Honeywell/COM DEV/exactEarth -- summary under Canadian Buyco
Overview
Under a CBCA Plan of Arrangement, the Company will spin-off its 73% interest in exactEarth under a s. 86 reorg and its Common Shares will be acquired by the Purchaser (an indirect Canadian sub of Honeywell International) for an initial payment of $5.125 per Common Share plus a second “Contingent Payment Amount” approximately two weeks following the closing date of up to $0.125 per Common Share (based on whether the exactEarth shares have appreciated, in their first five trading days on the TSX, over a value of $7.15 per share.)
Company
A CBCA corporation listed on the TSX (with a market cap of $362M) which is a global designer and manufacturer of space hardware and systems. As of November 5, 2015, there were 76,554,352 Common Shares, Options exercisable for 1,806,713 Common Shares, 618,068.649 RSUs, 426,287.458 PSUs, 277,572.30 DSUs and Director Share Units, and 117,239.2275 ESPP Shares issuable under the ESPP to eligible employees. The holders thereof are “Securityholders.”
Purchaser
Honeywell Limited, an indirect wholly-owned Canadian subsidiary of Honeywell International Inc.
exactEarth
exactEarth Ltd., a CBCA corporation which is a leading provider of global maritime vessel data for ship tracking and maritime situational awareness solutions. The Company co-sponsored the creation of exactEarth in 2009 and currently holds a 73% equity ownership position, with the remaining 275 interest held by the Minority Shareholder. In the preliminary transactions below, the two shareholders will convert debt into equity and subscribe for further shares at a price of $6.60 per share, implying a value for the Company's 73% interest of $102 million.
Minority Shareholder
Hisdesat Servicios Estrategicos S.A., a Spanish satellite communications services provider.
Support Agreements
Each of the Directors and Crescendo Partners (collectively, Crescendo Partners II, LP Series JJ and Crescendo Partners III, LP, and a large Shareholder of the Company), has entered into Support Agreements with the Purchaser pursuant to which they have each agreed to vote an aggregate of approximately 11% of the Common Shares of the Company in favour of the Arrangement. The Directors and executive officers of the Company and their associates and affiliates, as a group, beneficially owned, directly or indirectly, or exercised control or direction over, an aggregate of 2,793,265 Common Shares, representing approximately 3.6% of the outstanding Common Shares.
Preliminary exactEarth reorganization
On October 29, 2015, the Company and the Minority Shareholder agreed that:
- the Company will make a payment of $9,709,961 to the Minority Shareholder;
- the Minority Shareholder will purchase from the Company $1,882,471 of indebtedness that it holds in exactEarth, such that immediately following such purchase, the pro rata indebtedness held by the Company and the Minority Shareholder in exactEarth shall be 73% and 27%, respectively;
- the Company and the Minority Shareholder will convert all of the exactEarth indebtedness that each owns (after the debt purchase described above) in the aggregate amount of $47,769,000 into equity at a price per exactEarth Share of $6.50, for 5,365,340 exactEarth shares to the Company and 1,984,441 exactEarth Shares to the Minority Shareholder, all being at a valuation equal to an enterprise value of $125,000,000;
- the Company will subscribe for $14,600,000 of exactEarth Shares and the Minority Shareholder will subscribe for $5,400,000 of exactEarth Shares at a price per common share of exactEarth of $6.50, such that immediately following such subscription, the pro rata equity interest in exactEarth of the Company and the Minority Shareholder shall be 73% and 27%, respectively;
- certain members of senior management of exactEarth will subscribe for up to 100,000 exactEarth Shares at a price per exactEarth Share of $6.50; and
- exactEarth will implement management incentive plans as agreed.
Following the above pre-closing steps, exactEarth will have 21,637,815 exactEarth Shares outstanding,.the Company will own 15,722,605 exactEarth Shares or approximately 73%, while the Minority Shareholder will own 5,815,210 Shares or approximately 27%, consistent with the current ownership split.
Plan of Arrangement
- The Company shareholder rights plan will be terminated.
- The authorized share capital of the Company will be reorganized as follows: an unlimited number of New Common Shares will be created (having 10 votes per share); each Common Share will be exchanged with the Company for one New Common Share and 0.1977 of an exactEarth Share; and the amount added to the stated capital account for the New Common Shares will equal the paid-up capital of the Common Shares for purposes of the Tax Act exchanged above less the aggregate fair market value of the exactEarth Shares distributed on such exchange;
- Each Option, Share Award and ESPP Share issued and outstanding at the Effective Time will be deemed to be fully vested.
- In the case of any Trust Share Award, such Trust Share shall be sold pursuant to the Plan of Arrangement and the Consideration and exactEarth Shares received shall be paid to the holder thereof by the trustee as soon as practicable.
- All of the outstanding Options, ESPP Shares and all Non-Trust Share Awards shall be disposed of and surrendered by the holders thereof to the Company in exchange for the Cash-Out Consideration.
- Each New Common Share of a Dissenting Shareholder will be deemed to be transferred to the Purchaser in consideration for a debt claim against the Purchaser.
- Each New Common Share… will be transferred to, and acquired by the Purchaser, in exchange for the “Consideration” (comprising $5.125 cash per Common Share and the Contingent Payment)..
Contingent Payment Amount
The Arrangement Agreement provides that the Purchaser will deposit in trust the “Contingent Payment Amount,” which represents $10 million in cash (deposited by the Purchaser for holidng in escrow until distributed), or approximately $0.125 per Security. The Contingent Payment Amount will be used to satisfy the estimated increased Taxes that may be owing in circumstances where the exactEarth Shares increase in value, over the Company’s cost base in the first five trading days on which the exactEarth Shares are trading and, to the extent not required to satisfy an estimated increased Tax liability, such amount will be distributed to Securityholders. Accordingly, if the aggregate market value of the exactEarth Shares distributed by the Company is less than or equal to $112,400,000 (or $7.15 per exactEarth Share) then the full Contingent Payment Amount will be distributed to the former Securityholders, and if their value exceeds $112,400,000, an amount equal to the excess multiplied by 13% will be paid to the Purchaser, with only the balance of the Contingent Payment Amount (together with interest accrued thereon) distributed to the Securityholders on a pro rata basis.
Canadian tax consequences
S. 86 reorg. The Company expects that the fair market value of the exactEarth Shares received on the exchange for Company Common Shares will not exceed the paid-up capital of such Common Shares. A resident shareholder will realize a capital gain on such exchange only to the extent that the the fair market value of the exactEarth Shares received exceeds the adjusted cost base of such shares.
Sale. A Resident Shareholder that transfers New Common Shares under the Arrangement to the Purchaser for the Consideration including any portion of the Contingent Payment Received, will be considered to have disposed of such New Common Shares for proceeds of disposition equal to the amount of the aggregate Consideration, including any portion of the Contingent Payment Amount received.