Tick-tock: How Cubic decided on its sale to Veritas & activist fund

Veritas Capital and its activist hedge fund partner kept up their pursuit of Cubic Corp. over the course of five months and they apparently were quicker to act than the other prospective bidder.

Just like with Perspecta, roughly five months went by between when Veritas Capital and an activist hedge fund partner first approached Cubic Corp. about a deal and when the deal was finally sealed.

San Diego-headquartered Cubic also received one other formal written offer to acquire the company as it was trying to determine its future.

But there were too many red flags in that bid for Cubic Corp.’s board of directors to consider and the Veritas-led team was quicker to act, according to a regulatory filing posted Monday.

Veritas and the private equity arm of Elliott Management, the activist investment group led by Paul Singer, are acquiring the publicly-traded Cubic for $2.2 billion in cash. They all expect to complete the deal in the second quarter, pending regulatory approvals and a vote by Cubic’s stockholders. The company will then become privately held.

Cubic’s proxy filing that details the entire process, of which we clipped the relevant 25 pages here, is a required disclosure they must make ahead of a stockholder vote on the Veritas-Elliott proposal to acquire the company and take it private.

What comes out clear in the tick-tock descriptions of how the agreement came about is how Veritas and Elliott kept at it from their initial offer ranges in September to final signatures in February. The first non-binding indication of interest valued Cubic at $60.00 per share.

The final valuation ended up at $70.00 per share, or a 58-percent premium to the stock price when Elliott first revealed its stake in and intention to acquire Cubic in partnership with a then-unnamed private equity firm.

Cubic’s board knocked back the initial offers, but in October said it would be willing to add one more independent director in exchange for a one-year standstill agreement that governs and limits how takeover bids could be started. Elliott knocked back that proposal too.

Given Cubic’s status as publicly-traded, the board on Sept. 30 directed its financial advisers to start a targeted outreach to any selected party viewed as potentially interested in a transaction. Veritas and Elliott in the next month all signed non-disclosure agreements and got access to some due diligence materials.

An unnamed “Strategic Party C” also entered the picture in early October and was the lone other party to give written proposals to acquire Cubic. Strategic Party C’s first proposal of $63.00 per share in cash went to Cubic on Nov. 12.

There was one catch to that bid: it was primarily focused on Cubic’s transportation business and subject to a review by the Committee on Foreign Investment in the U.S. The bid would require a partner to buy Cubic’s defense business. No names of partners were provided then.

The proxy filing’s section outlining the board’s rationale for the sale indicates that whomever Strategic Party C was, they had not lined up a partner to acquire the defense business or lay out how regulatory approvals would be obtained in the absence of the partner.

One other concern the board had: “Strategic Party C had not yet provided a mark-up of or otherwise meaningfully engaged on the merger agreement.”

Whomever Strategic Party C was did continue making offers that topped off at a range of $72.00-$75.00 per share in cash provided to Cubic on Jan. 21. That proposal said they would be the only counterparty in any documentation regarding the deal and would not make completion conditional upon lining up a partner to buy the defense business.

But the long and short of it is that Strategic Party C asked Cubic on more than one occasion to grant them additional time to get through the necessary workstreams. Hence that disclosure of Cubic’s board having never received a mark-up.

Veritas and Elliott first learned on Jan. 31 that they were not the only ones seeking to win the race for Cubic. One week prior to that, Cubic’s financial advisers told the board that further delays to let Strategic Party C continue on its workstreams may cause Veritas to end the pursuit.

Three other concerns came up in a Jan. 21 board meeting. Their position was that Cubic should continue paying dividends up until closure, Veritas brought in some execution risk by requiring some third-party consents and license transfers, and then this:

“Veritas was introducing potential regulatory risks by seeking the ability to engage in certain transactions in the company’s industry during the pendency of the merger.”

It just so happens that Veritas also began due diligence activities in January in the lead-up to its acquisition of Perspecta.

Everyone obviously got past that issue. Veritas’ final offer of $70.00 per share was given verbally to Cubic on Feb. 2.

On Feb. 3, Cubic gave Strategic Party C a deadline of Feb. 7 to submit a revised proposal or mark-up of a merger agreement. Then on Feb. 6, Strategic Party C said it could not meet that deadline.

Then we all found out on Feb. 8 that Veritas and Elliott won the race for Cubic. That means two public company take-private deals for Veritas got to the finish line two weeks apart.