EFX: Equifax Gives TALX Shareholders the Illusion of Choice

By William Trent, CFA of Stock Market Beat

Stock Market Beat Mid Cap Watch List and Large Cap Watch List member Equifax (EFX) – whose business is likely well known in our credit-driven society – has agreed to buy Talx Corp. (TALX), which offers HR and payroll-related outsourced services including employment verification, unemployment cost and tax management, and associated paperless solutions.
According to Yahoo! Finance:

The companies expect the deal to be completed late in the second quarter or early third quarter, subject to regulatory approvals, approval by Talx shareholders and customary closing conditions.
Under the terms of the agreement, Talx shareholders can elect to receive, for each Talx share, either 0.861 shares of Equifax stock, $35.50 in cash, or a combination of stock and cash of equivalent value, subject to pro-ration, so that the total consideration consists of 75 percent Equifax stock and 25 percent cash. The stock portion of the purchase price will be tax-free to selling shareholders, according to the companies. All told, Equifax said it will issue about 22 million shares of Equifax stock and pay about $300 million in cash.

While TALX shareholders appear to have the choice whether to accept cash or stock, Equifax has secured an important limit with its pro-ration clause, which prevents its own stock from being stuck in purgatory while the deal waits for approval. Consider the following scenarios:

1. Equifax shares decline: If for whatever reason Equifax shares were to decline before the deal was completed, TALX shareholders would clearly prefer the cash. Without pro-ration Equifax would be asked to fork over the entire $1.4 billion in cash (an amount they don’t have.) They would have to either issue a load of debt or sell shares more cheaply (thus giving up more than the 22 million planned) in order to pay the TALX shareholders. With the pro-ration, if all the TALX shareholders ask for cash they will all get a 75/25 stock/cash mix.
2. Equifax shares rise: On the other hand, if Equifax shares go up a bunch then TALX shareholders would all ask for the shares – and the value of the acquisition would be much more than the $1.4 billion it is now. Although clearly less of a concern for both parties (the 22 million shares will be equally dilutive regardless of their value) Equifax limits the total size of the deal by keeping a $300 million cash component that doesn’t rise with the stock price.

When all is said and done, if 25% of TALX shareholders happen to ask for cash and the rest for shares, they will all get exactly what they want. But if what they want drifts very far from that magic balance, the choice really belongs to Equifax.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Starbucks (SBUX) call options; Landstar (LSTR) put options; Plantronics (PLT) put options

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