Handshakes and signatures will take you only so far. Shares of School Specialty
This should come as a rude awakening to every investor holding on to a company that is about to be acquired at a premium. There's a reason why stocks trade at a marginal discount to their buyout prices leading up to deal-closing dates. This is why. Sometimes, the best intended engagements get jilted on the way to the altar. Shares of School Specialty closed at $48.78 over the weekend, in anticipation of the $49 deal closing this week. This morning the shares opened at $39.
Everyone figured that School Specialty was spoken for. Last week, Standard & Poor's even tapped Portfolio Recovery Associates
School Specialty was having a problem with its grades. A week after the Bain Capital affiliate buyout was announced, the company posted a wider fiscal-fourth-quarter loss. That wasn't the deal breaker. A longtime director passing away after a heart attack a couple of weeks later didn't ice the deal. That came later, as the company now finds itself talking down its fiscal 2006 bottom-line prospects.
Back in June, with analysts expecting $2.51 in profits per share, the company's guidance range -- between $2.35 and $2.60 -- was within the ballpark of reason. Now the company is expecting to earn between $1.80 and $1.90 a share. Even if you back out expenses related to the company's organic expansion and a recent acquisition of its own, the adjusted outlook is now calling for earnings this year to come in no higher than $2.31 per share.
That finds the consortium backing the deal's financing requesting to engage in "supplemental due diligence." That's a term that, more often than not, leads to a lower deal price. It happened four years ago when Dynegy
In the end, it's why investors need to be aware of what's taking place in their portfolios, even after a merger has been announced.
However, in School Specialty's case, it would also be dangerous to assume the worst. The company was doing just fine before Bain came calling. It can certainly grind it out as a profitable stand-alone company if the revised terms are not favorable. Back in June, value guru Philip Durell wrote about School Specialty in Make Beautiful Music with Value. He considered the company one of a dozen strings to be played in a 12-string guitar. Today's weakness doesn't snap the string. As Philip points out, you could have bought the stock two years ago at a mere $17 a pop. It just needs to be retuned at the moment.
Then the concert begins.
Porfolio Recovery Associates is a Motley Fool Hidden Gems recommendation.
Longtime Fool contributor Rick Munarriz hasn't felt the urge to trade in his car for five years now, though he wonders how employees felt about the employee-cost pricing promotions. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.