Alliance Data Systems Buyout

Alliance Data Systems Corp (ADS)
Blackstone Capital Partners (BX)
$7.8B Buyout - Terminated Deal

Summary

Buyout of marketing support company

$81.75 per ADS share; $7.8B total
ADSnews - stock chart
Background of the Merger
10-K summary

Announced 5.17.07

Agreement terminated 4.18.08

See Terminated Deal - M&A Litigation below

Other developments

ADS allows BX to buy shares in advance of merger 8.31.07
ADS tenders for its debt 10.15.07
Investor presentation 4.16.08

Terminated Deal - M&A Litigation

BX counters by bringing suit in Delaware 4.23.08

Seeks a declaration that BX parties are not in breach of the merger agreement
News item

ADS terminates agreement;
Sues BX in New York for $170mm break-up fee 4.18.08

BX first sent a termination notice to ADS on 4.18.08
ADS then sent its own termination notice and brought suit
Press release
Form 8-K
ADS termination notice
ADS complaint

"... Blackstone Group and its counsel knew that the OCC would impose conditions to granting the required approval. The conditions that the OCC imposed were not extraordinary or unprecedented."
"Because a breach by Parent and Merger Sub would cost Blackstone V its $170million guarantee and damage its reputation in the industry, Blackstone Group did everything it could to cause a necessary condition to closing to fail namely, OCC approval in the hopes of avoiding payment of the $170million fee and harm to its reputation for walking out on the deal. "
"To save the transaction for its stockholders, ADS proposed that the purchase price be reduced by $400million and that the savings to Blackstone Group be used to fund the OCC requirement. Blackstone Group again refused, despite the absence of any economic burden on it."
"Blackstone Groups actions to protect its relationship with its lenders and its reputation, and to avoid paying the $170million [break-up fee], were intentional and taken in extreme bad faith. They breached representations Blackstone Groups senior executives had made during the negotiation of the transaction. These actions constituted a breach of Parents and Merger Subs obligations under the Merger Agreement. Accordingly, Blackstone V is obligated to pay ADS the $170 million [break-up fee] pursuant to the Limited Guarantee."

ADS declares BX in breach 3.17.08

ADS voluntarily dismisses Delaware suit Feb 2008

BX has said "that it is committed to working toward the closing of its acquisition of the Company, including working with Alliance Data on proposals directed to resolving regulatory issues."
ADS press release 2.08.08

ADS sues BX entities in Delaware Jan 2008

Claims that Blackstone failed to use good faith or reasonable best efforts to obtain required approvals from the OCC with respect to the change of control of World Financial Network National Bank, Alliance Datas bank subsidiary
Claimed that OCCs requests for $400mm in additional capital commitments were reasonable
ADS press release 1.30.08
ADS complaint 1.29.08
Defendant's brief 2.04.08

Emphasizes that Blackstone is not a direct party to the merger agreement and that Blackstone entities are "thinly-capitalized shell entities" that were formed "solely
for the purpose of consummating the Transaction" and, with ADS itself, the only parties to the Merger Agreement
"Notwithstanding that it had no contractual obligation to do so, in an effort to break this impasse, Blackstone made the extraordinary voluntary offer to the OCC to provide $100 million in "source of strength" support for the benefit of the Bank, well in excess of what any banking regulator has previously required of any other similar prospective controlling private equity stockholder of a bank. However, the OCC rejected that offer and continued to insist, among other things, that Blackstone provide at least $400 million of such support."
"It is undisputed that the [acquisition entities] do not have the financial resources necessary to satisfy the "source of strength" commitment sought by the OCC to support the Bank."
"The Merger Agreement confers no right to specific performance of the parties mutual obligation to use reasonable best efforts to obtain OCC approval for the transaction, or in connection with any other pre-closing condition (other than relating to the financing)."
"'[B]est efforts' [does] not entail a duty to make an investment that would be significantly different in kind from that contemplated by the Agreement, involving additional outlay or alteration of the business risks."
Citing Macksey v. Egan, 633 N.E.2d 408, 413-14 (Mass. App. Ct. 1994)

Developments prior to litigation

BX doesn't anticipate closing conditions to be satisfied

On account of approvals from the Office of the Comptroller of the Currency (OCC) of the change of control of World Financial Network National Bank, Alliance Datas bank subsidiary
ADS press release 1.28.08
Proxy statement disclosure re: OCC approval