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Shareholders seek class-action lawsuit against zulily over its $2.4 billion acquisition by QVC

September 23, 2015 03:58 PM
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Zulily Inc.’s shareholders aren’t going down without a legal fight when it comes to the discount online merchant’s sale to QVC.

Three zulily shareholders seek to have their lawsuits joined in a class action to fight what they allege are terms that are unfair to public stockholders in the company’s $2.4 billion sale to QVC.

Zulily, the publicly traded flash-sale merchant that grew sales to more than $1.2 billion in five years, has recently fought slowing growth, and its shares have plunged 46% year to date. Zulily’s shares, which closed at $17.78 on Tuesday, are down 73.9% from the stock’s all-time high of $68 per share in February 2014. Zulily, No. 39 in the Internet Retailer 2015 Top 500 Guide, uses a business model that has limited up-front inventory risk, as it doesn’t purchase products and house inventory until consumers purchase items on its website. This makes for a complicated and time-consuming fulfillment process, as truckloads of products are pouring into and out of its warehouses on a daily basis. It also leads zulily to have one of the longest delivery times among large online retailers, as most of its items arrive on consumer doorsteps in about two weeks, on average.

Liberty Interactive Corp., the parent company of home shopping giant QVC (No. 15 in the 2015 Top 500), is paying $18.75 per share for zulily—a 4.7% premium over zulily’s latest stock-price close. But the price is less than zulily’s $22 a share value when zulily went public in November 2013.

In separate lawsuits, three public shareholders claim the transaction is unfair to them and that the statement telling shareholders to tender their shares contained material omissions.

The lawsuits allege that zulily’s sale had been decided from early on because company co-founders Mark Vadon and Darrell Cavens not only stood to benefit personally, but also had the support of two of zulily’s biggest early investors—private equity firms Andreessen Horowitz and Maveron Equity Partners.

To support the claim, they point out that Vadon and Cavens will collectively make more than $1 billion from the deal—Vadon $648 million from his 34 million shares, while Cavens,  $394 million due to his 21 million shares. The two men, along with other zulily directors and executive officers, collectively own 91.3% of the voting power of zulily’s outstanding capital stock. “The economic interests of Maveron and Andreessen Horowitz undoubtedly influenced the board’s sale process, as their willingness to invest in zulily were critical components to the company’s early growth,” the lawsuits say. “But private equity firms are eager to cash out on their investments and return capital to their investors. Accordingly, the interests of Maveron and Andreessen Horowitz are not fairly aligned with zulily’s other public stockholders because both firms acquired a significant portion of their zulily shares below market price.”  Andreessen Horowitz will net about $78 million in cash and stock before taxes, while Maveron’s stake is worth about $107.1 million, almost all in capital gains, the lawsuits allege. The complaints also allege the defendants failed to disclose other important financial information such as Goldman Sachs’s economic interest in a big Liberty Interactive shareholder.

The shareholders—Scott Mao, Karan Jugal and Patrick Pisano—seek class-action status for similar shareholders and a jury trial. Lawyers for the plaintiffs had no further comment. zulily spokeswoman Andrea Conrad says the company does not comment on pending litigation.

Such shareholder lawsuits are not uncommon in blockbuster merger-and-acquisition deals, according to industry research. The average deal valued over $100 million garnered 4.5 lawsuits in 2014, according to data compiled by Cornerstone Research. Only one such case went to trial in 2014—the 2011 buyout of Rural/Metro Corp. by Warburg Pincus.

The companies’ executives laud the deal as benefiting both businesses since zulily, whose customers are mostly children and so-called Millennium moms seeking discounted toys and clothes, would supplement QVC’s audience of older shoppers who make purchases with a TV remote. The company says zulily will be able to leverage QVC’s global assets, vendor relationships and video commerce experience, while QVC will benefit from zulily’s younger customer demographic, personalization expertise and e-commerce capabilities.

Abe Garver, managing director at BG Strategic Advisors, says, “It’s a pretty weak case to say shareholders got a bad deal for three reasons: Liberty’s offer reflects a 49% premium from zulily’s share price; in a rare apology, investment banking firm Stifel says zulily’s stock was fairly valued at $12 on May 6, not its previous price target of $24; and Goldman Sachs & Co. wrote that the deal was fair, knowing its conclusion would get challenged in court.” 

QVC reported $8.8 billion in revenue in 2014, of which $3.5 billion came from e-commerce.

Zulily posted revenue of $298 million during the second quarter, and forecast $1.3 billion to $1.4 billion in sales for the year. 

 

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