Del Monte enters the Wall Street vernacular

April 14, 2011

By Lisa Lee
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Del Monte Foods is entering the Wall Street vernacular. A judge’s condemnation of Barclays for how it handled the food company’s leveraged buyout is resonating widely with boards of directors, chief executives, investment bankers and the like. Reflecting concern about the kind of conflicts of interest highlighted in the Del Monte saga, an investor recently warned 99 Cents Only Stores to watch its step when hiring advisers.

The judge in the Del Monte case didn’t set any grand new precedent and Barclays wasn’t even a defendant, but the strongly worded ruling did serve as a sharp reminder that conflicts matter — potentially legally as well as ethically. It said that Barclays, which was involved on both sides in Kohlberg Kravis Roberts’ leveraged buyout of the food group, “secretly and selfishly manipulated the sale process” for its own financial gain.

As a result, boards of directors are asking more questions before hiring advisers and leaning more toward independents — as they should. The Del Monte judge rebuked not just the bankers but also the company’s board for approving its adviser’s request to participate in the buyout financing.

That’s the kind of thing FBR Fund Advisors is getting at with its letter to 99 Cents Only, made public this week. It wanted the company’s special board committee to ensure it hired financial and legal advisers with no prior relationship to the Schiffer/Gold family and private equity firm Leonard Green & Partners, which want to buy the company. The mutual fund also said any advisers should agree up front not to participate in or support any bid. The company ultimately hired Lazard and Morrison & Foerster.

Earlier deals have raised judicial eyebrows about conflicts of interest. For instance, a judge ruling in 2005 on KKR’s buyout of Toys R Us criticized Credit Suisse for a milder version of the conflicts Barclays had, though less forcefully.

The Del Monte example has upped the ante. There may be times when it makes sense for a seller’s adviser to provide financing — but it had better make sense. Boutique advisory firms and others that don’t wield big balance sheets stand to gain from this latest addition to M&A lore.

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