NorthStar Merger Facing Investor Headwinds
NorthStar Asset Management Group’s (NYSE: NSAM) largest shareholder, MDS Capital, joined other activist investors in their opposition to the company’s proposed merger with Colony Capital and NorthStar Realty Finance (NYSE: NRF). The proposed merger, which would create a $58 billion equity REIT called Colony NorthStar Inc, was announced in June and is expected to close during the first quarter of 2017, if their respective shareholders approve.
NSAM, which spun off from NorthStar Realty in July 2014, is the sponsor of NorthStar’s non-traded REITs and other direct investment offerings.
MSD Capital is the private investment firm owned and controlled by Michael Dell and his family to manage their capital. Dell is the founder, CEO and chairman of personal computer giant Dell Inc. MSD Capital, MSD Partners, and their respective affiliates have a 10.2 percent stake in NSAM with 19 million shares owned.
In a letter to the special committee of the board of directors, MDS said that the proposed merger could be a positive transformational transaction for all three companies, but as it is currently structured, it falls short with respect to shareholder value. MDS also cited the currently proposed governance structure as being questionable.
“We expect [the special committee] to provide the oversight necessary to ensure that NSAM’s management is focused solely on value maximization for all stockholders, and that you will not allow any conflicts of interest, especially those that might arise from the potential triggering of severance and change of control payments, to impair what is in the best interests of NSAM and all of its stockholders,” MDS said.
Jonathan Litt, founder and CEO of investment management firm Land and Buildings Investment Management, remains outspoken in his scathing opposition to the Colony/NorthStar combination. Land and Buildings, which owns approximately 2 percent of NSAM, is also vying to replace the current board with six independent directors.
In a letter to shareholders, Litt claims that NSAM is the “crown jewel” of the merger and is “substantially undervalued” at $2.4 billion – substantially lower than Land and Building’s “mid-$3 billion” range estimate. He also claims that NorthStar executives and investment banks are “feeding at the NSAM trough” and that the tri-party merger involves “egregious transaction costs.”
“A $223 million golden parachute will be paid to David Hamamoto and his senior executives upon consummation of the merger, and David will still have a job,” said Litt. “In addition, advisory fees of $70 million will be paid to the four investment banks which provided fairness opinions to address egregious executive compensation of senior management and the glaring conflicts of interest between the boards of NRF and NSAM and management.”
Litt claims that investment banks Goldman Sachs and UBS have close ties to Hamamoto and other NSAM and NRF board members, according to a Land and Buildings investor presentation.
Litt is urging NSAM to improve its consideration and adjust the exchange ratio to reflect at least $2.9 billion company valuation. He is also asking the future management team to concentrate on core traditional real estate in predetermined sectors and “avoid esoteric investments which have hurt both Colony’s and NorthStar’s valuations over time.” Litt also envisions a smaller board with shareholder representatives who can help craft a “clear, compelling strategy” for fellow investors.
The merger has been unanimously approved by the special committees of NSAM and NRF, and the board of directors of Colony. If approved, NSAM shareholders will own approximately 32.85 percent, Colony shareholders will own approximately 33.25 percent and NRF shareholders will own approximately 33.90 percent of the combined company on a fully diluted basis. NSAM shareholders will also receive, in addition to its regular quarterly dividend, a special cash dividend equal to $128 million, which represents a one-time distribution of excess NSAM taxable earnings and profits.
