AVON, Mass. (HedgeWorld.com)–Some stockholders in The First Years Inc., a manufacturer of toys and related products for infants, want the company to hold out for a higher purchase price following a merger agreement between its management and RC2 Corp., Oak Brook, Ill., a wholesaler of auto-racing toys and collectibles.
Hedge fund Santa Monica Partners LP, Larchmont, N.Y., is among those who hope to block this proposal at the tendered price.
On June 4, The First Years Inc. entered into a merger agreement with RC2 providing that TFY will become a wholly owned subsidiary of RC2 subject to approval of TFY’s stockholders and to the absence of any material adverse change in the banking or capital markets that would affect RC2′s financing commitments.
According to the agreement, stockholders in TFY stand to receive US$18.60 in cash upon completion of the merger for every share of their stock then outstanding.
Joshua M. Eudowe, managing director of Santa Monica Partners, said in an interview that TFY has a devoted brand following but that it has long refused to make optimal use of that brand by, for example, licensing its name to the manufacturers of infant products it doesn’t make itself, or by marketing some of its products through Wal-Mart. Mr. Eudowe charged that Ronald J. Sidman, chief executive of TFY, has an excessively conservative management style, which leaves him sitting on large cash reserves and a valuable brand name, making effective use of neither.
Due to this sense of frustration, it was Santa Monica Partners that put TFY in play. Santa Monica Partners controls close to 700,000 voting shares in TFY, or 8.4% of the total voting equity. In December, when TFY was selling for US$14 per share, the hedge fund announced its own offer. “Based on the available public information and our discussions with management, the consideration per share payable for each share of common stock of The First Years Inc. acquired in the acquisition would be [US] $15 per share payable in cash at the closing,” according to Santa Monica Partners’ letter to the directors at that time.
Santa Monica Partners officials also held out the possibility that the cash amount could be higher. Depending “on the outcome of our due diligence review of non-public information on the Company. The transaction would be structured as a tender offer with a back-end merger,” according to the letter.
Also in December, Santa Monica Partners announced it would seek to place new directors on the board. That still is part of the game plan, Mr. Eudowe said Friday.
Those December announcements may have helped pique market interest, because TFY’s stock price rose consistently through the first quarter of 2004 to US$16 by the end of January and to US$17.50 in early March. The second quarter began with a retreat, back to US$16.50, but after the announcement of RC2′s offer, the market price rose to within pennies of the merger agreement’s price and has remained there.
Mr. Eudowe said that he believes the company is proposing to sell itself too cheaply. “We [at Santa Monica Partners] are trying to rally together some support for holding out for a higher bid. We think the company should be worth upwards of US$24 million.”
TFY company management has said in statements that it is pleased with the RC2 offer. “Our mission has always been to help parents make their child’s first years the best they can be, and we expect to continue this tradition as part of RC2′s broader platform following the merger,” said Mr. Sidman.
Contact Robert F. Keane with questions or comments at: