Vertrue shareholder says valuation errors include 'absurdly' low terminal value

By Jennifer Lanning Drey

Portland, Ore., June 22 - Vertrue Inc. shareholder, Brencourt Advisors, LLC, said errors in the Jefferies Broadview valuation of the company at $48.50 per share include the use of an "absurdly low terminal value," the use of a "size premium," the application of an incorrect cost of debt and the use of an incorrect market premium.

Brencourt, which is the beneficial owner of more than 28% of Vertrue's common stock, detailed the alleged errors in a schedule 13D filing with the Securities and Exchange Commission.

A spokesperson for Vertrue said the company is still reviewing the filing and therefore had no comment on Friday.

In Brencourt's filing, the shareholder said Broadview used a terminal multiple range of 6x to 7x EBITDA, which the shareholder called "absurdly low" because it is based on a weighted average cost of capital that is calculated too high and a terminal growth rate that is too low.

Broadview used a terminal growth rate of 2.5%, but Brencourt believes it should be at least 4.0%, according to the filing.

A 4.0% growth rate would result in a present value of $61.41, which is 26.6% higher than the current offer, Brencourt said.

Brencourt also said that by using a size premium, Broadview artificially raised the cost of the company's equity and therefore lowered the valuation. Brencourt said it is not accepted financial theory to use a size premium.

Additionally, Brencourt said Broadview's use of a 9.25% cost of debt is "an outright error in their analysis" because it represents the coupon to the company's senior notes due 2014. However, the stockholder said the company's cost of debt is the yield on its fixed income securities, not its coupon.

The yield on the company's 9.25% senior notes was 7.0% before the transaction was rumored or announced, according to the Brencourt filing.

Brencourt also pointed out that Broadview, in its base case, used a market premium of 7.8% to calculate the cost of equity, which it said is "vastly higher" than the 5% premium being used in the market today.

"Broadview's market premium is out of touch with reality in today's financial marketplace," Brencourt said.

As previously reported, Vertrue announced on March 22 a definitive agreement to be acquired by members of the company's management and an investor group including One Equity Partners, Oak Investment Partners and Rho Ventures for $48.50 per share in a transaction valued at about $800 million.

Vertrue is an internet direct marketing services company located in Norwalk, Conn.

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