The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The first BlackRock offer to purchase the Grand Bahama Port Authority (GBPA) was a “potential disaster” for both shareholder families, as it guaranteed they would receive just $37.5 million each.

Hannes Babak and Andre Feldman are alleging to the Supreme Court that, by removing two of the three trustees for the Hayward family trust, they saved both Sir Jack Hayward’s offspring and the St Georges from their own - and their advisers’ - imprudence.

Mr Babak, in a November 5, 2015, affidavit is claiming that the two dismissed trustees, Richard DeVries and Ian Barry, had negotiated a sales price that was just one-third of the GBPA and Port Group Ltd’s true value.

Both he and Mr Feldman argued that BlackRock’s terms, if accepted, could have left the Sir Jack Hayward Discretionary Settlement 1993 “insolvent” as the ‘guaranteed’ purchase price would have been insufficient to cover all the trust’s liabilities.

Outlining their rationale for engineering Messrs DeVries and Barry’s removal, Mr Babak alleged that BlackRock, the world’s largest private equity firm with $4.5 trillion in assets under management, came to the negotiating table in March 2015 via the St George family’s corporate advisers.

Mr DeVries led negotiations on the Hayward trust’s behalf, but Mr Babak and Mr Feldman alleged that they quickly became uneasy about an alleged lack of transparency and refusal to share information with them on the BlackRock talks.

“Things would seep out, but it was not clear what kind of deal he was negotiating,” Mr Babak alleged of Mr DeVries. “But it was clear he was spending a lot of time with Sarah St George and Andre, and I began receiving calls from our contacts in the GBPA asking us what was going on and suggesting that it looked like (from the number of meetings and calls taking place) a deal was imminent.”

Mr Babak alleged that Patti Bloom, the late Sir Jack’s long-time companion and (currently) main trust beneficiary, was in favour of fully selling its 50 per cent GBPA and Port Group Ltd stake - “but only at the right price”. Sir Jack, prior to his death, had been seeking $100 million.

Mr Babak, an ex-GBPA chair, claimed he had “real cause for concern” over the BlackRock acquisition once he received its ‘term sheet’ offer on May 9, 2015.

“Not only had Mr DeVries not been telling us how the deal he was negotiating was likely to be structured, but it turned out that what was being negotiated was a potential disaster for the [Hayward] trust,” he alleged.

“From what we understood, the basic deal structure had been agreed only subject to due diligence. We had to act fast to stop negotiations going any further.”

Rather than a straightforward ‘purchase for cash’, Mr Babak alleged that BlackRock would instead finance the deal via a ‘convertible loan’ equivalent to 50 per cent of the value of Intercontinental Diversified Corporation (IDC) - the holding company for the GBPA and Port Group Ltd.

The loan, converting into a cash payment to the Haywards and St Georges after three years, was seemingly set to come from a special purpose vehicle (SPV) or ‘HoldCo’ specifically set up for the GBPA deal.

Mr Babak alleged that it was unclear whether BlackRock actually owned the SPV, and its requirements that the two shareholder families secure the loan by pledging their shares was also deemed problematic.

The SPV would exercise voting rights over those shares, and receive interest at 8 per cent per annum via dividends from IDC (meaning the GBPA and Port Group Ltd.

BlackRock would pay a minimum of $75 million, and maximum of $150 million, to the Haywards and St Georges after those three years, with additional sums dependent on the GBPA and Port Group’s performance over the following three years.

Given the 50/50 ownership split, Mr Babak alleged that these terms meant both the Haywards and St Georges were guaranteed just $37.5 million each.

He based his argument that “this seemed like a low sum” on a 2011 valuation by Morgan Stanley, which said IDC and its Port Group subsidiaries were worth between $166-$224 million. If correct, that means the initial BlackRock deal was up to two-thirds below the GBPA’s true value.

“Moreover, the money would not be received for three years, leaving the [Hayward] trust with a huge period of uncertainty and illiquidity, and without any certainty its debts could be paid even when the money was received,” Mr Babak alleged.

“The trust would nevertheless effectively give up its shares on completion via the pledge despite not receiving any money upfront.

“In the meantime, BlackRock (assuming it was the HoldCo owner) would drain liquidity from IDC by means of the interest due on the convertible loan.”

BlackRock was also, as part of the deal, set to invest in the GBPA via $50 million worth of preference shares in return for gaining Board control. This, Mr Babak alleged, would dilute the Hayward and St George stakes - and give BlackRock an incentive to run down the GBPA/Port Group Ltd values to further reduce its purchase payments.

“So, in summary, the deal price was too low, the structure uncertain and, with perverse incentives for BlackRock, payment was substantially delayed and, in the meantime, control over ICD was lost,” Mr Babak alleged.

“It was a potential disaster for all shareholders, including the trust. I could not believe that after weeks of negotiation, Mr DeVries had ended up with this. It was unbelievable. It showed to me that he had no grasp at all of what the trust needed, or what was in the best interests of the trust.

“Having gone so far down the road, there was a danger that the terms of the deal would be set in stone (practically even if not legally) if the situation were allowed to continue. These sorts of deals have a habit of gaining momentum,” Mr Babak continued.

“As a result, it seemed to me clear that the negotiations with BlackRock either had to be stopped or turned in a completely different direction. It did not seem to me likely that Mr DeVries could do this, having been involved in negotiations for so long which have led down a particular, and potentially destructive, path.”

Hence the plan set in train by Messrs Babak and Feldman, with the alleged consent of Ms Bloom, which resulted in the Discretionary Settlement’s protector, Keith Griffiths, removing Mr DeVries and Mr Barry on May 17 this year.

Mr Feldman, in his affidavit, alleged that the Hayward trust’s liabilities meant that “a clean sale”, involving the whole of its 50 per cent GBPA/Port Group stake, for cash was the best option - something not on offer in the first BlackRock deal.

He and Mr Babak also claimed that the deal only involved a partial sale of the Hayward and St George interests - something that was against their 2010 litigation settlement, and unlikely to find favour with the Government. A lower purchase price was also likely to result

Mr Feldman added that the trust also had major liabilities to settle, including its $10 million share plus compounded interest of the ‘payment upon sale’ due to Mr Babak.

Some $7 million was also due to Sir Jack’s estate, while a former corporate trustee, Striker, had secured a lien over its assets in a dispute over fees - depriving the trust of liquidity via GBPA and Port Group Ltd dividends.

Mr Feldman concurred with Mr Babak’s assessment of the initial BlackRock offer, describing it as “clearly dangerous and unworkable”, and “a very poor offer both in numbers terms and the structure itself”.

He alleged that given the Hayward trust’s liabilities, the BlackRock transaction was “to the severe detriment of the trust’s beneficiaries: the risk was that they might be left with nothing”.

Still, Mr Feldman added: “I was mindful of the fact that BlackRock represented one of the better prospective purchasers of IDC; I did not want the trust to miss out on the opportunity of selling IDC to BlackRock.”

After easing Messrs DeVries and Barry out, Mr Babak and Mr Feldman picked up the BlackRock negotiations after the private equity firm submitted a revised offer on May 26.

“The deal was slightly better in terms of the price floor and so on, but it did not provide a firm route for the Hayward interests to fuly sell their shares, nor did it provide for a lump sum payment upfront to give the trust badly-needed liquidity,” Mr Babak alleged.

“In other words, stripped down to its fundamentals, it was just as bad a deal as before.”

After agreeing that the second BlackRock offer did not meet the requirements of the Hayward and St George families, nor the Bahamian government, Mr Babak alleged that he and Mr Feldman agreed it was “worth another shot”.

After meeting with BlackRock executives in New York, they obtained “a massive improvement” on July 31, 2015.

The revised BlackRock offer involved a purchase of the Haywards’ full 50 per cent stake; $60 million cash payment upfront; and “detailed structuring and financing provisions which were ultimately of no concern”.

“The value of the deal was much easier to assess and the benefits for the trust much more obvious,” Mr Babak alleged. “There was plainly still some negotiating to be done (for example, on price), but the fundamentals of the deal were much better.”