It’s not too late for Nash Finch Co. shareholders to vote no.
The Edina-based grocery distribution company concludes voting on its merger with Michigan rival Spartan Stores Inc. on Monday, and at $314 million the deal eases Nash Finch out of existence at a reasonable valuation.
So why vote no? Just the $25.8 million CEO Alec Covington will take out of the deal.
The way the shareholder vote is structured makes it easy to express displeasure, too, without making things worse by actually killing a deal. A binding vote approves the merger agreement, while a second question for shareholders is a nonbinding, up-or-down vote on the golden parachute compensation to executives.
Covington’s record isn’t bad, so the case for a no vote is mostly in how he got his deal. Covington didn’t get a sweet financial package from his board on his way out the door. He got one on his way in, and much of it is made up of stock-based gains he gets to keep just for having come to work.
Of the $25.8 million, more than $6 million is cash, including $5.1 million is severance. Amounts in various stock and retirement plans will come to $15.1 million, with shares valued at $25.09 each.
Then there’s a special bonus to pay for taxes on some of that compensation, triggered by the change-of-control agreements Nash Finch has with Covington and other key employees. This so-called tax “gross up” payment to Covington of $4.6 million is to fund an excise tax that gets slapped on payments deemed under the law to be excessive.
This payment, and similar ones to other officers, are mostly why the proxy advisory firm Institutional Shareholder Services told shareholders to vote no on the compensation. These payments, ISS said, “represent an extraordinary financial burden to shareholders and common market practice no longer justifies” them.
ISS noted that Covington and the other four most highly compensated executive officers will get $46.7 million, equal to 14.9 percent of the announced value for Nash Finch shareholders.
Nash Finch’s chief financial officer did not return calls to discuss these arrangements, but the company said in the proxy statement it prepared for the shareholder vote that executives hired since 2012 don’t get the tax gross-up bonus.
It should be noted that pretty much every company has change-of-control agreements for executives, triggered when a third party buys controlling interest. It’s common for executives to then get fully vested in stock-based compensation plans as well as cash.
“Really the purpose of these is to give the executive freedom to actually go out and act on opportunities to create value for the company, without being overly concerned with their own personal situation,” said Saado Abboud, principal with Keystone Compensation Group.
Much of what Covington will receive came out of negotiation when he took the job in April 2006, announced as the new boss during a challenging period for the company. The chairman of the board was then serving as interim CEO. The previous October the stock had fallen by nearly a third in one trading session, and the Securities and Exchange Commission was looking into the stock trading of insiders.
Nash Finch granted Covington 54,000 restricted stock units, which are essentially a promise by the company to deliver shares down the road. He would earn a right to get them over three years. He also got a second grant in 2007 of 152,500 restricted stock units, also vesting over time.
This grant, the company said in its proxy for the 2007 year, was to essentially fix a tax issue with the deal he got from the board in 2006.
This second grant was designed “to deliver the compensation originally promised to Mr. Covington, while at the same time increasing Mr. Covington’s equity interest in us, thereby tying his compensation more closely to stockholder value.”
It is, in fact, a fine thing to have the CEO own a piece of the company, and what’s particularly great for the CEO is not having to buy that ownership.
Consultants to boards say making grants like Covington’s can make sense, particularly if the company is struggling and needs to keep a strong leader.
Vesting stock grants over time “may simply be a way of holding somebody to the company,” said Jim Fox, a principal with the consulting firm Fox Lawson & Associates. “It’s a pretty simple concept. It may look unreasonable because they may not be tied to a performance indicator and most stockholders want some performance associated with” the grants.
Yes, shareholders do expect a little performance in their shares. Nash Finch has been a consistent dividend payer, but the stock closed at $30.52 per share on the day Covington’s appointment was announced. Seven years later, the consultants ISS hired valued the Spartan merger to shareholders at $25.44 per share.
While the company under Covington did make some moves, including buying stores in the Omaha market and distribution centers to augment its network serving military facilities, there were no game-changing deals during his tenure. He did actually start down the path on one, approaching Spartan Stores in 2011. Rather than Nash Finch buying Spartan, however, it will be Spartan shareholders with most of the ownership of the combined company.
To be fair, the business of distributing food and related products to independent grocery stores has been under pressure since he got there. If there hasn’t been a stellar performance for the company’s shares, it’s also true that Covington didn’t emulate crosstown Supervalu by flying his company into the side of a mountain.
But shareholders should expect more than that for a $25.8 million payout.
They don’t have the right to stop it, but they do have right to be unhappy about it.
And the opportunity to say so.
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