On Friday, we got word that a smallish company in a sector few care about had agreed to merge with a private fund for $26 per share. Of course, I found the whole thing pretty interesting, because several of my colleagues, particularly Whitney Tilson, had extolled the company's virtues over the last two years. And so Vancouver-based Imperial Parking (AMEX: IPK), a little company in an ugly business, will soon disappear from the ranks of publicly traded companies.
The premium over the previous day's closing price was a paltry 4.6%. Needless to say, many minority shareholders are not the slightest bit pleased to have an undervalued company called away from them at a marginal premium. I think they have a point, but I'm also not very sure what else management could have done.
Imperial Parking began trading in 2000, a spin-off from First Union Realty (NYSE: FUR). First Union (not the bank now known as Wachovia) purchased Imperial Parking in 1997, when it was a dog with fleas: $56 million in revenues, $26 million in debt. The price of purchase (including the debt) was $75 million.
Management has in the interim done a bang-up job of cleaning up the company. Its revenues have nearly tripled, to $150 million; it carries only $5.8 million in debt, balanced out by almost $21 million in cash. In effect, what First Union bought in 1997 at $75 million is being sold at about $30 million today.
Though you'd have to figure that a company with such a history would have performed miserably, it hasn't. The buyers are getting a steal -- ImPark produced $6.5 million in free cash flow in the last 12 months. This isn't some sort of engineered renaissance. ImPark turned into a dynamite company, but even dynamite companies can be beholden to the interests of their largest shareholders.
Therein lies the conundrum for ImPark's management, and it is what's led to the agreement to merge. It may not be getting a very good deal for shareholders -- its own actions suggest that $26 isn't that great of a price. But it may be the best deal it can possibly get, because everyone knows that a motivated seller isn't in a position of strength.
In late 2002, hedge fund Gotham Partners started getting hit with massive client redemptions, and management announced soon after that they would be unwinding the fund. "Unwinding" involves converting everything to cash, which means that regardless of the relative merits of any position held by Gotham, they were going to have to sell.
One may adduce that the principals have been attempting to do just that with their 31% stake in ImPark over the intervening year, but they have been unable to do so. ImPark was left with a choice of taking a chance on a new owner of all those shares or letting them flood the open market. Neither choice is very palatable. (I'm sure they considered other options, having as they do the necessary cash to repurchase most of Gotham's shares themselves -- at prices they've already acted on in the recent past.)
ImPark's public disclosures to date make it very clear that Gotham Partners is centrally involved with the decision to sell the firm, and that its votes would be in favor of the merger. There isn't much that the minority shareholders could do unless they were to mount a lawsuit on a fairness basis.
Perhaps the lesson is to be ever mindful of the shareholder makeup of the companies we hold. In many cases, the actions of the company are greatly influenced by the interests of the controlling shareholder. In some cases, this is beneficial to minority shareholders -- regard Warren Buffett at Berkshire Hathaway (NYSE: BRK.A) -- and in many others it is not. In this case, the needs of the controlling shareholder seem to have become the burden for all shareholders. I'm not sure that ImPark could have done any better in such a situation.
Bill Mann owns shares of Berkshire Hathaway.
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