More Blackwells Weirdness

Ok, maybe it's not "weird". Still, activist investor Blackwells did settle a brief, intense proxy contest with Braemar Hotels & Resorts (BHR) pursuant to some unconventional and even baffling terms.

This after its quirky and subversive proxy contest at DIS earlier this year. Then, it disrupted the Trian effort to elect two directors for reasons that remain largely unknown.

Right after the DIS-Trian-Blackwells contest wrapped up, Blackwells launched activist projects at both Ashford Hospitality Trust (AHT) and BHR. AHT advises BHR, a REIT. Blackwells ran a "vote no" project opposing two AHT trustees, including the CEO that also serves as board chair at BHR. Blackwells won the battle but lost the war: AHT failed to win a majority of shareholder votes for the two, and reappointed them to the board anyway.

Blackwells continued its spirited proxy contest at BHR until last week, when they announced the settlement. It has some terms unlike any other we've seen. Blackwells seems to give up much and receive relatively little. Oddly, Blackwells will also buy up to three times its current shares in BHR, funded in part by a loan from ... BHR.

Standstill, for a long time

The settlement contains many of the standard terms: cooperation, non-disparagement, confidentiality, you know them. It has other unusual ones:

• Blackwells can advise BHR on the appointment of one new director after BHR recruits that person, so there is no meaningful change to the BoD.
• The cooperation agreement extends for ten years, much longer than any other we've ever seen.
• Blackwells grants an irrevocable proxy to BHR to vote all its shares, with no exceptions or contingencies, instead of merely agreeing to vote for BHR directors and proposals.
• Blackwells maintains its ownership at around 8% of outstanding (more below), rather than varying within a specified range.

Also, BHR will reimburse Blackwells proxy contest expenses, amount agreed but undisclosed. BHR really doesn't want its shareholders to know what this will cost them.

Buy shares with BHR money

But wait, there's more. Blackwells commits to buying a huge slug of BHR shares, funded mostly by a BHR loan.

Specifically, Blackwells "shall" purchase 3.5 million shares in the open market over the next six months. It agrees to pay no more than $10/share, not a problem with shares trading around $2-3 lately. Blackwells stops when it hits 9.8% of outstanding shares, also not a problem: today it owns 1.2 million shares (including options), or about 2% of outstanding. Buying the agreed shares should get it to about 8%, unless BHR starts repurchasing a lot of stock. The agreement is silent as to how long Blackwells needs to hold these shares, or whether or how it can sell some or all of them.

Where will Blackwells get the $10 million or so it needs for this deal? From BHR, of course. The company will loan Blackwells 70% of the cost. The loan carries a five-year term, with payment-in-kind interest (added to principal), accruing at a market rate plus 300 basis points, not too bad. It's also unsecured, although guaranteed personally by Blackwells CEO Jason Aintibi, rather than secured by the very shares that Blackwells buys.

Why do this?

We sincerely don't know what's in it for everyone. Blackwells must buy a ton of shares of a company it criticized harshly, keep them for what looks like ten years, and gain no influence or any change in leadership or corp gov.

We also can't figure out why BHR wants Blackwells to increase its ownership and then finance most of that purchase, secured only by the personal guarantee of the activist that pursued it.

Another funny thing: the attorneys representing the parties. Cadwallader, more of an activist than BoD attorney (third-ranked activist attorney per Bloomberg, with no BoD clients) represents BHR. Vinson & Elkins, typically a BoD attorney (second-ranked BoD attorney, although they have a few activist clients) represents Blackwells.

Eager to see what happens here and to hear from others about what we may have missed.