Capitol Investment Corp. IV (CIC) and Nesco filed a prospectus supplement this morning revealing a newly amended merger agreement reducing the consideration to be issued to Nesco and canceling an additional number of the Sponsor’s founder shares. Furthermore, the original cash payment of $75 million to Nesco has now been changed to stock consideration (7,500,000 shares at $10.00)
Looking at the changes, the newly re-cut deal reduces the initial implied enterprise value of $1.087 billion by $50 million so that the new enterprise value is 1.037 billion. This means the implied multiple is now 5.7x 2020 Estimated Adjusted EBITDA of $190 million. Is this enough? Well, the original multiple for 2020 was 6.4x Estimated Adjusted EBITDA of $170 million, which is a nice change. However, if you notice, they’ve increased their projected EBITDA by $20 million ($170M > $190M). BUT, as recently as June 13th, when CIC filed a “Nesco Investor Update”, they were re-affirming an adjusted EBITDA outlook of $170 million…..so, over the past four weeks, that projection has increased almost 12%. For arguments sake, if we use the old figure of $170 million, the multiple is actually 6.1x.
Regardless, projections are “projections”, so let’s just say the multiple is somewhere in the range of 5.7x to 6.1x. The larger message here is that both sides are willing to make concessions to get this deal over the finish line. Additionally, their underwriters are making concessions too. Per the filing, their underwriters and financial advisors will also be reducing their fees by a sizeable $10 million. Everybody’s getting haircuts.
As a reminder, CIC has their shareholder vote scheduled for next Tuesday, July 16th, which means tomorrow is the last day shareholders can opt to redeem. Is this enough time to let investors absorb these changes? Seems a tad rushed, so perhaps a vote postponement is in the future so they can better market the new deal. Only problem is, they run out of time by mid-August…
A summary of the changes to the agreement have been provided below:
- The $75,000,000 cash previously disclosed as payable to Nesco Owner out of the transaction proceeds was eliminated and replaced with common stock consideration at $10.00 per share, or 7,500,000 shares, regardless of redemptions.
- Excluding the 7,500,000 additional shares referred to above, the aggregate common stock consideration to Nesco Owner was reduced by 3,303,597 shares (from 17,464,235 shares) as Nesco Owner’s contribution to the $50 million enterprise value reduction.
- Earnout consideration to Nesco Owner was increased by 1,651,798 shares. All earnout shares will be issued to Nesco Owner at the closing of the Transactions, but will be forfeit if the applicable trading prices are not achieved.
- The trading price of Capitol’s common stock must exceed $19.00 per share for any 20 trading days during a 30 consecutive trading day period or a sale transaction of the combined company occurs in which the consideration paid per share to holders of common stock exceeds $19.00 per share.
- The Sponsors have contributed to the enterprise value reduction by subjecting an additional 696,403 shares to cancellation or an additional lock-up:
- 348,202 shares (50%) will be subject to an earn-out such that if during the seven-year period following the closing of the Transactions, the trading price of Capitol’s common stock exceeds $19.00 per share for any 20 trading days during a 30 consecutive trading day period or if a sale transaction of the combined company occurs in which the consideration paid per share to holders of common stock exceeds $19.00 per share.
- 348, 201 shares (50%) will be cancelled.
- Nesco Owner has agreed that it and/or one or more affiliates will purchase an aggregate of 2,500,000 shares of Capitol common stock at the closing of the Transactions at a price per share of $10.00 ($25 million)
- Nesco Owner (and its successors and assigns) will now have the right to designate up to four persons to be appointed or nominated for election to the board of directors of Capitol if it and its affiliates own at least 45% of the common shares, subject to reduction based on the aggregate ownership of Nesco Owner and its successors and assigns, as compared to the original right to designate up to three persons. The board will consist of between seven and nine members depending on Nesco Owner’s pro forma ownership.
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