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Shareholder protest could 'in theory' block Lake Capital's buyout of Engine

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By Tony Walford, Founder

August 21, 2014 | 3 min read

Earlier today it emerged that Lake Capital had extended its offer for the proposed £100m buyout of Engine Group for around a week, after a group of external shareholders rejected the offer.

Engine Group has since said that is is confident it will be able to continue as planned with the deal.

However, below analyst Green Square's Tony Walford has outlined why the deal could in theory be blocked.

If the minority external shareholders can, as a group, ensure at least 25 per cent of the overall shareholders refuse to accept the offer then the deal in theory could be blocked.

If I was Lake Capital (and depending on how tight my metrics were in structuring the deal) I would increase the offer I was making to those dissenting shareholders in the hope that enough may decide to accept it to get it over the line.

However, if that 29 per cent consists a tightly bound group acting in concert - which it may well do as it comprises a number of individuals who sold their companies to Engine previously - this may prove tricky.

However it pans out, for Lake Capital to be accused of discriminating between different shareholders dependant on what value they are perceived to be to Engine going forward is not ideal reputationally.

That said, as we understand the employee shareholders are getting shares in the new entity instead of cash, this is different in nature and has higher risk - those shares may never be converted to cash, particularly if the debt levels increase as the group grows and the equity layer gets eroded - which can, and sometimes does, happen.

Regardless of this, the amount that is being offered per share to the ex-employee shareholders is significantly below that others have exited at previously and it is obvious why these shareholders will be very unhappy with this situation.

I will be very surprised if some accord isn't reached and would expect to see this deal complete. If it falls over, there will be a lot of question marks over what next for Engine.

Tony Walford is a partner at Green Square, corporate finance advisors to the media and marketing sector.

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