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A great deal for Onex holders, not so for those at EMS

It's the cost of doing a deal: Announce the sale of a public company, even at a healthy premium of 50 per cent to its market price, and expect lawsuits alleging the price isn't high enough.

Indeed, Emergency Medical Services Corp. of Greenwood Village, Colo., and its controlling shareholder, Toronto's Onex Corp., are going through the drill with the sale of EMS to a private equity firm, as they face nearly a dozen lawsuits. They have a problem that other deal makers don't, however: The deal to sell EMS to private equity firm Clayton, Dubilier & Rice is for a 10-per-cent discount, not a premium.

Why would EMS agree to a deal at a discount to market? The company's proxy circular to shareholders reveals it was the best offer on the table. But, as the plaintiffs note, Onex will get a near-tenfold return of its investment at the announced price of $64 (U.S.) per share, while some recent purchasers of the stock will end up underwater. The dichotomy raises questions about whether the EMS board adequately represented all shareholders.

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"Was the company for sale, or was Onex's stake for sale?" asks analyst Bill Kavaler of Oscar Gruss and Son Inc. "If the company is for sale, the board's job is to find the best price and perhaps to decide the price available now is insufficient. If Onex's stake is for sale, Onex can do whatever they want - however, the board is not obligated to facilitate Onex's exit from their investment."

EMS has two health-care businesses. It is the largest provider of ambulance services in the United States through its American Medical Response, Inc. subsidiary, and it operates a physician-outsourcing company EmCare Holdings Inc.

According to EMS's proxy, the full board launched the sale process in early November, right after an earnings miss shaved 4 per cent off the company's shares, bringing them to $52.80 apiece. Roughly a dozen potential buyers were contacted.

Despite the company's attempts to keep the process quiet, its stock showed "unusual activity" in early December, so EMS publicly acknowledged it was reviewing strategic alternatives. The shares zipped to $63, and began climbing higher as analysts offered their estimates of what a likely take-out price would be.

We are surprised that EMS did not command a premium valuation, given its long-term growth opportunities from acquisitions and health-care reform. Oppenheimer & Co.

The plaintiffs in one of the shareholder suits against EMS cite four analysts who cited prices of $70 or higher, and three who expected an enterprise value-to-EBITDA multiple of nine or 9.5 times their EBITDA estimates.

Instead, the $64-per-share purchase price was about eight times EBITDA, according to Oppenheimer & Co. Inc. "We are surprised that EMS did not command a premium valuation, given its long-term growth opportunities from acquisitions and health-care reform."

The problem? Apparently, none of the potential buyers agreed. The half-dozen expressions of interest received by EMS ranged from $59 to $65, with the high bidder ultimately dropping out. By February, Clayton, Dubilier & Rice was offering $63 per share as one of just two bidders. The EMS board's attempt to get $65 per share from either of the two failed.

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The board considered whether it should proceed at a below-market price, concluding that if it halted the sale process, the stock "would decline to substantially below" the current price and not rebound "for a significant period of time." (EMS spokeswoman Deborah Hileman declined to comment on the shareholder lawsuits, but the company's proxy says it believes "all of the allegations in the [suits]are without merit.")

Says Mr. Kavaler, the analyst, "You could argue the market got ahead of itself, but I argue the board showed, at best, an amazing lack of creativity, vision and understanding, and at worst they were buffaloed by a majority shareholder." The board should have investigated borrowing $900-million to buy out Onex's stake, Mr. Kavaler says, which would have the added benefit of extinguishing Onex' super-voting rights.

As it stands, Onex, with a 31-per-cent economic stake, will use its 81 per cent of the votes to back the Clayton, Dubilier & Rice bid. "This is an excellent outcome for Onex's shareholders and limited partners," Onex managing director Robert Le Blanc said in a statement. Onex acquired its stake in 2005 for $214-million and will receive $1.65-billion, including the proceeds from a pair of stock offerings in 2009. (Spokeswoman Emma Thompson declined to comment on the shareholder lawsuits.)

EMS says "the board of directors did not believe that the company's current financial situation or near-term future prospects indicated a need to sell the company." The non-Onex shareholders are entitled to wonder why, then, EMS took a below-market price.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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