Steve Mihaylo is a little late in the game with his proxy fight opposing Inter-Tel’s (ticker: INTL) sale to Canadian telecom software firm Mitel Networks for $25.60/shares. The meeting to approve the sale is scheduled to take place this Friday, June 29th, but Mihaylo’s final proxy statement was filed with the SEC only on Tuesday. It is highly unlikely that he will be able to mail the proxy statement to shareholders before the meeting. Inter-Tel has a head start, because most shareholders will not even receive Mihaylo’s voting card until after the meeting.
Steve Mihaylo created Inter-Tel in 1969 as a division of another telecom, took it public in 1981, and retired in early 2006 as CEO and director. He still owns some $125 million worth of INTL stock today. Inter-Tel manufactures voice and data network equipment for small to mid-size businesses.
Mihaylo fought a proxy war last year when he tried to acquire the company for $22.50, later boosted to $23.25, together with private equity firm Vector Capital. Management opposed the buyout and shareholders rejected it by a narrow margin of just over 50%. As part of the settlement of the proxy contest, Mihaylo joined the board again – only a few months after resigning – but was precluded from receiving confidential information about valuation and the sale of INTL. After the failed vote, Mihaylo gave up on the idea of buying the company in January and instead proposed a Seven-Point Plan centered around a $200-250 million stock repurchase program.
In a reversal of roles, management now wants to sell Inter-Tel, and Mihaylo fights the going-private transaction, seeking to keep it public. His criticism focuses rightly on the failure of management not to conduct a proper auction. But it is ironic that this argument is made by Mihaylo: when he made his own buyout proposal last year, he was pressuring management to sell the company in a rapid fire 30-day auction. Clearly, 30 days are not enough for other buyers to conduct due diligence, especially considering that Mihaylo had spent several months ondue diligence.
In a long saga, Inter-Tel’s management has been looking at various options to sell the firm for a couple of years, when Mihaylo was still CEO and afterward. Since 2005, a special committee of the board has lead that effort less than half-heartedly under the stewardship of Chairman Alex Cappello, who runs an eponymous investment bank in his day job. A number of potential acquirers approached Inter-Tel, but it appears that the board made no attempt to solicit proposals actively. The firms that approached Inter-Tel, a couple of strategic buyers as well as private equity firms, must have heard about a possible sale of Inter-Tel through informal channels, because no investment bank ever shopped the firm. A letter sent by Vector Capital to the board this April illustrates the deficiencies in Inter-Tel’s sales process. Vector offered to pay $26.50 after becoming “aware of market rumors of a near-term potential sale.” Clearly, if management had handled the auction professionally, potential buyers would not have to emerge on the basis of rumors. In subsequent emails, Vector indicated that it may even be able to increase its price to $27, in light of recent improvements in the industry. The board, however, ignored this proposal and focused instead on a comment made by Vector in 2006, when it indicated that it would be unable to pay more than $23.25. After the signing of the merger agreement with Mitel, Vector did make another proposal to purchase Inter-Tel for $26.50. Although Vector eventually decided not to proceed with a formal bid, its actions show that there may well be other potential buyers, and maybe they are not privy to market rumors.
Who is likely to win the fight? 3.2% owner Millennium Management has publicly declared its dissent, and Mihaylo will vote his 19% against the merger. Proxy advisers ISS and Glass Lewis have recommended voting against. Mihaylo has hired proxy solicitor MacKenzie, which seems to have put its most aggressive callers on this contest, judging by the call we got yesterday. If you factor in the non-votes, there is a good chance that the merger proposal will be defeated.
Mihaylo has doubled his alternative proposal, the recapitalization and buyback, to $400 million – $200 million from cash reserves and an additional $200 million in new borrowings. Mihaylo indicated he may not tender any of his own shares in a buyback. He owns 19%, so that his holdings could approach 50% after the buyback – not quite a “dominant share ownership position” as claimed falsely by Alexander Cappello in a letter to shareholders, but still a fair chunk of money and a clear statement that he does not see a recap as overly risky. We like it when someone puts his money where his mouth is, and hope that Mihaylo will beat the odds and prevail. According to Mihaylo’s calculations, INTL could be worth $28 after a recap, which is 5.6% more than shareholders would receive in the merger.
Disclosure: The author manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which owns shares of INTL and is in litigation with Vector Capital in an unrelated matter.