THE WALL STREET
Strikes a Blow to Deal-Making Banks
March 9, 2014 6:57
RBC tried to work both sides of ambulance operator Rural/Metro's
sale. Zuma Press
One Saturday in March 2011, several bankers at RBC Capital Markets LLC
were busy calling executives at Warburg Pincus LLC. The private-equity
firm had bid to buy ambulance operator Rural/Metro Corp., and RBC
wanted to help finance the deal.
That same day—on the final frenzied weekend of a three-month sales
process—another RBC team was preparing a presentation for
Rural/Metro's board that by one measure valued the company's shares
between $8.19 and $16.71. That range, which made Warburg's
$17.25-a-share offer look like a great deal, had been revised down
from one, prepared that morning for an internal RBC committee, that
topped out at more than $19.
In touch with both teams was a senior RBC banker who didn't tell
Rural/Metro that the bank at that moment was trying to get business
That scenario—with one team of a bank wooing the likely buyer while
another gives the seller advice that makes the buyer's offer look
good—helped land RBC in a legal mess. A Delaware judge on Friday found
the bank's hunger for financing fees colored its advice, should have
been relayed to Rural/Metro and led its board to accept an unfair
offer from Warburg.
RBC "failed to disclose the relevant information to further its own
opportunity to close a deal, get paid its contingent fee, and receive
additional and far greater fees for buy-side financing work," Vice
Chancellor J. Travis Laster said.
RBC, part of
Royal Bank of Canada, said in
a statement: "We have reviewed the opinion and are considering our
options. This process is not yet over."
In court, RBC said it told Rural/Metro early in the sales process that
it might seek a role financing the deal, and that any conversations it
had later with Warburg about doing so "logically couldn't have posed a
conflict or impaired in any way the advice RBC rendered to the board."
A Rural/Metro board member in court complimented the sales process
that RBC ran.
Mr. Laster hasn't ruled on damages. Plaintiffs, former shareholders of
Rural/Metro, are seeking up to $172 million, the difference between
the deal price and what they say was fair value.
The decision is the latest courtroom blow for banks, which
increasingly are being sued for their roles on mergers, and is likely
to rattle Wall Street.
In 2011, Barclays PLC was sharply criticized by Mr. Laster for
allegedly manipulating the sales process of Del Monte Foods Co. to
reap fees on both sides of the transaction. It paid $23.7 million
toward a settlement and lost out on $21 million in fees, while not
admitting wrongdoing. The following year,
Goldman Sachs Group Inc.
Surrendered a $20 million fee from the sale of El Paso Corp. to
Kinder Morgan Inc. after
another judge said that the bank's potential conflicts of
interest—including a 19% stake in Kinder Morgan—likely tainted the
process. In a settlement, Goldman didn't admit wrongdoing.
A handful of recent cases, filed on the heels of those incidents, have
been testing out a theory: that banks actively helped the boards
shortchange investors. Typically, these cases accuse financial
advisers of "aiding and abetting" a board's failure to get the best
They have targeted Moelis & Co. for its role advising on Epicor
Software Corp.'s 2011 buyout, and Jefferies LLC and KeyBanc Capital
Markets Inc. over the sale of steakhouse Morton's Restaurant Group
Inc. the same year. The Morton's claims were dismissed last summer.
The Epicor case has been settled, with $18 million going to former
shareholders, though Moelis isn't contributing, according to a person
familiar with the matter.
The Rural/Metro case appears to be the first of this type to go to
trial, and the outcome is likely to be felt by deal makers, said Kevin
Miller, a lawyer who often advises banks on merger assignments. "If
the decision is upheld, investment banks will have to change how they
do deals," said Mr. Miller, who wasn't involved in the Rural/Metro
Arizona-based Rural/Metro hired RBC in late 2010 to consider strategic
options such as a sale. When RBC initially pitched the company to
serve as an adviseron the matter, it relied on two recent deals,
signed at 9.5 times and 9.4 times the targets' earnings before
interest, taxes, depreciation and amortization, to show what
Rural/Metro might be worth.
RBC's final analysis—delivered after Warburg's bid had been
submitted—included a 2004 deal that was struck at a much lower
multiple, about 6.3 times Ebitda. That yielded a valuation range less
than Warburg's offer. RBC in court defended its valuation, saying
there were few comparable companies and transactions to consider.
At the time, Toronto-based RBC was pushing to grow its
investment-banking business. In 2007, RBC was ranked 15th in U.S.
investment-banking revenue, according to Dealogic. In 2013, it cracked
the top 10 for the first time.
RBC hoped to generate up to $27 million from the sale of Rural/Metro,
mostly from financing fees, according to court filings. RBC's banker
on the deal who had a client relationship with the company, Anthony
Munoz, called the deal "the most important fee event opportunity we
have in health care" in an email read in court. Mr. Munoz, through an
RBC spokeswoman, declined to comment.
RBC's actual payout from advising Rural/Metro was $5 million,
according to public filings. RBC didn't get fees for lending to
Warburg, which used three other banks for its buyout debt.
Moelis, a second adviser to Rural/Metro, agreed to pay $5 million last
year to settle allegations related to its fairness opinion.
Rural/Metro's board, which had been accused of selling the company too
cheaply, settled for $6.6 million. Neither admitted wrongdoing. RBC at
one point was also in talks over a settlement of at least $15 million,
according to people familiar with the matter.
Rural/Metro, which provides ambulance and fire-protection services for
about 700 communities in 21 states, struggled after Warburg bought it.
An ambitious acquisition strategy failed to pan out and payments from
insurers declined. The company filed for bankruptcy in August 2013
with $735 million in debt, much of it from the Warburg buyout. In
December, a judge approved a reorganization plan that wipes out the
private-equity firm's stake.
Liz Hoffman at