SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 13D
(RULE 13d-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULES 13d-1(a) AND AMENDMENTS THERETO FILED
PURSUANT TO RULE 13d-2(a)
VERTRUE INC
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(Name of Issuer)
COMMON STOCK, $.001 par value per share
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(TITLE OF CLASS OF SECURITIES)
92534N101
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(CUSIP NUMBER)
BRENCOURT ADVISORS, LLC
600 LEXINGTON AVENUE, 8TH FLOOR
NEW YORK, NY 10022
(212) 313-9700
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(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO
RECEIVE NOTICE AND COMMUNICATIONS)
MAY 18, 2007
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(Date of Event Which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition that is the subject of this Schedule 13D, and is filing
this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the
following box.
Note: Schedules filed in paper format shall include a signed original
and five copies of the Schedule, including all exhibits. See Rule 13d-7(b)
for other parties to whom copies are to be sent.
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(1) The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which would
alter the disclosures provided in a prior cover page.
The information required in the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
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Page 1 of 5 Pages
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CUSIP No. 92534N101 Page 2 of 5 Pages
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1. NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS (ENTITIES ONLY) BRENCOURT
ADVISORS, LLC
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2. CHECK THE APPROPRIATE BOX IF A GROUP* (a)
(b)[X]
INAPPLICABLE
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3. SEC USE ONLY
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4. SOURCES OF FUNDS
00 (FUNDS FROM INVESTMENT ADVISORY CLIENTS)
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5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEM 2(d) OR 2(e)
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6. CITIZENSHIP OR PLACE OF ORGANIZATION DELAWARE, USA
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NUMBER OF 7. SOLE VOTING POWER 920,589
SHARES -----------------------------------------------------------
BENEFICIALLY 8. SHARED VOTING POWER 0
OWNED BY -----------------------------------------------------------
EACH 9. SOLE DISPOSITIVE POWER 920,589
REPORTING -----------------------------------------------------------
PERSON WITH 10. SHARED DISPOSITIVE POWER 0
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11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 920,589
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12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES *
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13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 11 9.47%
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14. TYPE OF REPORTING PERSON*
IA
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* SEE INSTRUCTIONS BEFORE FILLING OUT!
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CUSIP No. 92534N101 Page 3 of 5 Pages
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ITEM 1 SECURITY AND ISSUER
Title of Class of Securities
Common stock $0.01 par value per share (the "Shares")
Name and Address of Issuer
VERTRUE INC
20 GLOVER AVENUE
NORWALK, CT 06850
ITEM 2 IDENTITY AND BACKGROUND
(a) BRENCOURT ADVISORS, LLC (the "Manager")
(b) 600 LEXINGTON AVENUE, 8TH FLOOR, NEW YORK, NEW YORK 10022
(c) The Manager serves as an investment manager to several funds and managed
accounts (collectively the "Funds").
(d) During the past five years, neither the Manager nor the Funds has not been
convicted in a criminal proceeding
(e) During the past five years, neither the Manager nor the Funds have been
party to a civil proceeding as a result of which they are subject to a judgment,
decree, or final order enjoining it from or mandating activities subject to
federal or state securities laws, or finding it in violation of such laws.
(f) The Manager is organized under the laws of Delaware, USA.
ITEM 3 SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
The Manager is the investment manager of several Funds which have acquired their
respective shares in open market transactions
ITEM 4 PURPOSE OF TRANSACTION
The Funds have acquired the shares of Common Stock for investment purposes and
have no other intentions other than those stated in the letter, attached here as
an exhibit. The Funds reserve the right to communicate further with the
Company's operating management and with members of its Board, as well as with
other stockholders and third parties about these and other matters. The Funds
continue to examine all of their options with respect to the possibility of
taking actions that they believe will enhance shareholder value. Any such
actions could relate to or result in one or more of the matters referred to in
paragraphs (a) through (j) of Item 4 of Schedule 13D. The Funds also reserve the
right to purchase or otherwise acquire additional Common Stock or to sell or
otherwise dispose of Common Stock owned by them, in each case in open market or
privately negotiated transactions or otherwise.
ITEM 5 INTEREST IN SECURITIES OF THE ISSUER
(a)-(b) The Manager may be deemed, for purposes of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, to be the beneficial owner of the
aggregate amount of 920,589 Shares owned by the Funds representing approximately
9.47% of the Issuer's 9,725,000 Shares outstanding as of March 31, 2007 (as
reported on the Issuer's Form 8-K filed on May 8, 2007 period ended March 31,
2007).
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CUSIP No. 92534N101 Page 4 of 5 Pages
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(c)
Transaction Date Bought Sold Price per Share ($)
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March 8, 2007 14,200 46.49
March 13, 2007 2,038 44.99
March 13, 2007 4,800 45.11
March 14, 2007 6,869 44.97
March 22, 2007 2,000 48.11
March 23, 2007 59,634 48.55
April 11, 2007 10,383 47.08
April 11, 2007 6,774 47.09
April 12, 2007 4,529 47.02
April 13, 2007 1,299 47.29
May 8, 2007 34,191 47.50
May 8, 2007 14,729 47.50
May 9, 2007 200 47.60
May 10, 2007 167,000 47.97
May 11, 2007 26,621 48.02
May 11, 2007 5,900 48.04
May 14, 2007 100,000 48.20
May 14, 2007 3,297 47.85
May 15, 2007 5,541 47.70
May 15, 2007 2,410 47.82
May 16, 2007 1,227 49.08
May 16, 2007 105,366 48.04
May 17, 2007 2,873 48.06
(d) None.
(e) Inapplicable.
(f) Inapplicable.
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CUSIP No. 92534N101 Page 5 of 5 Pages
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
May 18, 2007
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(Dated)
/s/ Michael Palmer
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(Signature)
Chief FInancial Officer
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(Title)
May 17, 2007
Gary A Johnson
President/CEO/Chairman of the Board
20 Glover Avenue
Norwalk, CT 06850
Dear Gary,
Brencourt Advisors, LLC ("Brencourt") is one of the largest shareholders of
Vertrue Incorporated ("Vertrue" or the "Company"). We are writing to inform you
of our dissatisfaction with the current offer price by the One Equity Partners
consortium ("One Equity" or the "Sponsors") and our intention to vote against
the merger offer. We believe that the current offer significantly undervalues
the strong growth that Vertrue is experiencing and is a sub-optimal alternative
to other strategies that deliver superior shareholder value.
THE CURRENT OFFER IS TOO LOW
Brencourt's position is that the current $48.50 offer price is too low. In
examining the materials the Board reviewed in support of this bid, namely the
Jefferies Broadview ("Jefferies") analysis set forth in the Company's
preliminary proxy statement on file with the SEC, we believe that there were
major flaws in Jefferies methodology which undervalued Vertrue's shares.
For example, Jefferies calculated a weighted average cost of capital ("WACC")
that was too low. Jefferies estimated that Vertrue's WACC was 16.5%, comprised
of a 17.8% cost of equity and a 9.25% cost of debt. We fail to see how Jefferies
could have arrived at these numbers. Aside from the fact that Jefferies used a
7.8% market risk premium (versus a market standard 5%), we believe the 2.3%
"Size Premium" for the cost of equity is ridiculous. Using Jefferies' beta of
1.4x, we believe the cost of equity should be 11.7%. Jefferies calculated the
cost of debt based on the coupon of the Company's publicly issued debt. However,
prior to the $48.50 offer, Vertrue's 9.25% senior notes were yielding 7%. Using
this correct cost of debt (7%) would result in a WACC of 10.2%. Based on
MANAGEMENT'S OWN PROJECTIONS, this more realistic WACC would imply an equity
value over $60, A 25% PREMIUM TO THE CURRENT OFFER. If one were to apply 10.2%
WACC to Jefferies' "NPV Sensitivity" chart, fair value for our shares would be
above $70.
Jefferies Market
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Beta 1.4 1.4
Market Risk Premium 7.8% 5.0%
Risk Free Rate 4.5% 4.7%
Size Premium 2.3% 0.0%
Cost of Equity 17.8% 11.7%
Cost of Debt 9.3% 7.0%
Corporate Tax Rate 38.0% 38.0%
Equity Value $582,361 $582,361
Total Debt $148,817 $148,817
WACC 15.4% 10.2%
WACC Jefferies Uses 16.5%
We believe that the other valuation methods employed by Jefferies were flawed as
well. While Jefferies correctly pointed out that there are no other truly
comparable public companies to Vertrue, they drew incorrect inferences from the
SOLE precedent transaction in the universe: Apollo's purchase of Cendant Corp's
Marketing Services Division ("Affinion"). First, that transaction occurred in
July 2005, NEARLY 2 YEARS AGO. Since then, valuations have gone up for nearly
every company, especially for less understood business models like Vertrue.
Second, Jefferies did not adjust for certain one-time items that raised the
Affinion acquisition multiple from 6.25x to 7.1x (please see the debt prospectus
for the transaction).
In similar fashion, Jefferies does not properly calculate the acquisition
multiple implicit in the Vertrue transaction. Jefferies reports that $48.50
represents 8.9x TTM EBITDA, ostensibly a fair multiple, especially with respect
to the Affinion transaction. However, this methodology ignores timing
differences in marketing spend that have artificially depressed TTM EBITDA,
thereby raising the transaction multiple. As you yourself stated on the 2Q07
(December quarter) conference call, "I want to point out that it's important to
note when comparing our performance to last fiscal year, our year-over-year
results reflect both a strong first half in fiscal '06 and an increased
marketing investment in the first half of fiscal '07". The results for the March
2007 quarter demonstrate your point. In that quarter, adjusted EBITDA rose to
$25.4 from $18.4 million in 3Q06.(1) Thus, based on management's projected June
2007 EBITDA, the implied transaction multiple would only be 7.2x.
Furthermore, Jefferies does not accord Vertrue the premium multiple that it
deserves vis-a-vis the Affinion acquisition. Vertrue, through its established
online platform and Management Service segment, has better growth prospects than
Affinion. A company with higher growth deserves a higher multiple. Therefore,
the 7.2x multiple used to arrive at a $48.50 price is not quite the "gift" that
the Jefferies analysis suggests. In fact, based on management's projected high
teens EBITDA growth, Vertrue should trade in the 10-13x range. Even if we
discounted that valuation to a 9x multiple, we still arrive at a fair value for
the stock above $60.
We also find fault with the IRR returns of this transaction. If one were to take
management's projections and use the same entry/exit multiples, One Equity will
realize a mid 40% IRR over a 5-year horizon. This analysis includes all fees and
expenses and does not consider One Equity re-levering at various stages of the
investment to take dividends out of the Company. Although we understand that new
buyers need an adequate return to compensate them for long-term risk, mid 40% is
far higher than the 15-20% IRRs that private equity sponsors typically accept in
current markets. At even a 30% IRR, the implied share price would be above $58,
20% HIGHER than the current offer.
Finally, we take issue with Jefferies analysis that this offer is fair because
it represents a 20% premium to the pre-NY Post article price of $40.12. While we
do not believe that the premium offered to shareholders has any relevance to the
ACTUAL value of our shares, we regard Jefferies analysis as incomplete. Nowhere
does Jefferies account for the technical selling caused by Vertrue's converts
that are struck at $40.37. Historically, the stock price has been capped by
convert holders who hedge their stock exposure above that strike price.
Likewise, Jefferies does not mention that the Company raised its guidance on
January 24, 2007, THE SAME DAY that the NY Post reported the company was up for
sale. We fail to see how Jefferies could not attribute any of the appreciation
in the stock to that. Therefore, based on the $43.82 closing price on January
24th, this transaction represents a mere 10.8% premium. How is that fair to
shareholders based on Jefferies analysis?
ALTERNATIVES
We believe that there are other ways to increase shareholder value other than by
accepting a low ball bid for the company. We believe that the Board should
reconsider its recommendation of the One Equity offer in the light of the points
we make above and the existence of alternative, value-enhancing transactions. In
particular, we encourage the Board to re-visit a leveraged recapitalization of
the Vertrue's balance sheet and to use those proceeds to fund a special dividend
to shareholders.
We understand the Board's reluctance to approach the debt markets considering
the Company's experience in 2004. However, much has changed in the market since
then. Affinion's experience in the debt markets is a directly relevant example
for Vertrue. At the end of 2005, Affinion launched a bond offering to partially
fund the acquisition by Apollo. In similar fashion to Vertrue's 2004 offering,
Affinion found that the capital markets were not receptive to its offering and
consequently, the underwriting banks were forced to hold a large portion of the
issue in a bridge facility. In order to move this bridge facility off their
balance sheets, the underwriting banks educated the investment community on
Affinion's business model to create demand for a new bond issue. In April 2006,
the bond issue was placed as 11.5% subordinated debt.
Over the next several months, Affinion met expectations and that same debt
appreciated substantially. Today, that 11.5% subordinated issue yields 8.8%
despite Affinion being levered 5.2X. Furthermore, in January 2007, Affinion
re-levered its balance sheet to 6.4X and used the $350 million of proceeds to
buy back preferred debt and dividend to Apollo an amount in excess of Apollo's
initial equity investment.
We believe Vertrue should draw upon Affinion's experience for the benefit of its
own shareholders. Based on current market conditions and management's
projections, Vertrue could issue debt to fund at least a $30 dividend while
still maintaining a healthy balance sheet with significant free cash flow. We
assess that based on a price to earnings ratio between 12.5 and 13.5x, the pro
forma stock price, including the special dividend, would be 25-35% higher than
the $48.50 offer. We further suggest that if market conditions one year from now
are similar and management meets expectations, Vertrue could issue more debt to
fund ANOTHER special dividend to shareholders, while allowing current
shareholders to maintain their ownership in the Company. We would note that
given the size of One Equity's financing package, the Sponsor's bankers believe
that this leveraged strategy for Vertrue is entirely feasible.
Looking at the proposed 1st lien / 2nd lien financing structure One Equity will
use for its transaction, we hypothesize that one year from now One Equity will
be in a position to take advantage of the cheap call protection of its debt and
re-lever the Company, and dividend most, if not all, of its equity investment to
itself. Clearly, we don't need a private equity company to do what we as
shareholders can do for ourselves.
At this point, I would like to note that Brencourt remains a strong supporter of
the Company, its management and its prospects. However we strongly urge the
Board of Directors to re-consider its endorsement of the current $48.50 offer.
We do not believe that the proposed transaction adequately compensates us for
our shares. Otherwise we remain prepared to further defend alternative means
that deliver greater shareholder value.
Sincerely,
/s/ WILLIAM L. COLLINS
----------------------
William L. Collins
Chief Executive Officer
Brencourt Advisors LLC
CC: James B. Duffy, EVP/CFO/COO/Director
Vincent DiBenedetto, EVP/Director
Robert Kamerschen, Director/Chairman of the Special Committee
Alec L. Ellison, Director
Joseph E. Heid, Director
Michael T. McClorey, Director
Edward M. Stern, Director
Marc S. Tesler, Director
(1) Company press release 5/08/07, after adding back $5.0 million of merger
related expenses