies are cheap these days because of all the disruption in the business.”
It is not expected that Cosmos will try to top the offer, said a financial analyst who spoke on condition of anonymity, which is 142% higher than the value of the shares in July before the non-binding Cosmos offer of $4.95 was announced.
“If you believe the economy is going to turn and you are buying right at the bottom of the trough, if that turns out to be the case it would be a really good buy for [Mill Road],” he said.
Privately held Mill Road’s asset portfolio includes communications and marketing companies as well as consumer products and retail companies, but neither the investment firm nor Cossette would comment on the specific holdings. Mill Road, which did not return calls for comment, has been described by managing director Scott Scharfman as “a Berkshire Hathaway for small companies,” which looks to make friendly, long-term investments in businesses with a market cap of less than $250-million -- a small-cap answer to Warren Buffett’s buy-and-hold conglomerate.
Its management team is made up of former members of private-equity giant Blackstone Group, and it was part of an investment group in the July takeover of Galaxy Nutritional Foods, Inc., which makes soy, rice and vegan cheeses. Mill Road’s holdings have included restaurant chain Kona Grill Inc. and footwear company R.G. Barry Corp., which it tried to buy in May, but the bid was rejected by that company’s shareholders.
Two of Cossette’s largest institutional investors, Burgundy Asset Management Ltd. and Beutel, Goodman & Co., which collectively hold about 18.6% of the company’s shares, had agreed to tender their shares to Cosmos, but both are also allowed to accept higher offers. Cosmos did not return calls for comment.
A proxy circular will be mailed to shareholders this week, and a special meeting will be held for the vote on the going-private transaction in mid-December, Mr. Barthe said.
Financial Post
hshaw@nationalpost.com
