Stub Equity -- The Next Big Thing
The recently announced LBO of Harman International Industries by KKR and Goldman Sachs Capital Partners offers the great unwashed public the chance to own a piece of the post-acquisition company alongside the sponsors. We have until the record date of the meeting called to approve the merger in which to buy the current shares of Harman and elect to exchange them for a piece of the "stub" post-closing equity. The terms of the exchange will put us on the same terms as KKR and Goldman, that is, each dollar we roll over into the stub will travel the same road to riches as the dollar invested by our new partners. Who's your daddy now?
Taking the stub is not mandatory. We can also take cash.
If there is widespread interest in holding a slug of the leveraged equity, up to 27% of the company could remain in public hands. With the steady stream of SEC filings the company will be required to make, we'll be able to follow the progress of our investment.
You can count on one hand the number of recent deals in which stub equity has been offered to the public. Does the Harman deal presage a new wave of investing, reflecting the stronger negotiating power of sellers? Or is this a one-time thing.
I guess that will depend on how well the stub does. If it does as well as the historic performance of these PE sponsors, then the boards of directors of future sellers may even come under pressure to provide stockholders the opportunity to hold a piece of the stub. From the PE sponsor side, offering a piece of stub equity may deflate the pressure to overpay.
