Sep 19, 2016 @ 03:54 PM
Michael Dell's MSD Capital Joins
Shareholders Challenging NorthStar And Colony Capital Merger
I cover the good, the bad and the ugly of finance.
The biggest shareholders in NorthStar Asset Management
are challenging the real estate investment firm’s merger with
Thomas Barrack’s Colony
Capital, arguing that the tie-up undervalues their shares and should
For months, activist hedge fund Land & Buildings has
taken on NorthStar, arguing its management has continued to collect
unwieldy compensation even as the company’s shares and its spun-off
commercial real estate REIT, NorthStar Realty Finance, dramatically
under-performed the broader real estate sector. In June, NorthStar and
Colony agreed to a three-party combination that would re-combine the
asset manager with its REIT and merge the entity with Colony
Capital. When the deal was announced, Land & Buildings’s vocal head
Jonathan Litt supported the strategic objectives of the merger, but
maintained an activist stance because he said it shortchanged NSAM
investors and did not come with strong governance.
Most recently, Land & Buildings said in a Sept. 14
letter it believes NorthStar Asset Management should be valued at $2.9
billion and not the $2.4 billion that is implied by the June merger of
equals stock exchange ratio. Litt is also seeking shareholder
representation inside the combined NorthStar and Colony to help guard
against potential governance shortfalls or shareholder unfriendly
maneuvers, and he wants the company to articulate a more clear “core
and core plus” real estate investment mandate.
Michael Dell, founder and chief executive officer
of Dell Inc., is the owner of MSD Capital. Photographer: Aidan
In mid-August, hedge fund Abrams Capital, a 5.8%
holder of NorthStar Asset Management’s shares turned activist,
disclosing in a filing it intended to vote against its Colony merger.
In a filing, Abrams Capital said it has “studied the background and
terms of the proposed merger among the Issuer, NorthStar Realty
Finance Corp. and Colony Capital, Inc. The Reporting Persons do not
believe that the merger as proposed is in the best interests of
shareholders of the Issuer and currently intend to vote against the
Michael Dell’s investment company
MSD Capital is joining this chorus of discontented investors.
On Monday, MSD Capital, a 10.2% NSAM holder, released
a letter indicating it would vote against the current deal due to
concerns on valuation and governance. “We have communicated to both
the Special Committee’s advisors and the management of Colony that we
do not intend to vote for the transaction as currently proposed,” MSD
Capital said. Like Land & Buildings, MSD believes a restructured
merger deal that includes improved governance safeguards can gain the
backing of shareholders.
“We agree that the proposed combination has the potential to create
significant value though scale, cost synergies, strategic focus and
enhanced valuation. The combination could be a positive
transformational transaction for all three companies,” MSD Capital
said. “However, we also believe that, as currently structured, the
proposed combination does not provide sufficient value to NSAM’s
stockholders. In addition, the currently proposed governance structure
for the combined company falls short of good governance norms in many
key respects,” the fund said.
NorthStar and Colony’s merger would create one of the
world’s biggest real estate investment firms, with a heavy presence in
commercial, retail and residential real estate. Last year Colony
Capital went public by way of a combination with its publicly traded
REIT, Colony Financial. After sub-par performance in 2015, Colony and
its billionaire head Thomas Barrack then sought to achieve added scale
through a merger with NorthStar, founded by former Goldman Sachs real
estate bigshot David Hamamoto.
When combined, the merged NorthStar and Colony is
expected to manage some $58 billion in assets, an have both an
improved balance sheet and the ability to find $115 in annual cost
The prospective combination mirrors consolidation
across the real estate management business as firms seek scale and
cost efficiency. In fact, in December, residential landlord Colony
Homes (35% owned by Colony
Capital) was acquired by Starwood Waypoint for $1.5 billion. Around
that time, American Residential Properties and American Homes For Rent
also merged, in a deal that generated
a big windfall for Land & Buildings’ Litt.
MSD Capital’s joining of the chorus of investors
contesting the NorthStar and Colony merger is somewhat of an odd
After all, MSD’s namesake, billionaire Michael Dell,
was accused by Carl
T. Rowe Price and Southeastern
Assert Management of shortchanging investors when taking Dell private
in a $24.9 billion leveraged buyout in 2013. That deal allowed Dell to
retool its operations outside of the public spotlight and eventually
bid on EMC in a $67 billion takeover that effectively returns P.C.
maker to public stock markets as a full-service IT company with the
scale to compete against Hewlett-Packard Enterprise and IBM.
Perhaps, just as Dell seeks a second shot on public
markets as a friendlier and better-performing tech giant, NorthStar
and Colony can reshape their merger to win the backing of big
A spokesperson for NorthStar didn’t immediately respond
to an email seeking comment. NorthStar Asset Management shares were
rising 1.4% in late trading at $12.33, while Colony Capital shares
were up over 2%. NorthStar Realty Finance shares were little changed.