Talk America (TALK) Holder Flagg Street Capital Said $8.10/Share Deal Does Not Reflect Full Value
Last Friday, Talk America agreed to be acquired by privately-held Cavalier Telephone & TV for $8.10 per share in cash.
A Copy of the Letter
"September 27, 2006
Board of Directors
Talk America Holdings Inc.
12020 Sunrise Valley Drive
Reston, VA 20191
Attention: Edward Meyercord
We are writing to you in connection with the announcement last Friday that you entered into an agreement for Talk America to be acquired by Cavalier for $8.10 per share in cash. In this respect, we wish to note at the outset that we agree with the conclusion implicit in that announcement that a sale of Talk America at this time is the best alternative for maximizing value for shareholders. However, we are seriously concerned that the proposed transaction with Cavalier does not reflect the best possible price reasonably available, and we are confident that other large shareholders share our concerns. We therefore look forward to a sale of the Company at a price that does reflect its full and fair value, whether to Cavalier or another buyer.
We also note that we filed a Schedule 13D on August 22nd and thereafter discussed with management whether Talk America should add a stockholder representative to its Board of Directors in order to ensure that maximizing shareholder value was the sole motivation in agreeing to any sale and that shareholder interests were otherwise observed; yet you nevertheless proceeded to announce a deal before you provided any formal response to our stated concerns. We therefore wish to ensure that this transaction is in your stockholders’ interests and represents the highest price reasonably attainable for the Company.
Our concerns in relation to the Cavalier transaction include whether:
• the price proposed to be paid actually reflects the fair value of the Company. We estimate that the proposed merger values Talk America at approximately 3x pro forma EBITDA (including synergies). By comparison, recent acquisitions in the CLEC space have been completed at 9-12x pro forma EBITDA;
• you ran a comprehensive sale process in which you contacted the full range of buyers that are likely to be interested in acquiring the Company and would be able to pay the best price, including granting them reasonably adequate time and access to information to formulate an offer;
• the Company was actively shopped before entering into the merger agreement; or, if not, that there were value-maximizing reasons not to do so, as well as why the merger agreement does not contain a so-called “go-shop” provision during which “go-shop” period only a substantially reduced break-up fee would be payable if a higher bid were to emerge;
• (1) you will be filing a Rule 13E-3 Transaction Statement in relation to the proposed merger and making all of the additional disclosures that are required in relation such a “go-private” transaction, including detailed disclosure of the projections on which Cavalier based its price, or (2) you have an adequate explanation as to why no such filing is required;
• the Board was incentivized to seek the highest possible price despite the lack of shareholder representation as noted above. In addition, we remain concerned that potential conflicts may exist in the form of: (1) the change of control and other payments and benefits that will accrue to the Company’s senior management by virtue of the transaction, and (2) the deal struck by Talk America’s CEO to become CEO of Cavalier at closing of the transaction, including the financial and equity incentives to be granted to him by Cavalier (and to any other members of the Company’s senior management or the Board); and
• a significant portion of the fees payable to Blackstone in exchange for its services are structured as “success” and/or “opinion” fees contingent on completion of the deal and delivery of its fairness opinion, particularly given our concerns about the deficiency of the proposed price.
We realize that Talk America has not yet filed a copy of its proxy statement which will include more details about the transaction. As such, we will reserve judgment on a number of issues (including the questions outlined above) until we get this additional information.
Should you wish to discuss any of these issues or the transaction generally, please feel free to give me a call.