November 26, 2009 / 7:11 PM / 10 years ago

DEALTALK-Cossette value double since putting itself on sale

(For more Reuters DEALTALKS, click [DEALTALK/])

* Cossette showdown comes next month

* Company could face all-or-nothing challenge

By Pav Jordan

TORONTO, Nov 26 (Reuters) - Saying “no” to a hostile bid has virtually doubled the value of Cossette Inc KOS.TO and set the stage for a showdown next month between two private equity firms wooing Canada’s biggest home-grown ad agency.

Stock in the Quebec-based company languished at C$3.25 a share, close to an all-time low, when Canadian private equity firm Cosmos Capital took a first run at the company in July. Its C$4.95-a-share offer valued the agency at C$78.2 million ($73 million).

Cossette responded by putting itself on the block and hiring Bank of Montreal (BMO.TO) to drum up suitors. It now trades at over C$8 a share as bids or proposals — there have been five so far — keep getting higher even as struggling global markets keep advertisers in a trough.

“The board did its job,” said one observer, commending Cossette decision makers for not seizing the first bid to come along.

As recently as in 2007 Cossette stock was worth almost C$14 a share, but that was before it lost some key accounts and before most of the modern world entered recession.

The agency has offices in Britain, the United States and China, as well as Canada. It has a major presence in the French-speaking province of Quebec, a difficult market for foreign companies to crack.

But the battle for control has become increasingly acrimonious, and Cossette’s challenge is to identify the best bidder, without ruining the chances of a deal.


The two bids currently on the table are each worth C$7.87 a share, one of them from U.S private equity group Mill Road Capital and the second from Cosmos, whose principal investors include two Cossette founders.

Cossette’s management recommends the Mill Road offer, which is already backed by 30 percent of shareholders. The proposal is not subject to due diligence and lets Chief Executive Claude Lessard keep running the company.

But Cossette, which serves major transnational clients, including McDonald’s, Bell Canada, General Motors and Coca-Cola, can’t consummate the deal.

Lockup agreements between Cosmos and two major shareholders give Cosmos control of more than 37 percent of Cossette stock, and an agreement needs 66 2/3 percent approval to go through.

To complicate matters further, Cosmos indicated in a private letter to the Cossette board that it might pay as much as C$8.10 a share provided it can see Cossette’s books.

Some shareholders want the board to entertain that offer.

“Their job is to maximize shareholder value. So how can they recommend shareholders accept C$7.87 a share, when there’s the possibility of C$8.10 a share?” a source at Cosmos told Reuters this week.

Some say Cosmos is on a fishing expedition, floating the chance of a higher bid without making an official offer.

“You have to remember this could go bad,” said one large investor in Cossette, painting a scenario where the board decides an C$8.10 Cosmos proposal may be superior, breaks the deal with Mill Road and pays the Greenwich, Connecticut-based investment firm a C$3.25 million break fee.

“And so they go with Cosmos and Cosmos gets into the data room and then they don’t like what they see and ... they walk, and then you have nothing.”

Investors vote on the Cosmos bid on Dec. 7 and the Mill Road deal on Dec. 18. ($1=$1.06 Canadian) (Reporting by Pav Jordan; editing by Janet Guttsman) ((; +1 416 941 8185; Reuters Messaging:

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