Now, in a fascinating development, the two subjects meet. PS and SH settled with Zoetis (ZTS) this week, and the terms of the agreement merit review.
SH began investing in ZTS about a year ago. SH entered into a promote agreement with PS, by which PS would pay SH a fee based on PS' gains. It looks to us like SH brought the idea to PS, who brought clout and funds. SH would handle the heavy lifting.
The settlement agreement rather favors PS, and leaves SH behind. ZTS appoints William Doyle, a PS advisor, to the BoD. ZTS and PS, but not SH, will together search for another director, similar to what we highlighted before.
ZTS seems to have gotten the better of the settlement. It adds a single PS director, and approves another. The settlement terms impose significant constraints on PS and SH:
- If Doyle leaves, ZTS can approve PS' proposed replacement
- PS (but not SH) maintains share ownership to between its current shareholding (about 8%) and 12.5% of outstanding shares, and cannot sell any shares to another activist investor.
- PS cannot pay Doyle directly based on ZTS performance.
- It includes every restrictive term we've seen in other agreements, including requirements to maintain confidentiality, follow corporate policies, support all ZTS directors, not propose anything the BoD opposes, and not participate in any M&A deal other than at the BoD invitation. Most of these restrictive terms also apply to SH.
Doyle delivered an irrevocable resignation letter to ZTS. If either PS or he violates the settlement agreement, he leaves the BoD without PS replacing him.
The agreement includes an two unusual terms that seem to indicate how little PS trusts ZTS. First, ZTS agrees to "not [use] committees of the BoD [to discriminate] against [Doyle or the additional director] in order to limit their participation in substantive deliberations of the BoD." Parties frequently understand this, but we've never seen it in writing. Second, ZTS can enforce the resignation letter only after undertaking an elaborate process to determine whether Doyle violated the terms of the settlement agreement (Section 1.h and j). Apparently, PS fears that ZTS will find some pretense to remove Doyle from the BoD.
ZTS pays nothing to either PS or SH for their expenses. Without a proxy contest they didn't spend a ton, but they spent something.
There's no love lost between ZTS and PS. The 11 page agreement covers most every conceivable contingency, as far from a handshake agreement as we've seen. It contains many terms that just serve to prevent the parties from screwing over each other.
PS and SH never disclosed their desired improvements at ZTS. We don't know whether this deal represents a big win, major defeat, or something in-between. We can't see the impact of a couple of BoD seats with no other agreed changes.
SH and PS did just fine. SH made about $60 million on their shares, for about a 50% gain in a year's time. They also earned a bit more on a derivative position. And, we estimate PS will pay another $10 million to SH based on the promote. PS itself looks to have made about $300 million on its original $1.6 billion investment.
We speculate that PS and SH won a small but meaningful concession from ZTS. They had not publicized any thesis for the company, and thus did not have a chance to round up support from other shareholders. They won a couple of BoD seats based largely on their 8.5% shareholding and PS' reputation, which they grudgingly accepted along with an onerous standstill agreement. Their profits make it worth it, though, which of course is what it's all about.
MRL |
