Silver Lake and Davidson Kempner face off over ecommerce start-up

Two of Wall Street’s most aggressive investment firms are battling over the control of a troubled ecommerce start-up, underlining how even companies buckling under high interest rates and a weakening economy remain prime targets for creative financiers. 

Vacasa, a publicly traded vacation rental marketplace once worth billions, last week accepted a sweetened buyout offer worth around $200mn from Casago, a small competitor whose bid is in partnership with Vacasa’s longtime private equity backer, Silver Lake.

But the Casago deal price of $5.30 per Vacasa share in cash is far less than the $5.75 now on offer from Davidson Kempner, a well-known credit hedge fund who last year lent $30mn through a convertible bond to the cash-strapped Vacasa.

The tussle for control of Vacasa, which is now heading for a tense shareholder vote, is a case study in how start-ups funded in the era of low interest rates and high valuations are now caught in the small print of rounds of successive financial engineering, leaving them at the whims of their clashing heavyweight Wall Street patrons.

Silver Lake — which boasts assets under management exceeding $100bn and has made multibillion-dollar windfalls in deals involving tech giants Dell and Broadcom — led growth equity financings for Vacasa in 2019 and 2020 which raised more than $400mn. It was joined by two other private equity firms in those investments, Riverwood Capital and Level Equity, and the trio have remained the three largest Vacasa shareholders. 

When the Oregon-based Vacasa went public in 2021 with a blank cheque company sponsored by TPG, the deal valued the company’s equity at $4.5bn.

But even at that upbeat moment, the rentals company still projected that heavy marketing and other spending would lead to several years of cash deficits. After a post-pandemic travel lull hit the business, the company’s market cap crashed below $50mn last year, and in August, Davidson Kempner lent Vacasa the $30mn through the convertible bond.

Davidson Kempner manages nearly $40bn and has deployed a so-called “loan to own” strategy in high-profile situations involving the likes of retailers J Crew and Neiman Marcus where in both it swapped its debt positions into reorganised equity during Chapter 11 bankruptcy restructurings. 

The convertible bond pays an 11.25 per cent interest rate and came with the right to appoint two directors to the company’s board. Importantly, if the convertible bond was fully converted into equity, it would represent around a quarter of Vacasa’s shares outstanding.

When Vacasa tasked its independent directors with securing a sale of the company, the convertible bond proved a sticking point — and Davidson Kempner made matters difficult, the company said in regulatory filings.

The firm controls about 20 per cent of the shares eligible to vote between its existing 7 per cent holding of common shares and the portion of the shares underlying its convertible bond it is allowed to exercise under change of control restrictions.

Regulatory filings reveal Vacasa’s board has long been wary of the firm. As a large creditor, Davidson Kempner “had different economic interests” than unaffiliated stockholders, the filings noted, and “was particularly well-positioned to act opportunistically and profit from a decline in the company’s liquidity position”. 

When Vacasa said that it had struck a deal in December with Casago at $5.02 a share, the two Davidson Kempner directors on the Vacasa board were the only ones to reject the deal, and subsequently resigned.

Since then, Casago — backed by Silver Lake, Riverwood and Level Equity — and Davidson Kempner have faced off against each other over the ownership of Casago, culminating in the competing bids 45 cents a share apart.

When Vacasa selected Casago as the winning bid despite its lower price, it said the offer came with “superior certainty of signing and closing” compared with Davidson Kempner’s.

Davidson Kempner for its part has accused the Vacasa board of improperly favouring Silver Lake, writing in a letter on Monday that the company directors have conducted a “flawed process and fail[ed] to establish a level playing field.”

Silver Lake, Riverwood and Level Equity, together currently own around 35 per cent of Vacasa shares, assuming the convertible bond conversion. Crucially, they have agreed to roll over their stake in the merged Casago-Vacasa entity.

In contrast, Davidson Kempner had said in the original 2024 Casago negotiations that it would only carry over its equity stake if it could also hold on to the convertible bond — a condition rejected by Vacasa.

People close to Davidson Kempner told the Financial Times that the Silver Lake-led trio’s continuing shareholding in Vacasa post-buyout explained their preference for the cheaper Casago deal, where they would participate in future upside.

Adding to the transaction’s complexity, Vacasa’s shareholders during its time as a private company are owed periodic payments for tax savings related to those private shares. Those shareholders include the Silver Lake-led trio.

These holders of the so-called “tax receivable agreement”- or TRA — agreed as part of the Casago deal to waive their right to an accelerated change of control payment of around $80mn, though the present value of the TRA if Vacasa stayed public was perhaps $15mn. The waiver leaves more cash for a buyer to pay to all shareholders.

However, they have not so far agreed to waive the payments if Davidson Kempner emerges as the superior bidder — a condition to close the credit firm’s $5.75 bid.

In its Monday letter, Davidson Kempner wrote that it was “unconscionable” and “preposterous” to secure cancellation of the TRA payments for the Casago-Silver Lake group but not for the Davidson Kempner bid.

Favouritism for that duo was akin to a “poison pill”, Davidson Kempner argued. At the same time, the credit firm has sought to sweeten its bid further with a $12mn termination fee for Vacasa as evidence of its commitment in pursuing a deal.

The stand-off now leaves open the possibility for a knife’s edge shareholder approval vote on the $5.30 deal with Casago, likely to be held in the next couple of months. A simple majority of Vacasa shareholders is needed to close the buyout.

Vacasa, Davidson Kempner and Silver Lake declined to comment. Vacasa shares closed on Friday at $5.49, well above the $5.30 Casago deal price.

Elisabeth De Fontenay, a former corporate lawyer and current professor of law at Duke University, said Vacasa shareholders unaffiliated with either side are left in a tricky spot. 

“Bidders who are insiders may have significant informational advantages over other bidders or the shareholders,” she said. “Depending on what part of the capital structure they hold, their incentives might differ from the common stockholders.”