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Exhibit (c)(1)
November 8, 2000
The Members of the Special Committee
of the Board of Directors
Holt's Cigar Holdings, Inc.
12270 Townsend Road
Philadelphia, PA 19154
Dear Sirs:
We understand that Holt's Cigar Holdings, Inc., (the "Company") HCH
Acquisition Corp. (the "Purchaser"), Robert G. Levin and the Fuente Investment
Partnership, a Partnership whose interests are beneficially owned by Carlos A.
Fuente, Sr., Carlos P. Fuente, Jr. and Cynthia Fuente Suarez (collectively, the
"Purchaser Stockholders") will enter into an Agreement and Plan of Merger dated
November 8, 2000 (the "Merger Agreement") pursuant to which (i) the Purchaser
would commence a tender offer (the "Tender Offer") for all the outstanding
shares (other than shares beneficially owned by the Purchaser Stockholders) of
the Company's common stock, par value $0.001 per share (the "Company Shares"),
for $5.50 per share (the "Consideration") and (ii) the Purchaser would be merged
with and into the Company in a merger (the "Merger"), in which each of the
Company's Shares not acquired in the Tender Offer, other than Company Shares
held in treasury or held by the Purchaser Stockholders or as to which dissenters
rights have been perfected, would be converted into the right to receive the
Consideration. The Tender Offer and the Merger, taken together, are referred to
as the "Transaction."
You have asked us whether, in our opinion, the Consideration to be
received by holders of the Company Shares pursuant to the Transaction is fair
from a financial point of view to such holders.
Berwind Financial, L.P., as part of its investment banking business,
regularly is engaged in the valuation of assets, securities and companies in
connection with various types of asset and security transactions, including
mergers, acquisitions, going-private transactions, private placements and
valuations for various other purposes, and in the determination of adequate
consideration in such transactions. We have been retained by you for the sole
purpose of providing this opinion and have not provided other investment banking
services to the Company. We have not been authorized by the Company or the
Special Committee of the Board of Directors to solicit, nor have we solicited,
third-party indications of interest for acquisition of all or any part of the
Company.
In arriving at our opinion, we have, among other things: (i) reviewed
the historical financial performance, current financial position and general
prospects of the Company, including a draft version of the Company's internally
prepared second quarter Form 10-Q, (ii) reviewed material to be sent to
shareholders in connection with the Transaction including the Tender Offer (the
"Tender Offer Materials") and the Merger Agreement, (iii) studied and analyzed
the stock market trading history of the Company, (iv) considered the terms and
conditions of the Transaction as compared with the terms and conditions of
comparable transactions, (v) met with certain members of the Company's senior
management and the Special
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Committee to discuss its operations, historical financial statements and future
prospects, and (vi) conducted such other financial analyses, studies and
investigations as we deemed appropriate.
Our opinion is given in reliance on information and representations
made or given by the Company, and its officers, directors, auditors, counsel and
other agents, and on filings, releases and other information issued by the
Company including financial statements, financial projections and stock price
data as well as certain information from recognized independent sources. We have
not independently verified the information concerning the Company or other data
which we have considered in our review and, for purposes of the opinion set
forth below, we have assumed and relied upon the accuracy and completeness of
all such information and data. Additionally, we assume that the Tender Offer and
Merger are in all respects, lawful under applicable law.
With regard to financial and other information relating to the general
prospects of the Company, we have assumed that such information has been
reasonably prepared and reflects the best currently available estimates and
judgments of the management of the Company as to the Company's most likely
future performance. We have also assumed, with your consent, that the Tender
Offer Materials and Merger Agreement that we reviewed will conform in all
material respects to the final Tender Offer Materials and Merger Agreement when
in final form.
Our opinion is based upon information provided to us by the management
of the Company, as well as market, economic, industry, financial and other
conditions as they exist and can be evaluated only as of the date hereof and
speaks to no other period. Our opinion pertains only to the financial
consideration of the Transaction and is provided for the information and
assistance of the Special Committee. Our opinion does not constitute a
recommendation to the Special Committee and does not constitute a recommendation
to the Company's shareholders as to whether such shareholders should tender any
Company Shares pursuant to the Tender Offer.
On the basis of, and subject to the foregoing, we are of the opinion
that, as of the date hereof, the Consideration to be received by the holders of
Company Shares pursuant to the Transaction is fair from a financial point of
view to such holders.
Sincerely,
/s/ Berwind Financial, L.P.
BERWIND FINANCIAL, L.P.
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OVERVIEW.
Pursuant to an engagement letter dated October 18, 2000 (the "Engagement
Letter"), the Special Committee retained Berwind to render a fairness opinion in
connection with the Transaction. Berwind is an investment banking and financial
advisory firm with experience in the valuation of businesses and their
securities in connection with mergers and acquisitions, private placements and
valuations for various corporate purposes. Berwind has had no prior investment
advisory or corporate finance relationship with the Company.
On November 8, 2000, Berwind delivered its oral opinion to the Special
Committee, subsequently confirmed in writing, that as of such date and based
upon the assumptions made, matters considered and limitations on the review set
forth therein, the Consideration to be received by holders of Shares pursuant to
the Transaction is fair from a financial point of view to such holders.
THE FULL TEXT OF BERWIND'S OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW SET FORTH THEREIN, IS ATTACHED
AS SCHEDULE I TO THE 14D-9 AND IS INCORPORATED BY REFERENCE HEREIN. THE
DESCRIPTION OF BERWIND'S OPINION BELOW SETS FORTH THE MATERIAL TERMS OF THE
OPINION. HOLDERS OF SHARES ARE URGED TO, AND SHOULD, READ CAREFULLY SUCH OPINION
IN ITS ENTIRETY. THE FOLLOWING SUMMARY OF BERWIND'S OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
Berwind's opinion is addressed to the Special Committee and addresses only the
fairness from a financial point of view of the consideration to be received by
holders of Shares, other than the Purchaser and the Purchaser Stockholders,
pursuant to the Transaction. The opinion does not constitute, nor should it be
construed as, a recommendation to any stockholder as to whether he or she should
tender his or her shares pursuant to the Tender Offer.
In connection with the preparation of the opinion, Berwind, among other things:
(a) Reviewed the historical financial performance, current financial
position and general prospects of the Company, including a draft
version of the Company's internally prepared second quarter Form 10-Q;
(b) Reviewed material to be sent to shareholders in connection with the
Tender Offer;
(c) Studied and analyzed the stock market trading history of the Company;
(d) Considered the terms and conditions of the Transaction as compared with
the terms and conditions of comparable transactions;
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(e) Met with certain members of the Company's senior management and the
Special Committee to discuss its operations, historical financial
statements and future prospects;
(f) Conducted such other financial analyses, studies and investigations as
it deemed appropriate.
In preparing its opinion, Berwind assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to it,
discussed with or reviewed by it, or publicly available. Berwind did not assume
any responsibility for independently verifying such information or undertaking
an independent evaluation or appraisal of the assets or liabilities of the
Company nor was it furnished with any such independent evaluation or appraisal.
In addition, Berwind has not assumed any obligation to conduct, nor did it
conduct, any physical inspection of the properties or facilities of the Company.
In connection with the preparation of its opinion, Berwind was not engaged nor
authorized by the Company, the Special Committee of the Board of Directors or
the Board of Directors to solicit, nor has Berwind solicited, third-party
indications of interest for the acquisition of all or any part of the Company.
Berwind's opinion is necessarily based upon market, economic and other
conditions as they exist and could be evaluated, and on the information made
available to Berwind as of, the date of the opinion and speaks to no other
period.
The following is a summary of the material analyses utilized by Berwind in
connection with the opinion.
VALUATION OF THE COMPANY.
PREMIUMS PAID ANALYSIS. Berwind performed a Premiums Paid Analysis for the
Company based upon the review and analysis of the range of premiums paid in
acquisitions of minority ownership positions for the period between January 1,
1997 through November 7, 2000. For the period selected, Berwind reviewed 59
selected transactions where the ownership of the acquiror in the target at the
time of the announcement of the transaction was greater than 70%. Using
information obtained from Thomson Financial Securities Data and other publicly
available information, Berwind obtained the premium of the offer price per share
relative to the target company's stock price one day, one week and four weeks
prior to the date of announcement of the transaction (the "Announcement"). The
following median and mean range of premiums were paid to the target company's
stock prior to Announcement:
<TABLE>
<CAPTION>
Median Range Mean Range Tender Offer
------------ ---------- ------------
<S> <C> <C> <C>
One Day 20.04% 20.57% 57.14%
One Week 20.81% 25.07% 62.96%
One Month 27.62% 35.71% 57.14%
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS. Berwind performed a Discounted Cash
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Flow Analysis (i.e., analysis of the present value of the forecasted unlevered
after-tax cash flows) for the Company for the five year period beginning October
1, 2000, using discount rates (determined through the use of the Capital Asset
Pricing Model) ranging from 16.5% to 18.5%, a terminal value based on the
perpetuity method and a range of financial forecasts provided by the Company's
management and adjusted through discussions with the Company's management. Based
upon the foregoing Berwind determined a reference range for an implied value per
Share of $4.69 to $5.58, with a midpoint of $5.19 (as compared to the Tender
Offer at $5.50).
FINANCIAL SPONSOR TRANSACTION ANALYSIS. Using the range of financial forecasts
developed in connection with the Discounted Cash Flow Analysis described above,
Berwind performed a Financial Sponsor Transaction Analysis for the Company. For
purposes of this analysis, Berwind has assumed a transaction value of $36.3
million and a financing requirement of $19.0 million. The transaction value was
determined by multiplying the Offer Price of $5.50 per Share by 6,602,863 shares
outstanding. The financing requirement was determined by subtracting excess cash
and marketable securities (including option proceeds) held by the Company from
the transaction value. Berwind assumed a financing structure of 35% equity and
65% debt. Berwind then calculated the rate of return on the equity investment
using residual value multiples of 3.5x, 4.0x and 4.5x forecasted 2005 EBITDA at
range of forecasted operating profit margins. Based on the range of residual
value multiples and forecasted operating profit margins, the rate of return on
the equity investment ranged from 14.8% to 32.6%, with a midpoint of 26.2%.
Berwind determined a financial sponsor's rate of return requirement to be 30% to
35% and calculated a range of implied Share prices. Based on an exit EBITDA
multiple of 4.0x and the range of forecasted operating profit margins the
implied Share price ranged from $4.54 to $5.46, with a midpoint of $5.03 per
Share (as compared to the Tender Offer at $5.50).
"COMPARABLE" COMPANY ANALYSIS. Berwind compared certain financial and operating
ratios for the Company with the corresponding financial and operating ratios for
a group of publicly traded companies engaged in the specialty retail business.
For the purpose of its analysis, the following companies were used as companies
"comparable" to the Company: Boyd's Collection, Ltd.; Brookstone, Inc.; Guitar
Center, Inc.; Natural Wonders, Inc.; Right Start, Inc.; Sharper Image Corp.;
Sunglass Hut International, Inc., and UST, Inc. (collectively the "Comparable
Companies").
For each of the Comparable Companies, Berwind calculated price-to-earnings
multiples based on the Comparable Companies' latest twelve months ("LTM")
earnings, estimated earnings for current fiscal year and estimated earnings per
share for the next fiscal year. This analysis resulted in the following
multiples:
<TABLE>
<CAPTION>
Range of
Multiples Median Tender Offer
----------- ------ ------------
<S> <C> <C> <C>
LTM earnings 8.7 - 16.0x 10.0x 11.2x
Estimated current 7.4 - 13.9x 10.6x 9.7x
year earnings
Estimated forward 8.0 - 11.9x 10.4x No Company
year earnings estimate
</TABLE>
Berwind also calculated enterprise value multiples (defined as market value of
equity plus net debt less excess cash) based on LTM sales, LTM earnings before
interest, taxes, depreciation and amortization ("EBITDA") and LTM earnings
before interest and taxes ("EBIT"). This analysis resulted in the following
multiples:
<TABLE>
<CAPTION>
Range of
Multiples Median Tender Offer
----------- ------ ------------
<S> <C> <C> <C>
LTM Sales 0.2 - 3.3x 0.5x 0.6x
LTM EBITDA 3.7 - 7.6x 6.2x 3.8x
LTM EBIT 5.5 - 10.6x 7.5x 4.3x
</TABLE>
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To calculate the trading multiples utilized in the Comparable Company Analysis,
Berwind used publicly available information concerning the historical and
projected financial performance of the Comparable Companies, including public
historical financial information and consensus analysts' earnings estimates.
None of the Comparable Companies is, of course, identical to the Company. Due to
the widespread consolidation within the Company's industry, no directly
comparable public company exists and conclusions as to the valuation of the
Company based on the Comparable Company method is limited. Accordingly, a
complete analysis of the results of the foregoing calculations cannot be limited
to a quantitative review of such results and involves complex considerations and
judgments concerning differences in financial and operating characteristics,
size and number of outstanding shares in the public market of the Comparable
Companies and other factors that could affect the public trading volume of the
Comparable Companies, as well as that of the Company. In addition, the multiples
of stock price to estimated earnings for the Comparable Companies is based on
projections prepared by research analysts using only publicly available
information. Accordingly, such estimates may or may not prove to be accurate.
INDUSTRY TRANSACTIONS ANALYSIS. Using publicly available information, Berwind
analyzed transactions in the cigar industry since November 1, 1996.
Specifically, Berwind reviewed the following transactions: L&LR, Inc.'s
acquisition of the outstanding shares of 800 JR Cigar, Inc., in a going private
transaction; Swedish Match AB's offer for General Cigar Holdings, Inc.; Seita
SA's offer for Consolidated Cigar Holdings, Inc.; Swisher International's offer
for its outstanding public shares; the acquisition of Boynton Tobacconists, Inc.
by Windsor Capital Corp.; Tabacalera Cigars International SA's offer for
Havatampa Inc.'s Cigar Division; General Cigar Holdings, Inc.'s acquisition of
Culbro Corp.; Mafco Holdings, Inc.'s purchase of the outstanding stock of Mafco
Consolidated Group, Inc. in a going private transaction; and General Cigar
Holding, Inc.'s offer for Villazon & Co. (collectively, the "Industry
Transactions"). Berwind noted that six of the nine Industry Transactions
represent the acquisition of control of the target company, which may not be
directly comparable to the acquisition of a minority stake of a target company,
as in the Transaction. Berwind also noted that seven of the nine Industry
Transactions involved companies, the revenues of which and purchase price for
which were substantially larger than those for the Company. The Boynton
Tobacconist transaction was of a company substantially smaller than the Company.
The Companies analyzed in the Industry Transactions differ materially from the
Company due to size, historical growth and growth prospects, profit margins and
product mix and conclusions as to the valuation of the Company based on Industry
Transactions is, therefore, limited. Berwind also noted that certain
transactions were announced during periods of significantly different industry
fundamentals and expectations as compared to the current time period. Berwind
calculated the transaction values for the target companies based on financial
results for the LTM immediately preceding the announcement of each of the
respective transactions including price-to-LTM earnings, enterprise value-to-LTM
revenue, enterprise value-to-LTM EBIT and enterprise value-to-LTM EBITDA. The
analysis resulted in the following multiples:
<TABLE>
<CAPTION>
Median
Median All Going Private
Transactions Transactions Tender Offer
------------ ------------- ------------
<S> <C> <C> <C>
Price/Earnings 12.1x 11.7x 11.2x
Enterprise Value/ 2.0x 1.6x 0.6x
Revenue
Enterprise Value/ 9.6x 7.4x 4.3x
EBIT
Enterprise Value/ 8.7x 6.5x 3.8x
EBITDA
</TABLE>
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No company utilized in the Industry Transaction Analysis is identical to the
Company nor is any transaction identical to the contemplated transaction between
the Company and the Purchaser. The Company differs in some cases markedly from
the Industry Transactions. An analysis of the results, therefore, requires
complex considerations and judgments regarding the financial and operating
characteristics, size and number of outstanding shares in the public market of
the Company and the companies involved in the Industry Transactions, as well as
other facts that could affect their publicly-traded and/or transaction values.
The numerical results are not in themselves meaningful in analyzing the
contemplated transaction as compared to Industry Transactions.
The summary set forth above does not purport to be a complete description of the
analysis presented by Berwind. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. Berwind believes that selecting any portion of its analysis
or of the summary set forth above, without considering the analyses as a whole,
would create an incomplete view of the process underlying Berwind's opinion. In
arriving at its opinion, Berwind considered the results of all such analyses.
The analyses performed by Berwind are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than those suggested by such analyses. The analyses do not purport to
be appraisals or to reflect the prices at which the Company might actually be
sold or the prices at which the Shares may trade at any time in the future. Such
analyses were prepared solely for the purposes of Berwind providing its opinion
to the Special Committee as to the fairness, from a financial point of view, of
the Consideration to be received in the Transaction by holders of Shares, other
than the Purchaser and the Purchaser Stockholders. Because such analyses are
inherently subject to uncertainty, being based upon numerous factors and events,
including, without limitation, factors related to general economic and
competitive conditions beyond the control of the parties or their respective
advisors, none of Berwind, the Company, the Purchaser or any other person
assumes responsibility if future results or actual values are materially
different from those forecast. The foregoing summary does not purport to be a
complete description of the analysis performed by Berwind and is qualified by
reference to the written opinion dated as of November 8, 2000 of Berwind as
attached as an exhibit to the Schedule 14D-9.
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Pursuant to the terms of the Engagement Letter, the Company will pay a fee of
$100,000 to Berwind for its services and for the rendering of its opinion as to
whether the Consideration to be received by holders of Shares pursuant to the
Transaction is fair from a financial point of view to such holders. In addition
to any fees payable to Berwind pursuant to the Engagement Letter, the Company
has agreed to reimburse Berwind for its reasonable out-of-pocket expenses, in
connection with its services and for the rendering of its opinion. The Company
has also agreed to indemnify Berwind, its affiliates and each of its directors,
officers, agents, employees and controlling persons against certain liabilities,
including liabilities under U.S. federal securities laws.
