Activist shareholders, proxy advisory firms and analystsremain unsure whether a prolonged proxy battle could arise in a complextri-party merger after the largest shareholder of saidit would vote againstthe transaction without considerable modifications to the pending deal.
The announcement by MSD Partners LP and MSDCapital LP served as the latest hit to a that would unite NorthStarAsset Management, NorthStarRealty Finance Corp. and Colony Capital Inc. under the new name Colony NorthStarInc. MSD Partners and MSD Capital, which manages the capital of Dell Inc.founder Michael Dell and his family, owned a 10.2% stake in NorthStar AssetManagement's outstanding common stock as of Sept. 19, when the investment firmsent a letter to the company outlining its concerns. Frustrated by a structureit described as falling short of "good governance norms," MSD Capitalsaid the combined entity's deficiencies could limit investors' ability toachieve full valuation for their shares in the new company.
Through a spokesman, MSD Capital declined to comment furtheron the matter.
The letter may help build momentum among shareholders toblock the merger following pledges by two others in recent weeks to stifle the combination, whichcould create the world's fifth-largest independent real estate managementcompany, according to the companies. Activist investor , which has nominated six directors to the NorthStar AssetManagement board, said Sept. 7 that it will not support the merger. Weeksearlier, Abrams CapitalManagement LP, NorthStar Asset Management's third-largestshareholder, took a similar position.
The merger attempt comes roughly two years after NorthStarAsset Management was spun off from NorthStar Realty Finance. As part of thattransaction, NorthStar Asset Management entered into a 20-year externalmanagement contract to manage NorthStar Realty Finance.
Jessica Levi-Ribner, an analyst with FBR Capital Markets,described the contract as onerous in the event that the tri-party dealcollapses. To buy back into the contract, it will cost NorthStar Realty Financebetween $1 billion and $1.3 billion to compensate NorthStar Asset Management,and an additional $450 million to $550 million in taxes, FBR estimated.
Levi-Ribner considers the sum of the three companies worthmore than the individual components due in part to the prohibitive buyout. InJune, she upgraded shares of both NorthStar Asset Management and Colony Capitalto "outperform" from "market perform."
While Keefe Bruyette & Woods analyst Ann Dai said theproposed transaction could be preferable for investors in comparison with thestatus quo, she emphasized that management could improve their chances bycrafting a more coherent core business model. Increased disclosures ontransaction costs and concessions on change-in-control payments could also helpsway investor sentiment, Dai suggested.
"We believe the situation remains fluid," the KBWanalyst wrote in a Sept. 19 note to clients.
The tri-party deal could face another hurdle in garneringsupport from shareholders as outgoing company executives depart withcompensation packages that could be viewed as overly generous. Five members ofNorthStar Asset Management's executive team, including Executive Chairman DavidHamamoto, could be compensated with combined golden parachute payments inexcess of $223 million, according to a July 28 proxy statement. Hamamoto couldreceive $86.3 million in equity compensation, while CEO Albert Tylis and ChiefInvestment & Operating Officer Dan Gilbert could receive $52.8 million and$45.3 million respectively, the filing shows.
"[Hamamoto's] compensation is off the charts of anycompany I've been involved in," said Jonathan Litt, chief investmentofficer at Land & Buildings. "I've never seen numbers like this."
Kevin McManus, vice president at Egan-Jones, said that whileproxy advisory firms employ different models for determining the sizes ofgolden parachute payouts, the industry standard is typically 3x an executive’snormal payout from the previous year. Hamamoto earned $20.4 million in totalcompensation in 2015.
Officials from NorthStar Asset Management did not respond toa request for comment.
If the merger goes through, Colony Capital founder TomBarrack will become executive chairman of Colony NorthStar, while CEO RichardSaltzman will assume the same title with the new company. NorthStar AssetManagement's Hamamoto would become executive vice chairman.
FBR's Levi-Ribner anticipates that a vote could be held atsome point in early to mid-November.