Benzinga | Jun 2, 2021 07:58AM EDT

MDC Partners Special Committee Releases Letter In Response To Indaba Capital Management (Full Letter)

The Special Committee of Independent Directors of MDC Partners Inc. (NASDAQ:MDCA) ("MDC Partners" or the "Company") today released the below letter in response to Indaba Capital Management, L.P. ("Indaba") and the letter it sent on May 26, 2021 regarding the proposed business combination (the "Proposed Transaction") involving MDC Partners and Stagwell Media ("Stagwell").

Dear Mr. Schrier,

We received your letter dated May 26, 2021, regarding the proposed business combination transaction between MDC Partners ("MDC") and Stagwell Media ("Stagwell").

While we have appreciated our dialogue over the past months, frankly we are surprised that you continue to misunderstand our process, the negotiation history, the strategic rationale for the transaction and the significant value the transaction has, and we believe, will continue to create for MDC shareholders.

We understand your desire to own an even bigger part of the combined company. However, the Special Committee worked for months to negotiate the best transaction possible for MDC shareholders. Notably, after many hard negotiations which achieved substantial increases in value for MDC shareholders, we were told by Stagwell that it was unwilling to provide MDC shareholders with more. We have no doubt that the resulting transaction is in the best interests of MDC shareholders.

In the meantime, MDC stock has rallied from $1.15 per share -- before Stagwell publicly indicated its interest in combining with MDC in June 2020 -- to nearly $5 per share now. This price movement is the hallmark of a transaction that has been well received by shareholders broadly. The transaction has already, and we believe likely will, continue to create value for MDC shareholders. Rarely, in our experience, does a stock quadruple during negotiations and announcement of a large acquisition; even more unusual is for a shareholder to oppose such a deal. MDC's stock price closed at a three year high of $5.46 per share on May 20, around the same time that your firm paradoxically was complaining that the transaction did not provide sufficient value to MDC. Once you privately and publicly indicated your intention to vote against the deal, the stock declined as shareholders began to fear that this accretive transaction may not be approved. We believe a rejection of the transaction would be a mistake and would leave MDC a weaker company, and its stock less valuable, than if the deal were completed.

To put a fine point on it, we believe your concerns about the transaction are unfounded and misguided. Our sound and robust process, vigorous negotiations, strategic rationale and the opportunities for value creation are undeniable:

* The Special Committee Was Created to Mitigate the Conflict of Interest -- You are correct, of course, that Mr. Penn is both the Chairman and CEO of MDC and the Managing Partner of Stagwell. As a result, within hours of Mr. Penn proposing a business combination transaction involving MDC and Stagwell, the MDC Board empaneled a Special Committee of independent directors to ensure the interests of MDC's public shareholders were protected. The Special Committee negotiated with Stagwell for many months on behalf of MDC shareholders, from an arm's length perspective, with the advice of independent financial advisors and its own lawyers. Your claim that Mr. Penn was "rooting" for Stagwell is not news to our Special Committee: Mr. Penn was always seen by the Special Committee as our counterparty, and we negotiated against him vigorously. This Special Committee approach is a conventional, well-understood solution to conflicts of interest that arise in dozens of merger and acquisition transactions every year, including every management buyout.

* The Transaction Was Negotiated Over Many, Many Months and Achieved an Attractive Result -- As described fully in our proxy statement, the Special Committee engaged in a vigorous negotiation process and achieved a favorable outcome for MDC shareholders. The transaction was negotiated between the Special Committee and Stagwell over a six-month period. During that time, the Special Committee conducted extensive diligence on the Stagwell business and sought, and received, significant improvements in the economics and transaction terms. Importantly, the Special Committee understood the economy would recover from the pandemic, took account of both risks and opportunities to both companies and critically evaluated projections and assumptions offered by Stagwell. The final deal was the result of dozens of negotiation sessions and consideration of various scenarios for future performance of both businesses, aided by independent financial advisors and counsel. As described in our proxy statement, two independent financial advisors to the Special Committee rendered opinions that the percentage ownership of New MDC to be held by the holders of the MDC common shares upon completion of the Transaction is fair, from a financial point of view, to such holders (other than Mark Penn, Stagwell, Goldman Sachs and their respective affiliates).

* The Strategic Merits of the Transaction Are Undeniable -- The transaction has financial and strategic merit, providing MDC with capabilities, scale, growth, cash flow and substantial deleveraging it cannot achieve independently. There are benefits to MDC from cross-selling, cost savings and market positioning opportunities that can uniquely be achieved through a combination with Stagwell. MDC, which has struggled for years to grow and which has never attracted viable strategic interest (despite multiple strategic review processes), will be a scaled, relevant and growing business once again after this combination. The new MDC will have manageable leverage, new digital capabilities and the ability to truly compete against the big four ad holding companies for the most lucrative marketing assignments from global clients.

* The Transaction Creates Value for MDC Shareholders -- As noted, MDC stock has reacted very favorably to the transaction, appreciating significantly as shareholders have come to understand the strategic merits and opportunities of the combination, including $30 million in identified run-rate cost synergies. We believe MDC's stock price would not be at these levels in the absence of the Stagwell deal because the market recognizes the unique merits of this combination. Obviously, we would all prefer an even higher stock price, but we certainly do not regret that the stock has quadrupled since the start of our negotiations with Stagwell, on significantly increased volume and with substantial, new investor interest.

We understand you would prefer more. We have a counterparty in Stagwell that has a strong business and has insisted on receiving a fair value for its contributions to the combined company. Notably, the economics of this transaction have been public since early October, and the Company has not received a single inquiry about an alternative transaction during that time.

You are, of course, welcome to exercise your voting rights in any manner you wish. We firmly believe that voting against this transaction is a mistake and risks leaving MDC in a much weaker position, with too much leverage and too little scale, and without the critical digital capabilities to compete in the future.

We are pleased with the reception to the transaction that we have received from shareholders large and small and are disappointed that your desire to have a greater stake in the combined business is seemingly blinding you to the significant merits of the present deal, as well as the value it has already created, and is putting the transaction at risk for all MDC shareholders.

We encourage Indaba to reconsider its stated opposition and join with other MDC shareholders to vote FOR this combination.

Sincerely,

The Special Committee of the Board of Directors of MDC Partners