TravelCenters of America’s latest rejection of the acquisition offer made by convenience store operator Arko revealed the two companies have a history — and it isn’t a good one.
TA’s latest rejection of Arko (NASDAQ: ARKO) and its determination to be acquired by major oil company BP (NYSE: BP) was delivered in a letter to Arko CEO Arie Kotler and general counsel Maury Bricks and filed with the Securities and Exchange Commission.
TA’s (NASDAQ: TA) management repeated concerns it has expressed before about Arko’s ability to finance an acquisition at a $92-per-share price, higher than the BP offer of $86. (The letter also revealed that the next highest offer after BP, when TA was actively seeking buyers, was $68 per share.)
But the letter also said that part of TA’s concerns is rooted in a collapsed deal from 2018.
“Execution risk with Arko is of paramount concern to the TA Board,” the company wrote. “Our concern regarding execution risk is augmented by TA’s own prior experience with Arko on another deal.”
According to the letter, TA was selling stand-alone convenience stores in 2018 to focus on its travel centers. “After the opportunity to conduct due diligence, Arko made a high bid and then substantially reduced its bid when it was time to commit. The Board worries Arko will do the same here and that, if Arko is successful in derailing the BP transaction, TA shareholders will lose out on a real deal at a substantial premium to what may be otherwise achievable.”
TA’s letter said that Arko’s continued calls for more TA cooperation in providing due diligence should not be necessary, as TA is a public company with a proxy on file with the SEC that spells out five-year projections. That fact “creates even more execution risk for TA shareholders,” the letter said.
And in a zinger aimed at the David and Goliath nature of the BP versus Arko battle for TA, TA’s directors noted that Arko “has never before acquired a public company or engaged in a transaction of the magnitude of the proposed transaction with TA and this inexperience also concerns us.”
There is a roughly $100 million difference in the offers between BP and Arko for TA. The BP offer for the 15.1 million shares of TA comes in at about $1.3 billion. Arko’s total is roughly $1.4 billion.
Another revelation in the letter is that with BP giving its approval, Arko and TA executives did “engage” last Wednesday.
The results of that meeting can be seen in the TA letter and its criticism of two parts of the Arko offer that have been raised previously: Arko’s funding for the deal — the size of the bid for TA is worth more than the entire capitalization of Arko — and Arko’s efforts to bolster its credit standing in light of its less than investment-grade debt rating.
TA criticized Arko for not securing a bridge loan that would allow it to close an acquisition. “Typically, a party with a credit profile like Arko’s provides the board of a public company target with funding assurance by securing an immediately available bridge loan financing commitment,” TA’s directors said in the letter. But Arko hasn’t done that and TA said it has no plans to do so.
The letter went on to criticize Arko’s plans to cobble together financing from several different sources, including using the $416 million in cash on TA’s balance sheet.
Arko’s plan to strengthen its credit profile in light of its credit rating was spelled out by the company recently when it proposed to partner with an unidentified investment-grade insurance company. But the TA letter criticized the proposal, saying that TA was not told of the identity of the insurance company and that a meeting with it would not be set up by Arko.
After recapping the history and its issues with the current bid, TA said it is “confident that shareholders will not be distracted by Arko’s highly conditional finance proposal.” Selling the company to BP “is in the best interest of shareholders and maximizes shareholder value,” the directors said, closing the letter by repeating its recommendation that shareholders vote to back the BP bid.
The letter did not mention the objections of SVC (NASDAQ: SVC), the landlord for the properties where TA’s service centers sit, or the opposition of RMR (NASDAQ: RMR), which is a consultant to TA. Together, the two companies own 11.9% of TA and are backing the takeover by BP.
A special meeting of shareholders to approve the acquisition of TA by BP is scheduled for May 10. The deal is projected to close May 15.
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