Ousted CEO eyeing takeover of Harvey
Montgomery offers no cash, but securities
But Montgomery, who was fired as CEO by the board a year ago, is not offering any cash in his bid. Instead, he is offering securities that may be valuable in three years' time if he is able to turn the company around in a deal his spokesman described as "almost like an employment agreement" where he stands to eventually get 30% of the equity if he is successful.
The offer comes six months after Harvey hired Donaldson Lufkin & Jenrette to find a buyer, a search that has produced no takers, so Montgomery may be banking on shareholder nervousness about the company's future prospects.
Stock surge
The uncertainty about the sale has sent Harvey's stock price down to a low of $4.50 in recent weeks from its year high of $15.25. Investors initially reacted en-thusiastically to news of Montgomery's offer, sending Harvey stock up 21% to close at $6.38, but a closer inspection of the bid's details produced a scornful reaction.
"Its ridiculous," one takeover speculator said. "He is asking for the company for free."
Harvey's response was noncommittal. Harvey chairman Gary Gray said in a statement that the company had referred Montgomery's proposal to DLJ for advice on whether it has "any substance."
"It will be reviewed along with other alternatives currently under consideration," Gray said. Wall Street sources said that in recent weeks Harvey was believed to be talking with an individual investor about a deal, although the identity of the investor is not known.
Harvey's board put the company on the market five months after it fired Montgomery and hired former All American Communications CEO Tony Scotti and former MGM chief financial officer Mike Hope to take over its management and come up with a business plan. Harvey lost $4.8 million in the first nine months of last year.
Purchaser pursued
While the two came up with a plan to expand Harvey's direct-to-video-production activities, it required the company to raise $40 million in extra capital, and that need prompted the board to start a search for a buyer.
But that same need for capital raises questions about Montgomery's plan. He is offering shareholders zero-coupon bonds secured on Harvey's assets that would pay $7.50 each in three years, making them worth $4 to $5 now.
Having the bonds secured on Harvey's assets suggests that the company would not be able to borrow any money for anything else, because debt typically needs security. A spokesman for Montgomery, Gary Maier of Pondel Parsons & Wilkinson, said this was an issue to be clarified.
If Montgomery can turn around the company, equity warrants attached to the bonds could be converted into stock accounting for 70% of Harvey. This means Montgomery is giving existing shareholders the chance to get back control in three years if he can reverse the company's fortunes.
Yet Montgomery was fired as CEO by the board after a dispute over his contract renewal, and underlying his departure was a sense from board members that his performance was lacking, sources said. Montgomery sold his 15% stake in the company after he left.
Saudi support
Montgomery's big hope may be Saudi investor Ahmed Bin Khalid al-Saud, who backed Montgomery in his purchase of the Harvey library several years ago and remains the company's controlling shareholder with a little more than 50% of the stock.
But the two had a falling out at the time of Montgomery's contract renewal talks and there is no evidence their relationship has improved. Maier said he was not aware whether Montgomery had spoken with the Saudi about this bid.
In its search for a buyer, the board is believed to have been looking for a price of around $10 a share, Wall Streeters said, a price target so ambitious it scared off potential buyers. Still, people close to the situation said there were other alternatives.
Harvey has relatively little debt and one observer said shareholders may be better off liquidating the company than accepting Montgomery's bid.
