In a rare display of boardroom competence and courage, Transaction Network Services (TNS) announced today that it will recapitalize the firm by taking on $240 million in extra debt and paying shareholders a $4/share dividend, which is a hefty 25% at the current share price. Recapitalizations like this one are a standard tool of private equity firms, who pay themselves hefty dividends after taking a company private, and then flip the firm loaded with extra debt to risk-seeking buyers. It is refreshing to see that boards are questioning the value added by private equity firms in such transactions and are beginning to do these deal themselves in order to benefit their shareholders.
This recapitalization comes in the wake of at least two recent buyout proposals, both of which were rejected as inadequate. John J. McDonnell, Jr., founder of TNS, made a $20/share bid in December, but revised it down to $16/share a month later. If McDonnell had bet on a passive and complacent board that goes along with any proposal, then he miscalculated the situation completely.
The presence of activist investors doubtlessly helped in getting such a good deal for shareholders. Endowment Capital and Shamrock Activist Value Fund had been circling TNS for a few months. In January, Shamrock sent a letter to the board requesting a $6/share dividend, among other demands. Although the $4 dividends falls well short of that level, it is still a sign that board listens and is making an effort.
TNS should be a case study for other boards about letting shareholders rather than private equity firms reap the benefits of financial engineering.
Disclosure: The author manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which owns shares of TNS.