KKR/Circor: congratulations, your underbid has won the deal

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More money, more problems. That is the view of the board of directors at Circor International, a US industrial company. Earlier this month, it acceded to a $1.6bn go-private buyout from KKR. A rival offer has emerged, however, from a smaller private equity group, Arcline Investment Management. On Wednesday Arcline made a bold bid, 12 per cent higher per share than the latest KKR deal price.

The Circor board had already rejected a previous Arcline bid, modestly higher than KKR’s original pitch. Earlier this week, Circor had wrung a small bump from KKR relative to this.

KKR dealmakers also offered to fund the entire deal in equity to avoid any closing risk. That meant more to Circor earlier in the week, when the gap in the bids was just a couple of bucks per share. But the spread has now opened to $6 per share, worth more than $100mn in aggregate, leaving directors with a tougher dilemma.

Financing risk in M&A has largely evaporated since the 2008 financial crisis. Buyers arrive with legal commitments from the banks that provide bridge loans. Arcline says it has guaranteed loans from Bank of Montreal. Even in last year’s messy case of Elon Musk acquiring Twitter, a group of banks appeared at the closing to fund $13bn of buyout debt. 

In a filing, Circor revealed it had concerns that Bank of Montreal would have trouble syndicating acquisition debt. That pushed it to favour KKR. Yet that risk belongs to the Canadian lender, not Circor or Arcline. In a worst-case scenario, the bank would simply have to absorb losses on its own balance sheet.

Arcline’s blowout price, an 80 per cent premium, is based on cost savings and other benefits earned with an existing portfolio company. As such, regulators may have competition concerns, another reason Circor cites as favouring KKR’s bid.

Even so, it looks very odd for a winning bid to be so much lower than the losing offer. Circor shareholders should test the logic of the board unwaveringly.