Did VenGrowth funds’ boards cast a wide-enough net?

By Dan Hallett, CFA, CFP on November 21st, 2010

The battle over the handful of VenGrowth labour sponsored investment funds and the New Generation Biotech LSIF is getting interesting.  (See our initial overview if you’re new to this story.)  It’s tough to say which way the vote will go but a couple of recent developments indicate that VenGrowth is worried that its preferred deal will be shot down.

VenGrowth has repeatedly stated that Covington II Fund Inc’s proposal to acquire its funds is the best deal (and the best manager) and that the funds’ boards of directors recommended Covington’s proposal only after vetting a few different offers.  Yet GrowthWorks Capital – one of Canada’s two LSIF consolidators – was not invited to make an offer.

Covington quickly improved its offer only after GrowthWorks entered the fray, promising  a sweeter bid.  Among other things, GrowthWorks committed to directly paying $5 million of the more than $28 million in termination and other lump sum payments that will be triggered under the Covington deal.

On November 19, Covington stepped up and announced it would also absorb $5 million of the termination fees.  I can’t help but wonder, however, what kind of deal VenGrowth funds’ boards could have negotiated if they actually invited all interested parties to the table.  Purposely excluding a firm that is willing, able and interested in doing a deal seems inconsistent with the boards’ responsibility to make reasonable effort to maximize shareholder value.

But there is more to the transaction costs than the termination fees.  There are liquidity provisions (for those wanting to exit the funds), ongoing management expense ratios, financing costs (which are rich under Covington’s proposal) and the quality of management (for those staying invested).  In a November 19 Research Bulletin to financial advisors, we recommended voting NO to the Covington deal partly in protest to what I viewed as a botched process.  But there are signs that VenGrowth is worried.

Within the last week, VenGrowth sent a second mailing to its shareholders urging them to approve the Covington deal and sending additional copies of forms.  They had been actively promoting a BMO Nesbitt Burns research report supporting the Covington offer.  (Note, however, that calling the Covington offer “sub-par” – as that report did – is  hardly a ringing endorsement.)

Most interesting, however, was an announcement made late Friday in an apparent attempt to block votes cast by financial advisors on behalf of their clients.  Ironically, GrowthWorks issued a release just one minute earlier updating the terms of its offer.  All votes must be received by Tuesday November 23 so that they can be counted for the November 25 meeting.  At that time, we will know the outcome.