A preliminary proxy statement filed by Empire District Electric Company with the Securities and Exchange Commission March 30 details the decision to offer the Joplin-based company for sale, the steps that were taken to arrange for bids, the bidding process, and how Canadian company Algonquin eventually became the successful suitor.
The information, though it makes for mind-numbing reading in some places, includes how Empire District Electric reacted when its sale plans were leaked to the media, the late entrance of an alternate bidder, the departure of other bidders who initially showed interest, and just about everything except why the company's management and board of directors thought a sale/merger was necessary.
The Board and management of Empire regularly review and assess Empire's long-term business plan and strategic alternatives available to enhance shareholder value, including potential business combination transactions.
On October 29, 2015, the Board held a meeting that was also attended by certain members of senior management, representatives of Moelis and a representative of Cahill Gordon & Reindel LLP , which we refer to as Cahill, Empire's outside legal counsel.
At that meeting, the Board, members of senior management and representatives of Moelis discussed Empire's businesses and operations, competitive position, strategic goals and available strategic alternatives, including a potential sale of Empire to a third party. At the request of the Board, a representative of Moelis discussed (1)the drivers of value and strategic activity in the utility sector, including recent industry valuations, capital considerations, merger and acquisition activity and associated drivers, and recent transaction multiples and premiums, (2)Empire's strategic position from a market perspective and potential valuations and (3)options for consideration to maximize shareholder value, including remaining as a standalone public company, growth through acquisitions and a sale to a third party. Moelis also provided preliminary valuation analysis of Empire based on publicly available information, strategic alternatives, process approaches, potential counterparties and recent transaction multiplies and premiums.
After discussion and consideration of the information received during the meeting, including with respect to Empire's strategic alternatives, the Board determined that it needed additional information and directed Mr. Brad Beecher, President and Chief Executive Officer of Empire, to work with Moelis and Mr.Randy Laney, Chairman of the Board of Empire, to develop an engagement letter with Moelis which would authorize Moelis, at the direction of the Board, to solicit market information more specific to Empire's current financial and market positioning to determine if the potential transaction multiples and premiums described in Moelis' presentation could be applicable to Empire.
Following the October 29, 2015 board meeting, Mr. Beecher and Mr. Laney and representatives of Moelis had several conversations and meetings to discuss a potential process with respect to receipt of indications of value (including potential counterparties to be contacted) and the terms of an engagement of Moelis as Empire's financial advisor. Mr. Beecher and Mr. Laney directed Moelis to prepare a presentation regarding a process to solicit indications of value from potentially interested parties, referred to as a "PhaseI" process, to be discussed at the upcoming November18, 2015 Board meeting.
On November 18, 2015, the Board held a meeting that was also attended by representatives of Moelis and Cahill to discuss a potential Phase I process.
At the meeting, a representative of Cahill reviewed with the Board its fiduciary duties in connection with the Phase I process and any related sale process. Mr.Beecher and Mr. Laney then summarized for the Board the discussions they had with Moelis since the last Board meeting.
Representatives of Moelis reviewed in detail their presentation about a potential Phase I process in the event the Board were to decide to explore such a process. Specifically, representatives of Moelis identified for the Board a list of potential counterparties that included nine "Tier 1" and twenty-four "Tier 2" strategic and financial counterparties that had been developed in consultation with Mr.Beecher and Mr.Laney.
The Tier 1 counterparties included a representative group that Moelis (in consultation with Mr.Beecher), believed had the greatest likelihood to maximize shareholder value to Empire's shareholders. The Tier 1 counterparties were selected based on several factors, including a determination of such counterparties' market capitalization and financial wherewithal, the potential synergies arising from an acquisition of Empire and such counterparties' possible interest in acquisitions generally, and specifically with respect to Empire.
Representatives of Moelis reviewed with the Board its preliminary illustrative views, based on publicly available information, of the standalone and pro forma earnings per share and break even analysis for each strategic counterparty and an illustrative transaction analysis for the financial counterparties. Representatives of Moelis also discussed the timing and process of contacting the potential counterparties in the event the Board determined to move forward with the process. Moelis also utilized management financial forecasts and certain other financial analyses to provide the Board illustrative preliminary valuation references for Empire.
The Board, based on the information provided by Moelis and discussions about the process criteria at the meeting, adopted the Phase I process outlined by Moelis, approved the Tier1 list of counterparties and gave management the authority to augment the Tier 1 list with companies from the Tier2 list if, following the initial outreach to Tier 1 counterparties, there existed a shortage of potential counterparties in any of the Canadian, U.S. strategic or financial counterparty categories.
In addition, after discussion and consideration of the information received during this meeting and the October29, 2015 Board meeting, the Board determined that it was in the best interests of Empire's shareholders to engage Moelis as Empire's exclusive financial advisor in connection with a potential sale process.
Because of the Board's view that the Tier 1 potential counterparties constituted a representative group of parties with the greatest likelihood to maximize value to Empire's shareholders, the Board determined not to invite other parties to participate in the Phase I process, except as noted above, in order to minimize the risk of the process becoming public and to maintain an orderly process. Following the results of Phase I, the Board would then determine whether or not to continue with any further process and, if so, whether or not to augment the list of potential counterparties. Mr.Beecher was directed by the Board to inform Moelis to initiate the Phase I process and proceed with contacting each of the identified potential counterparties.
Between November 18, 2015 and November 25, 2015, pursuant to the Board's direction, a representative of Moelis contacted the chief executive officer or other senior officer of each potential Tier 1 counterparty and one Tier 2 counterparty identified by Moelis (in consultation with Mr.Beecher) for inclusion in Phase I and informed them that the Board had retained Moelis to assist Empire in connection with its review of strategic considerations and that in order for Empire to better understand its value from a strategic perspective, the Board was interested in receiving an indication of value for Empire from such potential counterparty.
A representative of Moelis informed each potential counterparty that if such potential counterparty was interested in participating in this exercise, Moelis would provide it with a non-disclosure agreement, and subject to execution of such non-disclosure agreement, Moelis would share with such potential counterparty (i)a confidential information presentation about Empire prepared by Empire management (including certain nonpublic information about Empire) and (ii)instructions for such potential counterparty to submit at the completion of PhaseI a non-binding indicative proposal, which proposal would include a per-share offer price for our common stock, on a fully diluted basis.
Between November 20, 2015 and November 30, 2015, seven potential counterparties Algonquin and companies that we respectively refer to as Bidder A, Bidder B, Bidder C, Bidder D, Bidder E and Bidder F entered into nondisclosure agreements with Empire. We refer to each counterparty that executed a non-disclosure agreement as a Bidder and, collectively, as the Bidders. Three potential counterparties informed Moelis that they were not interested in participating in Phase I and did not execute non-disclosure agreements.
Shortly after each Bidder executed a nondisclosure agreement, Moelis distributed to each Bidder the confidential information presentation, which included management financial projections and the PhaseI instructions, which stated that each Bidder's non-binding indicative proposal was to be submitted by December 17, 2015.
Between December 1, 2015, and December 14, 2015, one or more members of senior management, including Mr.Beecher, Ms.Laurie Delano, Vice PresidentFinance and Chief Financial Officer of Empire, Mr.Ron Gatz, Vice President and Chief Operating OfficerGas of Empire, and Ms.Kelly Walters, Vice President and Chief Operating OfficerElectric of Empire, participated in telephone calls with Algonquin and Bidder A, Bidder B, Bidder D, Bidder E and Bidder F regarding the confidential information presentation.
On December 11, 2015, following the close of trading of Empire's common stock on the NYSE, Bloomberg News published an article stating that Empire was exploring a sale, was working with an adviser as it seeks potential buyers, that the process was at an early stage, and that no final decision had been made as to whether or not Empire would pursue a sale.
In response to that article and unusual trading activity in Empire's common stock, Empire distributed a press release on December 13, 2015, announcing that although no decision had been made by the Board, it was in the early stages of exploring strategic alternatives and that it had retained a financial advisor to advise Empire in connection with exploring such strategic alternatives.
Shortly after Empire announced that it was exploring strategic alternatives, Moelis and Empire were collectively contacted by nine parties inquiring about the sale process, but only one of those parties, Bidder Gelected to execute a non-disclosure agreement and enter the Phase I process.
Upon execution of the non-disclosure agreement by Bidder G on December15, 2015, Bidder G was provided with a confidential information presentation about Empire and instructed to submit a non-binding indicative proposal, which proposal would include a per-share offer price for our common stock, on a fully diluted basis, by January7, 2016.
On December 16, 2016, Bidder A and Bidder C informed Empire that they were no longer interested in continuing to participate in the process. Also on December 16, 2015, Ms.Laurie Delano, Vice PresidentFinance and Chief Financial Officer of Empire, and Mr.Rob Sager, Controller, Assistant Secretary and Assistant Treasurer participated in a telephone call with Bidder D regarding certain financial information prepared by management provided to the Bidders.
On December 17, 2015, Empire received nonbinding indicative proposals from each of Algonquin and Bidders B, D and F. On December 18, 2015, Empire received a nonbinding indicative proposal from Bidder E. Algonquin's indicative proposal included a per-share offer price of $31.00. The indicative proposals of the other Bidders included per-share offer prices in the range of $27.18-$30.00; however, Bidder E and Bidder F's non-binding indicative proposals each requested an exclusivity period during which such Bidder would finalize due diligence and Empire would exclusively negotiate the terms of a definitive agreement with such Bidder. Also on December 17, 2015, following submission of their nonbinding indicative proposal, a representative of Algonquin contacted Moelis and indicated that, subject to access to non-public information, Algonquin might be able to potentially increase its offer and would be prepared to conduct its due diligence of Empire in an expedited timeframe.
On December 21, 2015, the Board held a meeting that was also attended by certain officers of Empire and representatives of Moelis and Cahill to discuss the nonbinding indicative proposals. Mr.Beecher and representatives of Moelis reviewed with the Board the PhaseI process, including the receipt of the five nonbinding indicative proposals on December 17, 2015 and December 18, 2015 and the contacts from nine parties subsequent to the publication of the December 11, 2015 Bloomberg News article.
Specifically, the Board, Mr.Beecher and representatives of Moelis discussed the level of indicated interest of each of the potential counterparties (including those initiating contact after the December 11 article) and the benefits and considerations of a potential transaction with each counterparty. Representatives of Moelis discussed each of the indications of value received, with particular focus on the proposals from the two highest biddersAlgonquin and Bidder Fincluding the structure of transaction consideration, exclusivity requirements, organization structures, due diligence requirements, required approvals, community and regulatory relationships and other issues. A representative of Moelis also presented an illustrative preliminary valuation analysis update based on management forecasts and certain other financial analyses.
Representatives of Moelis then discussed with the Board potential next steps in the process, which we refer to as Phase II, if the Board decided to proceed with Phase II. Phase II would include, among other things, (i)Empire granting the remaining Bidders access to an electronic data room to conduct due diligence, (ii)Empire distributing a draft merger agreement to the remaining Bidders, (iii)additional management presentations and potential site visits and (iv)a request for the remaining Bidders to submit final, binding proposals, which would include each Bidder's mark-up of the draft merger agreement in a form that each Bidder would be ready to execute. The Board discussed with Mr.Beecher and the representatives of its outside advisors strategic issues regarding Phase II.
The Board also determined, based on the indicative proposals received, the discussions with Mr.Beecher and Empire's outside advisors, and the time necessary to prepare for Phase II, that Moelis would contact each of the Bidders and inform them that no decision regarding timing on the remainder of the process would be provided until early January 2016. In the case of Bidder E and Bidder F, Moelis was directed to inform them that their requests for exclusivity would not be granted and that to continue in the process they would need to proceed without exclusivity. In the case of Algonquin, Moelis was directed to obtain additional information regarding Algonquin's statement on December 17, 2015 that, subject to being granted access to non-public information, Algonquin might be able to potentially increase its offer and would be prepared to accelerate its due diligence of Empire. In light of the December 11, 2015 article and subsequent Empire press release, the Board considered that other counterparties who would be interested in the process were on notice of the process and could contact Empire if interested (as evidenced by the nine inquiries following those events). As a result, the Board determined not to approach additional counterparties at that time.
A representative of Cahill then discussed with the Board each of the non-disclosure agreements that was executed and certain terms that likely would be included in the draft merger agreement that would be distributed to the Bidders in Phase II, including certain regulatory conditions and the Board's fiduciary duties in connection with the process.
After the meeting, a representative of Moelis telephoned each of the Bidders to communicate the Board's directive. On December 22, 2015, Bidder F informed Moelis that it was no longer interested in continuing to participate in the process because Empire had not agreed to its proposed exclusivity period. However, Bidder F did inform the representative of Moelis that Bidder F's proposal would stand in the event Empire was willing to grant exclusivity to Bidder F at a later date but that Bidder F was unlikely to meaningfully increase its $30.00 per share indicative offer price. In a separate discussion, on December 22, 2015, a representative of Bidder E informed Moelis that it would need 45 to 60 days of exclusivity to submit a final proposal. In a separate discussion, on December 22, 2015, a representative of Algonquin and a representative of Wells Fargo, Algonquin's financial advisor, asked Moelis to request that the Board advise Algonquin as to the terms on which the Board would be willing to grant exclusivity to Algonquin.
On December 23, 2015, the Board held a meeting that was also attended by certain officers of Empire and representatives of Moelis and Cahill. At this meeting, Moelis provided an update and discussed with the Board Moelis' conversations with each of the Bidders on December22, 2015. A representative of Moelis further informed the Board that Bidder G expected to submit a nonbinding indicative proposal to Empire by January7, 2016.
The Board determined, based on the discussions with Mr.Beecher and Empire's outside advisors, to direct Moelis to respond to Algonquin with the following terms under which the Board would consider granting exclusivity to Algonquin in the context of a Phase II process: (1)receipt of a binding offer of at least $34.00 per share and completion of diligence by January 14, 2016, (2)submission of a mark-up of the merger agreement which contained acceptable terms and conditions, (3)indicated values from all other Bidders in the process must be below Algonquin's revised offer to be delivered on January 14, 2016 and (4)Algonquin would be granted access to the electronic data room in order for Algonquin to complete due diligence on Empire by January 14, 2016. In addition, the Board determined that Bidder B, Bidder D and Bidder E would be granted access to the electronic data room on January 4, 2016 in order to conduct due diligence on Empire. It was further determined that the electronic data room would contain a draft of the merger agreement.
On December 23, 2015, a representative of Moelis contacted a representative of Algonquin to convey the Board's determination.
On December 28, 2015, a representative of Moelis was informed by a representative of Wells Fargo that, subject to being provided access to non-public information, Algonquin remained willing to consider increasing its proposal to $34.00 per share and expressed an interest in having immediate access to the electronic data room in order to start due diligence on Empire. Algonquin and certain of its outside advisors were granted access to the electronic data room on December 28, 2015.
On January 4, 2016, a representative of Moelis contacted Bidder B, Bidder D and Bidder E to invite them into Phase II of the process and to communicate that the final decision regarding a potential transaction would be made in mid-to-late February. Also on January 4, 2016, Bidder D and certain of its outside advisors were granted access to the electronic data room.
On January 5, 2016, Bidder E informed a representative of Moelis that they were no longer requesting exclusivity in order to continue in the process, and Bidder E and certain of its outside advisors were granted access to the electronic data room.
Also on January 5, 2016, a representative of Algonquin informed a representative of Moelis that Algonquin would not be able to meet the January 14, 2016 target date for a final bid to consider moving forward on an exclusive basis; however, the representative of Algonquin informed the representative of Moelis that Algonquin expected to be able to submit a final bid towards the end of January and remained interested in proceeding on an expedited basis. The representative of Moelis informed the representative of Algonquin that Algonquin could continue to participate in the process on a non-exclusive basis, that the Board had a regularly scheduled meeting in early February and the Board could consider a revised proposal if Algonquin were to submit one prior to that time.
On January 7, 2016, Bidder G submitted a nonbinding indicative proposal of $27.50-$28.50 per share, comprised of 50% cash and 50% stock, and was granted access to the electronic data room on January 8, 2016.
On January 8, 2016, Bidder B informed Moelis that it was no longer interested in continuing to participate in the process.
Between January 7, 2016 and January 15, 2016, members of senior management conducted management presentations to each of Algonquin and Bidders D, E and G.
In addition to the nine parties that contacted Empire earlier in the process, on January 14, 2016, Mr. Beecher was contacted by an additional potential counterparty identified as Bidder H, and a non-disclosure agreement was entered into. Bidder H was then given (i)a confidential information presentation about Empire prepared by Empire management (including certain nonpublic information about Empire) and (ii)instructions for such potential counterparty to submit a non-binding indicative proposal, which proposal would include a per-share offer price for our common stock, on a fully diluted basis.
On January 18, 2016, Cahill received a mark-up of the merger agreement from Husch Blackwell LLP, which we refer to as Husch Blackwell, Algonquin's outside legal counsel in connection with the transaction.
On January 22, 2016, a representative of Moelis distributed to Algonquin, Bidder D, Bidder E and Bidder G, a letter indicating that final bids would be due on February 25, 2016 and that Empire reserved all rights to modify or otherwise abandon the process. Also on January 22, 2016, Empire and Bidder G amended the existing non-disclosure agreement between the parties to make such agreement a mutual non-disclosure agreement such that information regarding Bidder G could be shared with Empire in order for Empire to consider Bidder G's stock component of its bid proposal. Also on January 22, 2016, Cahill distributed a revised draft of the merger agreement to Husch Blackwell.
On January 25, 2016, members of senior management conducted a telephone call with Bidder H regarding the confidential information presentation, and on January 28, 2016, Bidder H informed Moelis that it was no longer interested in continuing to participate in the process. Also on January 25, 2016, Cahill received a revised draft of the merger agreement from Husch Blackwell.
On January 26, 2016, Bidder E verbally indicated to a representative of Moelis that it could increase its indicative offer to a price per share of $29.00 (up from its $28.00 initial indication of interest), or perhaps slightly higher, but that it would require exclusivity in order to move forward in the process.
On January 27, 2016, a representative of Bidder G informed Moelis that Bidder G was revising its indicative offer to provide for all cash consideration.
On January 29, 2016, a representative of Bidder D called a representative of Moelis to inform Moelis that Bidder D was lowering its indicative offer price to a range of $25.00 to $26.00 per share (down from its $28.00 per share initial indication of interest) and it would require exclusivity in order to move forward in the process.
On February 2, 2016, Husch Blackwell distributed to Cahill a revised draft of the merger agreement and a draft of a parent guarantee.
On February 3, 2016, Algonquin submitted its final proposal, which included (1)a price per share of $34.00, (2)drafts of each of the merger agreement, parent guarantee, parent disclosure schedules and Empire disclosure schedules, (3)a draft of an exclusive negotiations agreement (which provided that Empire and Algonquin would be required to negotiate exclusively through February 9, 2016 but that Empire would not otherwise be restricted from continuing its strategic review process or be required to turn off access to the electronic data room for other Bidders participating in the PhaseII process) and (4)executed debt commitment and fee letters from Canadian Imperial Bank of Commerce, the Bank of Nova Scotia, JPMorgan Chase Bank, N.A. and Wells Fargo Securities,LLC. The proposal stated it was subject to final approval by Algonquin's board of directors.
On February 4, 2016, the Board held a meeting that was also attended by officers of Empire and representatives of Moelis and Cahill. At that meeting, representatives of Moelis provided an update to the Board of the Phase II process, including the discussions Moelis had with the Bidders.
Representatives of Moelis and Cahill and Mr.Beecher reviewed with the Board the final proposal received from Algonquin, including the per-share offer price and the mark-up of the draft merger agreement. Moelis provided a preliminary financial overview and analysis of Empire on a standalone basis and the Algonquin proposal. A representative of Cahill provided a summary of the revised draft of the merger agreement and parent guarantee. The representative of Cahill also provided a summary, as well as the terms of the exclusive negotiations agreement.
A representative of Moelis then reviewed certain information provided by Moelis with respect to prior engagements or potential engagements that Moelis had with Algonquin and the other potential counterparties. The Board determined, in consultation with Cahill, that none of the disclosed engagements presented a significant conflict.
After discussion, the Board determined that the proposal from Algonquin could provide greater value to Empire's shareholders than Empire remaining as a standalone company (including the risks and uncertainties in executing Empire's business plan and achieving its financial projections, risks in identifying additional growth opportunities, general macroeconomic challenges and market risks) if an agreement could be reached with Algonquin. The Board directed Empire's management to finalize the terms of the merger agreement and related documents. In addition, the Board directed that Mr.Beecher execute the exclusive negotiations agreement requested by Algonquin, but noted that it had not made a final decision to sell Empire at this time.
Between February 5, 2016 and February 9, 2016, representatives of Cahill (on behalf of Empire) and Husch Blackwell (on behalf of Algonquin) negotiated the merger agreement and related documents.
On February 9, 2016, the Board held a meeting that was also attended by officers of Empire and representatives of Moelis and Cahill. At that meeting, representatives of Moelis and Cahill reviewed with the Board the final proposal received from Algonquin, including the per-share offer price and the revised draft merger agreement. The representatives noted for the Board (i)that Algonquin's per-share offer was (x)$5.50 higher than Bidder G's indicative per-share offer of $28.50, which was not conditioned on exclusivity and (y)$4.00 higher than Bidder F's indicative per-share offer of $30.00, $5.00 higher per-share than Bidder E's verbal indicative per-share offer of $29.00 and $8.00-$9.00 higher than Bidder D's verbal indicative per-share offer of $25.00-$26.00, each of which were conditioned upon receiving exclusivity, (ii)that Algonquin's per-share offer price represented (x)an approximately 50% premium to the closing price of Empire's common stock on the NYSE on December10, 2015, which was the last trading day prior to the date that there was a public news report that Empire was exploring a potential sale, and (y)a higher premium to the unaffected market price of Empire's common stock than all of the comparable precedent electric utility industry transactions reviewed with the Board and (iii)their belief that, in the aggregate, the terms of the negotiated draft merger agreement with Algonquin were generally favorable to Empire and its shareholders.
Based on a variety of factors, including (w)the premium being offered by Algonquin and the difference in price between Algonquin's proposal and the remaining indications of value, (x)the limited number of remaining Bidders, (y)the discussions held to date between Moelis and the remaining other Bidders, and (z)the analyses prepared by Moelis and discussed with Board, the Board determined that is was not likely that any of the remaining Bidders would increase their bids to at least $34.00 per share and that there was no certainty that the remaining Bidders would submit a final proposal on other transaction terms as favorable as the terms provided for in the Algonquin proposal.
Moelis also reviewed the financial analyses performed by Moelis in connection with its evaluation of the consideration to be received by the holders of shares of Empire common stock in the merger. Moelis delivered its oral opinion to the Board (which was subsequently confirmed by delivery of a written opinion dated February 9, 2016) to the effect that, as of February 9, 2016, based upon and subject to the assumptions made, procedures followed, matters considered and limitations and qualifications set forth in the opinion, the per-share merger consideration to be received by holders of Empire common stock was fair, from a financial point of view, to such holders.
Following these presentations, and after discussion, deliberation and consideration of all of the factors that it considered relevant, the Board unanimously determined that the merger was in the best interests of Empire and its shareholders, and declared it advisable for Empire to enter into the merger agreement, adopted the merger agreement and approved Empire's execution, delivery and performance of the merger agreement and the consummation of the transactions contemplated by the merger agreement and resolved to recommend that Empire's shareholders adopt the merger agreement. Shortly thereafter, Empire, Algonquin and Merger Sub executed the merger agreement, and Empire and Algonquin issued a joint press release announcing the execution of the merger agreement.