0:00

Today. I want to talk about

0:02

emanate that's mergers and Acquisitions.

0:04

Now to do this, I'm

0:06

gonna dive into a bit

0:08

of a hypothetical situation here

0:11

where I've spent years not

0:13

covering financial news, but rather

0:15

making and selling the best

0:17

pizza in New York. Now.

0:19

I call in the F T's Wall Street editors who

0:21

cheat end up to help me with the next part

0:23

here. So. Cg, Let's picture

0:26

this. I have this pizza restaurant

0:28

that I built up and run

0:30

it for years. Everyone loves my

0:32

pizza. I'm really proud of it,

0:34

but now I'm done with that.

0:36

I want to sell it and

0:38

I'm looking for a buyer. So

0:40

how does this process work with

0:42

a typical emanate deal? For.

0:44

Or imagine or her mother pizza chain

0:46

or I was just them Buster and

0:48

I want to restaurant in the location

0:50

and I came to you and said

0:52

of i'd like to buy it for

0:55

a thousand dollars or two. Thousand

0:57

dollar. Your terminal by for my needs. A

0:59

Russian is worth more than what they want

1:01

to buy from. Million dollars per and thought

1:03

John Wall your how will you like go

1:05

back for those of maybe it's a million,

1:07

maybe it's neither and seventy five thousand but

1:09

we settle Ultimately annoying dollars of and so

1:11

we sign a contract. Ah and contract says

1:13

I'm going to buy your restaurant four million

1:16

dollars and I'd write you a check. You'd

1:18

get the money, I get the restaurant and

1:20

we would go on our separate ways. Sounds.

1:23

Simple enough, right? That's.

1:26

How Emanate tends to work. You need

1:28

a buyer? You need a seller. They.

1:30

Agree to a price and then

1:33

handshakes. Money is exchanged for a

1:35

business. But. To

1:37

cheat says that's not what happened

1:39

with the deal he recently came

1:42

across. This particular case involved a

1:44

private equity firm that wanted to

1:46

buy a grocery store chain called

1:48

Save Mart and the deal. It's

1:50

normal. that is until the very

1:52

end. It's. So the money

1:54

changed hands but since this was a

1:57

private company or health can still break

1:59

loose out. The words and A did. That

2:02

how turned into a court battle

2:04

that. Had a surprising out.

2:06

Com The court has ordered a

2:08

seller's to pay the buyer hundred

2:10

nine million dollars which is not

2:13

how this normally works Meaning that.

2:15

The family that owns the grocery

2:18

store chain might actually end up

2:20

paying this from to take the

2:22

business off their hands. And

2:25

what's even more surprising is that this

2:27

one hundred and nine. Million Dollar

2:29

Dispute. With only brought

2:31

up after the deal had already

2:34

closed. That I think is actually

2:36

the most important, the most interesting aspect of

2:38

this whole points fight. Ah, why is this

2:40

speak? why are we talking about it after

2:42

the money has to stamps. I'm

2:59

in college and death from the financial times.

3:04

Mergers and acquisitions tend to follow

3:07

a set order. Of Operations.

3:09

But that wasn't the case for the owners

3:12

of the grocery store chain sleep. Sitting

3:15

behind. The much were playing inside

3:18

the mechanics of the fry them

3:20

feel making process set in this

3:22

specific case. When it's very.

3:31

Hazy. Welcome to the Shell. But. You haven't

3:33

begun to be here. So. Our listeners

3:35

who live in California's Central Valley places

3:38

like Sacramento or Modest still he probably

3:40

heard of Save Mark. It's

3:42

a grocery store chain like Kroger

3:44

or Sainsburys goes back several decades

3:47

and like any other gross chain,

3:49

it's really well known and just

3:51

part of the fabric of of

3:53

the Southern California community. For.

3:56

Many years the chain is owned by this

3:58

one family. The Pitch you need. But

4:01

in 2015, the long-standing patriarch of

4:03

the family, Bob Piccinini, dies.

4:07

Sad news out of Modesto, Bob Piccinini, a man

4:09

who started in his family grocery store as a

4:11

box boy at the age of 12 and

4:13

rose to become the owner of a 240-store chain known

4:17

as Save Mart and a number of other brand names worth

4:20

$2.3 billion, according to Forbes, in the latest survey.

4:22

He has passed away at the age of 73.

4:25

The family continues to own Save Mart for the

4:27

next few years. But then

4:30

in 2021, they decide, like I

4:32

did with my hypothetical restaurant, that

4:34

it's time to sell. If

4:36

you're selling any asset, whether it's your house or a

4:38

company, you obviously want the highest

4:40

price you can get. But

4:42

there's these other kind of social factors that will come

4:44

into play where you ideally want the buyer to take

4:46

care of your asset, feel like it's going to be

4:49

a good steward of it. So

4:51

a potential buyer pops up, a

4:53

private equity firm called Kingswood Capital

4:55

Management. The founder of

4:58

Kingswood is a gentleman named

5:01

Alexander Wolf, and he has a

5:03

distinguished career in private equity. He

5:05

had years ago been in a

5:07

firm called Cerberus Capital Management. And

5:09

then just prior to forming Kingswood,

5:12

he was at another firm called

5:14

Ares Management. Cerberus, famously in Greek

5:16

mythology, is a three-headed dog that

5:19

roams or guards the gates of hell.

5:21

And then Ares is the Greek god

5:23

of war. So Ares and Cerberus have

5:26

a reputation as being very shrewd,

5:28

very sharp, and not afraid to play

5:30

rough when necessary to win. But

5:33

Kingswood's efforts assure the Piccininis that they'll

5:35

take care of the Save Mart business.

5:38

And they win the family over towards the end of 2021. There

5:42

definitely was this sense between Kingswood and

5:44

Save Mart and the family that Kingswood

5:46

was going to be a responsible

5:49

owner of this business. They had great plans, they

5:51

were going to grow it, and that Save

5:53

Mart can actually not only get a good price, but they

5:55

could feel good about the party

5:57

that was going to take over this institution. For

6:00

a few months, Save Martin Kingswood go

6:02

through the typical sale process. The

6:05

due diligence, reviewing the books, valuing the

6:07

business, deciding what shape it should be

6:09

in when Kingswood takes it over. And

6:12

finally, in March 2022, the deal closes. Typically,

6:17

these private company deals are structured

6:19

in a way that is described

6:21

as debt-free, cash-free. Remember

6:23

that phrase, debt-free, cash-free.

6:26

What that means is the buyer essentially

6:28

just wants to buy the business

6:30

itself and does not want to

6:33

get stuck with either the existing

6:35

debt on the business or

6:37

the cash. The company's balance sheet

6:39

will typically just get swept up

6:41

by the owners. And so truly,

6:43

they're just buying the operations. So,

6:47

in this particular debt-free, cash-free

6:49

acquisition, it shakes

6:51

out that Kingswood gets the business, and

6:53

the Piccinini family gets about $30 million.

6:57

And this is typically where the story ends. The

7:00

buyer gets the business, and the seller gets a

7:02

check. That's not

7:04

what happened here. And

7:07

that's because this deal involves a

7:09

privately owned company. The

7:11

big difference is when a public deal closes

7:13

where there are shareholders and they get $50

7:16

a share and they're paid out at

7:18

closing, that is the end of the story.

7:22

That is not quite true in private company

7:24

deals. And the difference is

7:26

private companies typically have

7:28

only one or two or

7:30

a handful of shareholders. They're all known and easy

7:33

to find, whereas a public company

7:35

has thousands of shareholders, not millions.

7:37

For that reason, there is the

7:39

idea of post-closing adjustments in a

7:41

private company deal where a

7:43

buyer can say, hey, we agreed to there being $75

7:46

of eggs on the balance sheet, but in fact, there's

7:52

$73 or $77, and we just need

7:54

to resolve these differences, typically very small,

7:56

just so we get what it is

7:59

we each bargain. Before the very

8:01

typical process and usually it leads

8:03

to some very, very small minor

8:05

adjustments. Okay, that's what you you.

8:08

Typically see in this scenario, but

8:10

in this case it ended up

8:12

being. A. Nine.

8:14

Figure. Number. That they

8:16

need to sell a house. Try

8:18

to sell area and so in this

8:21

instance there's as he is a dispute

8:23

about the down seats are closing our

8:25

and it's not miner or it as

8:28

a hundred and nine million dollars Just

8:30

so does a very big number. ah

8:32

and of almost unprecedented. So.

8:34

Where'd it seems would get this hundred

8:37

nine million dollar figure? So

8:39

that see seem to understand

8:41

about the transaction is that

8:43

when kings would buys season

8:45

part they're actually buying to

8:47

businesses. One is the grocery

8:50

store which we've been talking

8:52

about. ah but also. Say.

8:54

Smart owned a stake in

8:56

another company which was a

8:58

food wholesaler distributor. Which basically

9:00

means to deliver groceries time.

9:02

There is grocery stores to

9:04

sell. That

9:07

business was called Ss Eye

9:09

and Say Mart owned fifty

9:11

percent of it. Now remember.

9:13

This deal with get free. Cash

9:16

free. So that meant

9:18

that when they sold to King's

9:20

what does family owners while they

9:22

were responsible for any outstanding debts.

9:24

So on as a sigh which

9:26

is the distributors balance sheets it

9:29

had his own death of a

9:31

hundred and nine million dollars and

9:33

so that was just his own

9:35

dead from its own operations And

9:38

so the dispute is this as

9:40

a side had it's own deaths

9:42

and said mart said oh we've

9:44

already accounted for that are on

9:47

our own financial statements from that

9:49

is what you kings would have

9:51

bought and there's no reason to

9:53

independently say. It's something that we

9:55

have to account for. Ah, and Kingswood

9:58

says no, In fact, the way. Contractors

10:00

written is that any dad had

10:02

any trademark company or subsidiary of

10:04

counts as a liability which you

10:07

need to pay for and you

10:09

need to come up with that.

10:11

Four hundred and nine million dollars.

10:14

Let's. Break this down even more because

10:16

there's an accounting part to the story

10:18

and a legal part. To this

10:20

story. So lipstick, Accounting part

10:23

First, Eventually.

10:25

Same. Rights as that based on the accounting

10:27

methods that they use to. keep their bucks.

10:30

The death of the distributor they

10:32

partially own ss I is already

10:35

baked into a single line item

10:37

on their balance sheets. And

10:40

that single line represented

10:42

the net value of

10:44

that subsidiary. Basically was

10:46

the assets mars liabilities.

10:48

Pretty straightforward stuff. nothing

10:50

unusual about that. Now

10:52

Sir Tom's the legal part of this.

10:55

Kings. Would take the close read

10:57

of their merger agreement. Their contract

10:59

the St Mark's and says. Wait

11:02

a second. the and things would

11:04

after closing Ended up calling this

11:06

technicality when he said hey look

11:08

at a size books it has

11:10

one hundred minute hold that on

11:12

the Us I books and in

11:15

fact the merger contract says you

11:17

the family have to pay off

11:19

all the trademark group that for

11:21

the steel to close on track

11:23

terms and maybe it's double counting,

11:25

Maybe it's not. but it doesn't

11:27

matter because it's not. Clearly

11:30

written and therefore we're going to coldest

11:32

reality and you're going to peel off.

11:37

Okay, so the pitch name is essentially

11:39

receive a one hundred and nine million

11:41

dollar bill from Kings. What? How

11:44

do they react to that? I. Think

11:46

said pal from my various conversations

11:49

with. Those. People involved are

11:51

overseas. Soft. See that

11:53

they would not have signed an agreement that

11:55

had them writing a check to rub to

11:57

the buyer. That doesn't make sense. Wouldn't piss

11:59

wind. by your house typically, right? Not

12:02

surprisingly, the two sides, Kingswood and Safe

12:04

Mart, can't agree on an outcome

12:06

on their own. So they take

12:08

this dispute to an arbitrator. So

12:11

Suji, how does the

12:13

arbitrator rule in this? So

12:15

the arbitrator, who is a former

12:18

Delaware judge, an expert

12:20

in corporate law, in fact

12:22

sides with Kingswood and agrees.

12:24

What? He does, yes. How?

12:28

How does he do that exactly? There's like

12:30

these two competing schools of thought that collide

12:32

in this case, which is what does the

12:34

actual contract say, the words and what does

12:36

it literally say? And

12:38

then what did the parties actually want to do? What

12:41

is the spirit of this agreement? And

12:43

in a perfect world, those would be perfectly aligned. The words

12:45

in the contract would say exactly what the deal that they

12:47

want. When they don't, a

12:50

judge has to say which one actually prevails. Is

12:52

it the words on the page or is it

12:54

like what they were like really trying to solve

12:57

for? And in this

12:59

instance, the judge or the arbitrator says, in

13:02

fact, the words on the page lead

13:05

me to believe the $109 million

13:07

falls into this formal definition of

13:09

indebtedness. It needs to be

13:11

brought into the transaction. And therefore the

13:14

family needs to send back the $109 million

13:16

to the private equity firm. So

13:20

the pitch and EMI seem backed into a

13:22

corner over this contract technicality,

13:25

but the battle isn't over yet. Coming

13:29

up, Sajit lays out what's

13:31

next and what other companies

13:33

can learn from the fiasco. With

13:44

the FT News briefing, get caught up on what's

13:46

important in the time it takes to drink your

13:48

coffee or tea. Our 10

13:50

minute podcast runs down the biggest stories

13:52

of the day, whether it's interest rates,

13:55

AI or private equity. If

13:57

you're one of those who were hoping for rate

13:59

cuts. then this looks like

14:01

bad news. The idea that

14:03

private equity is gonna die is probably

14:05

a little bit extreme. Tune

14:08

in every weekday to get a handle on

14:10

the latest business news. Before

14:17

the break, we heard the arbitrator's decision. They

14:20

ultimately sided with Kingswood. The

14:23

PE firm then got that decision blessed as

14:26

binding by a Delaware court. That

14:29

was the second nail in the coffin for the

14:31

Piccininis. But

14:33

the family isn't done fighting this dispute

14:35

yet. Their next stop

14:37

is the Delaware Supreme Court. So,

14:40

Suji, what

14:42

happens if this arbitration decision

14:45

is upheld by that court?

14:48

Does that mean that the Piccininis

14:50

have to pay Kingswood to take

14:52

their business essentially? They

14:55

have to do that and they will pay interest as

14:57

well in the 109 million because the transfer of money

15:00

is taking more time than the time of the decision.

15:02

So they are bearing the costs

15:04

of obviously not just their lawyers, but the

15:07

interest as well from delaying

15:09

the payment. And in a high interest

15:11

rate environment, that number is probably just

15:13

taking off. That's exactly right. Yeah, no, yes.

15:16

Yeah, yeah. What, in

15:19

your opinion, would have solved or

15:21

stopped this dispute from happening? Just

15:24

better contract writing, better

15:26

contract reading. Yeah,

15:28

I mean, it sounds like

15:30

there should have just been a more

15:33

explicit conversation before the closing on

15:36

saying, hey, SSI has this debt.

15:39

It's actually incorporated already in the SaveMart

15:41

balance sheet in this one equity line.

15:44

Therefore, it doesn't need to be accounted

15:47

for somewhere else or brought onto the

15:49

balance sheet for the purposes of the

15:51

purchase price calculation. SaveMart

15:54

and the family say, in fact, we had all

15:56

these discussions and there was no controversy and it

15:58

was all out there. There's emails

16:00

and financial statements flying

16:02

back and forth where everyone agreed on this

16:05

treatment. But

16:07

obviously, Kingswood felt differently. So

16:10

why did Kingswood wait until

16:12

after the deal closed to

16:14

say anything? So the

16:16

Save Mart lawyers asked the Kingswood executives

16:18

in depositions, why or how did

16:20

this $109 million issue come up after the

16:22

deal closed? And they both

16:24

said that, in fact, Kingswood knew all along

16:27

before the deal closed that the $109 million

16:29

was going to be an issue. But

16:33

they decided to stay quiet because

16:35

they thought it was

16:37

something that was better handled after closing and

16:40

the negotiations were already tense and

16:43

this would just raise the temperature.

16:47

And it was within

16:49

their rights to stay quiet because there

16:51

was this post-closing mechanism. So

16:53

that is all

16:55

interesting and theoretically correct. But

16:58

their answers, again, go back to the social

17:00

aspect of dealmaking. It

17:04

was contentious before closing, already did. It

17:06

certainly bringing this up after closing was

17:08

not going to lower the temperature. So

17:11

in some ways, it sounds like Kingswood

17:13

has made a great deal here. They're

17:16

going to get this windfall from this $109 million. I'm

17:21

curious, what do you think

17:23

this does for Kingswood's business in the long

17:25

term? Do you think that this is

17:27

showing other people what

17:29

savvy dealmakers they are or

17:32

what exactly? Obviously, having

17:34

an extra $109 million coming in is

17:36

going to be a huge victory

17:39

and seems like a great trade

17:42

for them with their canny lawyering

17:44

and accounting. But they

17:47

want to be in business for the next several

17:49

years and raise new funds and buy new

17:52

companies. And when they go out

17:54

and enter auction processes, sellers are

17:57

choosing between a bunch of private

18:00

firms who all look the same.

18:02

So there very much could be

18:04

some kind of reputational blowback as

18:06

Kingswood, oh, is that firm that

18:08

called that accounting technicality and made

18:10

off with $109 million against that

18:12

grocery store family in California, do

18:14

we really want to sign a

18:16

contract with them? And that is

18:18

something Kingswood I think is going to have to

18:21

confront and think about. And it

18:23

will be really interesting to see how it is

18:25

they respond to

18:28

this going forward. The Piccininis, as

18:30

you said, there was a

18:32

lot of due diligence that went into this

18:34

on both sides. The

18:37

family patriarch at one time

18:39

was on the four billionaires list. These

18:41

are not totally naive people. They

18:44

did not follow the turnip

18:46

truck. Yeah. So and

18:49

even they ended up kind of getting

18:52

duped in this situation. So I'm curious,

18:55

what can other business owners

18:57

with less experience learn

18:59

from this story? Typically

19:02

in an M&A transaction,

19:04

the buyer and seller

19:06

are both like ultimately

19:09

aligned. And even if the

19:11

negotiation is tough at the closing,

19:13

they're both happy, right? Because the seller is

19:15

getting money, which they want, and the buyer

19:17

is getting a business that they want. So

19:19

for that reason, sometimes I think maybe then

19:21

the parties are not

19:23

as careful

19:26

or as fastidious as they should

19:28

be, because they just don't

19:31

envision a scenario where they're

19:33

going to be potentially exploited.

19:36

And again, this whole reputational point, if

19:38

you're like a person that's known for

19:40

exploiting counter parties, you're

19:42

potentially going to pay for that down the road. So I

19:45

think there's real question marks for both sides

19:47

about how they should feel about how

19:50

this all went down. Sujit,

19:54

thanks For being here. Thanks for having me. Money

20:13

is hosted any become legendary

20:15

Sofia Athlete is our producer.

20:17

Cooper Forehand is an executive

20:19

producers sound design and mixing.

20:21

They can't even. Sell

20:24

family as the Global Hot Hot. Thanks

20:28

for listening Seen a freak? Hauling

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