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4) Date filed:
December 12, 1997
Mr. Larry McCurdy
President and Chief Executive Officer
Echlin Inc.
100 Double Beach Road
Branford, CT 06405
Dear Larry:
Thanks for calling this afternoon to report on the results of your meeting
earlier today. I was pleased to hear that you intend to bring our proposal
to your Board of Directors next week for their consideration. I thought it
would be helpful to summarize my thoughts in a format that you could present
to them.
Since my first meeting with Trevor Jones in February, I have felt strongly
that a strategic merger of SPX and Echlin would be a "win-win" situation for
our shareholders, customers and employees. I thought that our meeting last
month in Las Vegas, the meeting between Patrick O'Leary and Bob Tobey, and
our subsequent phone conversations had been comprehensive, candid, and
productive. I am writing this letter in the hope that I can convey to you
and your Board of Directors the merits of our proposal, and my strong desire
to progress towards a mutually beneficial transaction.
This letter outlines the details of our proposal for a strategic combination
of Echlin and SPX. It does not constitute an offer to buy or merge with your
company. SPX has every intention of keeping this letter confidential and we
request that you and your Board also maintain confidentiality.
As we discussed, SPX is thinking of a price for Echlin shares in the $40's
range, which would be paid in a combination of cash and SPX stock. At this
level, Echlin shareholders would realize an immediate premium in excess of
30% over the current trading price. If there is additional value in your
company that we have not identified, we are open to revising our thinking.
We would welcome the opportunity to be persuaded by you that there is
additional value in Echlin shares.
At a 75/25 ratio of stock to cash, Echlin shareholders would maintain
approximately a 70% ownership of the new entity, sharing in the upside
inherent in both SPX and Echlin. In addition, the stock portion of the
transaction would be tax free.
This proposed transaction would provide your shareholders with two powerful
benefits: (1) IMMEDIATE PAYMENT OF A SUBSTANTIAL PREMIUM FOR THEIR SHARES IN
CASH AND TRADEABLE SECURITIES, AS WELL AS (2) THE OPPORTUNITY TO BENEFIT FROM
THE SUCCESS OF THE COMBINED COMPANY GOING FORWARD.
I have outlined our current thinking below in a question and answer format.
I believe that this format clearly communicates the benefits of our proposal
to all Echlin stakeholders and forms the basis for continued discussion:
() WHAT IS THE STRATEGIC RATIONALE OF THE PROPOSED COMBINATION OF ECHLIN
AND SPX?
Consolidation is occurring at all points of the vehicle service value
chain. SPX's strength in special service warranty tools, OEM dealer
distribution, diagnostic and emissions testing equipment, service and
owners' manual development, and vehicle component manufacturing are a
great fit with Echlin's aftermarket parts business.
() Access to aftermarket parts is only one critical element of the fully
integrated vehicle service process. Consolidation of vehicle service
locations, growth of mega dealerships, and increasing complexity of
vehicles are market trends that drive integration of the vehicle
service lifecycle. Both Echlin and SPX need to proactively address
this integration trend, or market forces will take over.
() WHAT WOULD THE COMBINED ENTITY LOOK LIKE ON A PRO FORMA BASIS?
The revenue of the combined entity would exceed $4.5 billion, leading
to a rank of 300th in the Fortune 500. The revenue split would be 53%
aftermarket parts, 32% OEM components, and 15% service tools and
equipment. The increased size, coupled with an ideal mix of businesses
to support the market driven trend towards integration of the vehicle
service process, will result in an entity that is ideally positioned
for future growth and profitability.
() WHY IS SPX THE RIGHT PARTNER?
In addition to the strategic fit, the operational turnaround underway
for the last two years at SPX mirrors the challenges faced by the
Echlin leadership team today. During the last two years, SPX stock has
appreciated by over 350% while Echlin shares have declined by over 15%
during the same period.
() Another similarity between our two organizations is our mutual belief
in the principles of EVA as a method to maximize shareholder wealth.
The SPX leadership team successfully implemented EVA in less than six
months and had over 75% of all associates on an EVA incentive pay
system within the first year.
We implemented an Operational Excellence program in all businesses that has
resulted in shorter cycle times, lower inventories, and improved
profitability. Our OE components businesses now have 14% operating margins.
In addition, we have instituted a series of shareholder friendly actions
including a Dutch Auction tender offer and open market repurchases.
Our rapid execution of improvement plans has paid off in operational
results. We expect our 1997 EPS to reflect an improvement of nearly 70% over
1996 and we are forecasting an additional 28% increase for 1998. Analysts'
12-month Echlin prices for SPX stock are in the range of $85 to $100.
SPX has created over $700 million in market value for its shareholders in the
last two years through rapid execution of an operational and strategic
turnaround. Echlin has announced similar turnaround plans, but the execution
has not yet resulted in the creation of shareholder wealth.
The turnaround experience of the SPX leadership team, coupled with the
industry expertise of Echlin management, can accelerate the improvements
underway at both companies. Both SPX and Echlin shareholders can participate
in the upside resulting from performance improvements within the new combined
entity.
() DOES SPX HAVE FINANCIAL RESOURCES TO COMPLETE A TRANSACTION?
The combined entity will have EBITDA approaching $500 million, thus
supporting nearly $3 billion in debt. After discussions with several
potential financing sources, we are very confident in our ability to
obtain the capital necessary to fund the cash portion of a cash/stock
transaction.
() ECHLIN SHARES ARE UNDERVALUED AND MANAGEMENT HAS PLANS IN PLACE TO
INCREASE SHAREHOLDER WEALTH OVER THE NEXT SEVERAL YEARS. WHAT IS THE
BENEFIT FOR ECHLIN SHAREHOLDERS OF A TRANSACTION WITH SPX NOW?
We are not proposing a cash transaction where shareholders are asked to
sell out for a bargain price, leaving the new owner to reap all of the
upside in the company. Rather, what we are proposing is a business
combination of the two companies. Echlin shareholders will realize a
substantial, immediate premium. Even more importantly, they will share
in the significant future upside by owning approximately 70% of the
newly created combined entity.
() The proposed transaction increases the likelihood that Echlin
shareholders will realize the upside in Echlin, as well as benefit from
the upside inherent in SPX. Echlin shares have not appreciated, in
spite of the restructuring plans and management changes that have been
recently implemented, and have never traded over $40 per share. In
fact, the stock has declined by over 15% during the last two years.
() At the same time, SPX has appreciated over 350% and the S&P 500 has
increased 60%. There is significant upside in SPX shares, and we
continue to believe that our stock is undervalued. Our execution of
operational improvements, including the implementation of EVA, has
rapidly improved all operating measurements. Analysts' 12-month Echlin
prices range up to $100 per share.
() There is significant opportunity to create shareholder value for the
shareholders of both companies, but only with exceptional execution of
turnaround plans. Combining the management teams of SPX and Echlin
increases the likelihood of a successful execution of these plans.
() There is no reason to wait. The sooner the transaction is completed,
the sooner both sets of shareholders begin to benefit. Even if Echlin
shares begin to appreciate due to improved profitability from your
restructuring plans, it doesn't diminish the merits of our proposal.
Your shareholders would get a significant premium and an opportunity to
share in the upside of both Echlin and SPX.
() WHAT IS THE IMPACT ON ECHLIN'S CORPORATE IDENTITY?
Wall Street is confident in SPX's ability to execute a turnaround and
increase shareholder wealth. Therefore, to maximize the value to
shareholders of the combined entity, it is critical that SPX be seen as
the acquirer in any strategic merger with Echlin. However, we are open
to the possibility of maintaining the Echlin name in association with
all or part of the new entity.
() WHAT IS THE IMPACT ON ECHLIN DIRECTORS, OFFICERS, AND EMPLOYEES?
To maximize the value to both sets of shareholders, it is essential
that I be Chairman and CEO of the combined entity. However, SPX values
the industry expertise that Echlin management would bring to the
combined team. We are confident that we can develop an approach to
governance of the combined entity that takes into consideration the
significant stake that your shareholders will have in that company.
The most logical next step would appear to be for our respective teams to
undertake an intensive analysis with valuation of the proposed transaction in
mind. As I mentioned earlier, we are receptive to being convinced by you
that Echlin shares have a value greater than we have already identified. I
suggest that our companies retain Joel Stern of Stern Stewart & Company to
assist with this valuation analysis. Joel is an independent third party that
is familiar with both of our organizations.
I am delighted that our discussions up to this point have resulted in your
agreement to present the idea of a strategic business combination with SPX to
your Board. I hope that this letter will facilitate that presentation, in
fact I suggest you share a copy of it with the Board. We view our proposal
as a strategic combination of SPX and Echlin, rather than an acquisition of
your company. My strong preference is for us to enter into discussions with
the goal of negotiating and entering into a definitive business combination
agreement as quickly as possible.
I am also prepared to meet with and make a presentation to your Board of
Directors about any and all aspects of the proposed transaction. I have
discussed the matter with my Board of Directors and have their full support
to pursue the transaction.
I look forward to hearing from you after your Board Meeting next week.
Sincerely,
/s/ John B. Blystone
John B. Blystone
Chairman, President & CEO
jep/JBB/Echlin
Enclosures
<PAGE>
December 17, 1997
CONFIDENTIAL
Mr. John B. Blystone
Chairman, President and Chief Executive Officer
SPX Corporation
700 Terrace Point Drive
Muskegon, MI 49443-3301
Dear John,
I received your letter of December 12th. As part of our regular meeting with
the Board of Directors in connection with our annual meeting this week, I
shared your views as expressed to me by you as well as those in your letter
with the Board and had a full discussion of the merits of your proposal.
Our position remains that Echlin has no interest in pursuing further
discussions with SPX regarding a combination of our businesses.
Thank you for your interest in us.
Sincerely,
/s/ Larry McCurdy
<PAGE>
December 18, 1997
CONFIDENTIAL
To: The Echlin Board of Directors
I was disappointed to hear that the Echlin Board chose not to pursue my
proposal for a strategic combination of SPX and Echlin. As outlined in my
letter of December 12 to Larry McCurdy, I believe that the proposed
transaction is in the best interest of Echlin shareholders and SPX
shareholders.
My letter, which is attached, did not constitute an offer to buy or merge
with your company, but outlined in detail the merits of the proposed
strategic combination of SPX and Echlin:
() Echlin shareholders would realize an immediate premium of at least 30%.
If there is additional value in your company that we have not identified,
we are open to revising our thinking.
() At a 75/25 ratio of stock to cash, Echlin shareholders would maintain
approximately 70% ownership of the new entity, sharing in the upside
inherent in both SPX and Echlin.
() Consolidation is occurring at all points of the vehicle service value
chain. As the vehicle service process continues to integrate, SPX's
strength in special service warranty tools, OEM dealer distribution,
diagnostic and emissions testing equipment, service and owners' manual
development, and vehicle component manufacturing are a great fit with
Echlin's aftermarket parts business. A combination of SPX and Echlin
would position the new entity for future success.
() The operational turnaround underway at SPX for the last two years mirrors
the challenges faced by the Echlin leadership team today. The turnaround
experience of the SPX leadership team, coupled with the industry expertise
of Echlin management, can accelerate the improvements underway at both
companies.
() There is no reason to wait. Echlin stock appreciated this week after
announcement of first quarter earnings. This does not diminish the merits
of our proposal. Echlin shareholders have the opportunity to realize an
immediate premium and share in the long-term upside of the new and
stronger combined entity.
In my letter, I stated that the most logical next step would be for our
respective teams to undertake an intensive analysis with valuation of the
proposed transaction in mind. I suggested that our companies retain Joel
Stern of Stern Stewart & Company to assist with this valuation analysis. I
still believe that this course of action has the greatest potential for
creating significant value for both Echlin and SPX shareholders.
I also offered to meet with and make a presentation to the Echlin Board of
Directors to discuss any and all aspects of the proposed transaction. I
believe that such a meeting would be mutually beneficial and will be glad to
meet with the Echlin Board during the week of January 5, 1998.
My strong preference is for us to enter into discussions with the goal of
negotiating and entering into a definitive business combination agreement as
quickly as possible. There is no reason to wait. The sooner the transaction
is completed, the sooner both sets of shareholders begin to benefit.
Please call me if you would like to set up a meeting. During the period
December 21 to January 1, I can be reached at (941) 434-2212.
Sincerely,
SPX CORPORATION
/s/ John B. Blystone
John B. Blystone
Chairman, President and
Chief Executive Officer
jep\JBB\Echlin3
Enclosure
December 23, 1997
Mr. John B. Blystone
Chairman, President and Chief Executive Officer
SPX Corporation
700 Terrace Point Drive
Muskegon, MI 49443-3301
Dear John:
We received your correspondence dated December 18, 1997. This
correspondence, together with your correspondence dated December 12, 1997,
has been discussed with every Board member and the Board is of unanimous view
that Echlin does not have an interest in pursuing discussions with SPX
Corporation.
If you do value confidentiality, you should be aware that several of your
letters to our Directors were misdirected - one in particular was sent in
care of a non-profit organization on which he served.
Very truly yours,
/s/ Larry McCurdy
CONFIDENTIAL
January 8, 1998
Mr. John B. Blystone
Chairman, President and Chief Executive Officer
SPX Corporation
700 Terrace Point Drive
Muskegon, MI 49443
Dear Mr. Blystone
I hereby acknowledge receipt of your January 6, 1998 letter informing me of
the SPX filing under the Hart-Scott-Rodino Antitrust Improvements Act
requesting clearance to acquire voting securities of Echlin Inc. valued in
excess of $15 million. While I consider this a rather precipitous move, I
have referred this notice to our teams of outside advisors.
I want to take this opportunity to reiterate our prior responses to your
previous overtures: the proposed combination has neither business nor
strategic rationale. The combination is clearly not in the best interest of
the Echlin shareholders.
I trust that our deeper analysis of the drivers of the automotive aftermarket
and the service repair industry will confirm the above. However, should it
be necessary, please be advised that Echlin and its advisors stand ready to
aggressively defend our shareholders interests.
Very truly yours,
/s/ Larry McCurdy
cc: Mr. J. Kermit Campbell
Ms. Sarah R. Coffin
Mr. Frank A. Ehmann
Mr. Edward D. Hopkins
Mr. Charles E. Johnson
Mr. Ronald L. Kerber
Mr. Peter H. Merlin
Mr. David P. Williams
