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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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CONTROL DEVICES, INC.
(Name of Subject Company)
CONTROL DEVICES, INC.
(Name of Person Filing Statement)
COMMON SHARES, NO PAR VALUE
(Title of Class of Securities)
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21238C 10 3
(CUSIP Number of Class of Securities)
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BRUCE D. ATKINSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONTROL DEVICES, INC.
228 NORTHEAST ROAD
STANDISH, MAINE 04084
207-642-4535
(Name, Address and Telephone Number of Person Authorized to Receive Notice
and Communications on Behalf of the Person Filing the Statement)
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COPIES TO:
JAMES A. STRAIN
SOMMER & BARNARD, PC
4000 BANK ONE TOWER
INDIANAPOLIS, INDIANA 46204
317-630-4000
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This Amendment No. 2 to Schedule 14D-9 is being filed to amend Item 4. of
this schedule to read as set forth below.
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ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) RECOMMENDATION OF THE BOARD OF DIRECTORS
At a meeting held on February 22, 1999, at which all the directors were
present, the Board of Directors of the Company unanimously approved and adopted
the Merger Agreement, including the Offer, the Merger and the other transactions
contemplated thereby. The Board of Directors has determined that the Merger
Agreement is fair to and in the best interests of the Company and its
shareholders. The Board recommends that shareholders accept the Offer and tender
their shares of Common Stock pursuant to the Offer and if a meeting of the
Company's shareholders is required to be called and held in accordance with
applicable law, recommends that shareholders approve the Merger Agreement and
the transactions contemplated thereby, including the Merger. For a discussion of
the Board's reasons for its recommendation, see "Reasons for Recommendation,"
below.
A joint press release announcing the Merger Agreement and related
transactions and a letter to the shareholders of the Company communicating the
Board's recommendation are filed as Exhibits to this Schedule 14D-9 and are
incorporated herein by reference.
(b) BACKGROUND TO THE OFFER; REASONS FOR THE RECOMMENDATION OF THE COMPANY'S
BOARD OF DIRECTORS
BACKGROUND OF THE OFFER
On March 3, 1998, Dresdner Kleinwort Benson North America LLC (together with
Kleinwort Benson Securities Limited, "Dresdner Kleinwort Benson"), Parent's
financial adviser, sent a letter to Bruce D. Atkinson, the President, Chief
Executive Officer and a Director of the Company, offering to introduce
representatives of Parent to the Company for the purpose of exploring a
potential alliance. On March 24, 1998, representatives of Dresdner Kleinwort
Benson met with Mr. Atkinson and Jeffrey G. Wood, Vice President, Chief
Financial Officer, Secretary and Treasurer of the Company at the Company's
headquarters in Standish, Maine, for the purpose of obtaining information about
the Company.
On April 29 and 30, 1998, Dr. Fred Westlake, Executive Chairman of Parent,
and Oliver G. Burns, Finance Director of Parent, met with Mr. Atkinson and Mr.
Wood at the Company's headquarters. The meeting consisted of a general
discussion regarding the background of the two companies and their strategic
alternatives. On May 18, 1998, Dr. Westlake met in New York City with Ralph R.
Whitney, the Chairman of the Board of the Company, to discuss the possibility of
a business combination between the Company and Parent. The foregoing discussions
and various subsequent discussions focused principally on an exchange of shares
resulting in a combined company and various management, governance and similar
issues related thereto. The possibility of a small cash component was also
considered.
Following a series of telephonic and fax communications, a confidentiality
agreement was entered into between the Company and Parent on June 4, 1998. The
confidentiality agreement provided for the mutual exchange of certain
information between Parent and the Company and also contained customary
"standstill" provisions extending to June 30, 2000.
On June 15, 1998, Mr. Burns met with Mr. Atkinson and Mr. Wood at the
Company's headquarters to learn more about the Company. On June 16, 1998, Dr.
Westlake advised the Parent Board of the discussions with the Company. On June
19, 1998, Messrs. Whitney and Atkinson met with Dr. Westlake and Mr. Burns and
representatives of Dresdner Kleinwort Benson in Detroit. No agreement could be
reached as to price or structure during the meeting and the parties agreed to
suspend further negotiations until the Company's design, marketing and
consulting services agreement and licensing arrangements with an unaffiliated
person (the "Consultant") could be renegotiated.
In late June 1998 the parties recognized that a significant period of time
would be required to complete the negotiations with the Consultant and they
agreed to defer further due diligence investigations
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until that matter was resolved. At the July 30, 1998 meeting of the Company
Board, Mr. Whitney reported that discussions with Parent were continuing and
that Parent seemed to have a strong desire to complete a transaction. Mr.
Whitney stated, however, that Parent was concerned about the relationship with
the Consultant. The Company Board then directed Mr. Atkinson to work toward
resolving the issues with the Consultant. In mid-August 1998, the Company
advised Parent that it had reached an agreement in principle with this
individual on the restructuring of their arrangements. As discussed herein, the
restructuring was finalized in late December 1998.
On August 24, 1998, after consultation with various members of Parent's
Board of Directors (the "Parent Board"), Dr. Westlake sent a fax to Mr. Whitney
seeking to resolve the issues of price and structure. He expressed his
preference that a substantial portion of the consideration be in the form of
Parent shares and said that he would be prepared to recommend $18.00 per Company
share. Dr. Westlake and Mr. Whitney discussed these issues on August 27 and
concurred that they would each support a transaction valued at $18.00 per
Company share, payable half in Parent stock and half in cash, subject to due
diligence, definitive documentation, satisfactory market conditions and board
approvals. Accordingly, a due diligence meeting among representatives of Parent
and the Company and their advisers was held in Portland, Maine, on September 2,
1998.
Prior to such meeting, however, stock market conditions in New York and
London had deteriorated markedly. The closing price of Parent shares on the
London Stock Exchange (the "Closing Price") dropped from 390.5p on August 21,
1998 (the last trading day preceding Dr. Westlake's fax), to 388.0p on August
26, 1998 (the last trading day preceding the conversation between Dr. Westlake
and Mr. Whitney) to 326.0p on September 1, 1998 (the last trading day preceding
the Portland meeting). The closing price of the Company's shares dropped from
$13.25 on August 21 to $11.63 on September 1.
Due to these market disruptions, Parent decided to suspend further due
diligence investigation of the Company. On September 5, 1998, a representative
of Dresdner Kleinwort Benson requested that Mr. Whitney explore alternative
prices and structures. Mr. Whitney responded that he wished to let market
conditions stabilize, but expressed a willingness to consider an all cash
transaction.
During September and October, various efforts were made to address the
issues of price and structure in light of then prevailing US and UK market
conditions.
On September 18, 1998, Parent received a report on the Company from
AutoFina, a consulting firm experienced in the automotive parts business.
AutoFina's report on September 18, 1998 was cautious as to the Company's growth
prospects.
At a September 10, 1998 meeting, various members of the Parent Board
concluded that Parent should not continue to proceed to acquire the Company on
the basis of an $18.00 per share price substantially payable in Parent shares.
At a September 29, 1998 meeting, the Parent Board considered the possibility
of acquiring the Company entirely for cash, but concluded that this should not
be done entirely on the basis of debt financing. It was agreed to explore the
possibility of a rights offering with Dresdner Kleinwort Benson. Dr. Westlake
and Mr. Whitney met in Denver on October 5, 1988 to discuss the situation. On
October 9, 1998, the closing price of the Company shares on the Nasdaq reached
its 1998 low of $8.75 per share.
On October 19, 1998, the Parent Board again reviewed the possibility of
acquiring the Company in an all cash transaction and reaffirmed that borrowing
all the funds required would over-leverage Parent. The Parent Board also
concluded, after receiving advice from Dresdner Kleinwort Benson, that the use
of a rights offering to partially finance such an acquisition was not
practicable due to then prevailing UK stock market conditions. In light of the
factors described above, the Parent Board decided to terminate further
negotiations with the Company. Dr. Westlake so advised Mr. Whitney on the same
day.
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On November 17, 1998, during a review of the Company's operations in Europe,
Messrs. Atkinson and Wood met with Dr. Westlake and Mr. Burns at Parent's
headquarters in Ascot, England and discussed the Company's business.
In late November, based upon improving conditions in the UK market and a
rise in Parent's stock price on the London Stock Exchange, Dresdner Kleinwort
Benson advised Parent that the prospects for a successful rights offering had
improved. After deliberation, Parent's management concluded that the acquisition
of the Company in an all-cash transaction would be attractive, but only at a
price significantly lower than $18.00 per share. Among the factors contributing
to the latter decision were Parent's lower estimation of the Company's growth
prospects and the continued uncertainty of the worldwide automotive parts
markets.
On December 7, 1998, Dr. Westlake, after consultation with certain Parent
Board members, faxed to the Company a draft term sheet proposing to acquire all
the Company shares at $16.00 per share in cash, subject to various conditions,
including the renegotiation of employment and severance arrangements with
Messrs. Atkinson and Wood and Michel Hauser-Kauffmann, Managing Director of the
Company's French operations, the agreement of certain officers and directors of
the Company to invest $13 million of the proceeds of their Company stock and
stock options in Parent stock, and the payment of a termination fee and expenses
under customary conditions. On December 9, 1998, the Parent Board reviewed the
situation. Price and structure negotiations by telephonic and fax communications
continued between the Company and Parent during December.
On December 27, 1998, the Company and the Consultant entered into an
additional license agreement which provides for minimum cash royalty payments.
On December 28, 1998, the Consultant and the Company terminated the consulting
services agreement signed in April of 1995 and amended the Company's 1995
license agreements with the Consultant to reduce the minimum cash royalty and
license payments on certain products. In connection with the termination of such
consulting services agreement, the Company paid the Consultant a one time
payment of $635,553.
On January 4, 1999, Dr. Westlake and Mr. Burns met with Mr. Whitney at
Parent's headquarters. Mr. Whitney inquired whether Parent would reconsider a
share-for-share transaction. Alternatively, he said, he would be prepared to
recommend an all cash transaction at a price of $16.25 per share. On January 7,
1999, Mr. Burns sent Mr. Whitney a fax declining to reconsider a share-for-share
proposal, but agreeing to proceed on the basis of $16.25 per share in cash,
subject to various conditions. After Mr. Whitney consulted with each member of
the Company Board about the proposed terms and conditions (including price) of
the exclusivity letter, on January 14, 1999, the parties entered into a letter
agreement in which the Company agreed to give Parent a period of exclusivity for
six weeks in order for Parent to proceed with negotiations and a due diligence
investigation. Attached to the letter agreement was a draft "proposed term
sheet," which was expressly subject to Parent's completion of due diligence and
a working capital review and the signing of definitive documentation. The
document contemplated a purchase price of $16.25 per share in cash, investment
in Parent stock of $8 million of proceeds by certain officers and directors, a
termination fee of $3 million (plus expenses) payable by the Company in
customary circumstances, renegotiated employment arrangements with Messrs.
Atkinson, Wood and Hauser-Kauffmann, and binding undertakings to accept Parent's
offer by the Company directors and Messrs. Wood and Hauser-Kauffmann.
At the January 22, 1999 Company Board meeting, Mr. Whitney reported to the
full Company Board that matters were progressing with the Parent.
During January and February, 1999, representatives of Parent and its
financial, accounting and legal advisors conducted a due diligence investigation
of the Company. During the same period, negotiations continued between
representatives of Parent and Messrs. Atkinson, Wood and Hauser-Kauffmann on the
revised employment arrangements of such Company executives. Negotiations
commenced in February,
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1999 as to the terms of the Merger Agreement, the Shareholders Agreement and the
Subscription Agreement (the "Definitive Company Agreements").
On February 20, 1999, Dr. Westlake and Mr. Whitney had a telephone
conversation in which they agreed that the termination payment would be a $2
million fee plus expenses, such fees and expenses not to exceed $7 million in
the aggregate. They also agreed as to various provisions of the Shareholders
Agreement.
From time to time throughout the period from the signing of the
Confidentiality and Standstill Agreement until the Company Board meeting on
February 22, 1999, Mr. Whitney consulted with and updated various Company Board
members regarding the ongoing discussions with the Parent.
On February 22, 1999, the Parent Board approved the Definitive Company
Agreements and the financing arrangements described in Section 9, after the
review of such agreements and arrangements with its financial and legal
advisors. Also on February 22, 1999, the Company Board approved the Merger
Agreement and the Shareholders Agreement after review of such agreements and
arrangements with its financial and legal advisors. At such meeting, Cleary Gull
rendered its opinion that as of the date of such opinion and subject to certain
matters stated therein, the Per Share Amount was fair to the Company's
shareholders from a financial point of view.
A press release announcing the transaction was issued by Parent and the
Company on February 23, 1999.
REASONS FOR RECOMMENDATION
The Company's Board of Directors determined that the Merger Agreement and
the transactions contemplated thereby, including the Offer and the Merger, taken
together, are fair to, and in the best interests of, the Company and its
shareholders. In arriving at its decision regarding its recommendation set forth
above, the Board of Directors considered, among other things, the following:
(1) the terms and conditions of the Merger Agreement, the Offer and the
Merger, including the amount and form of the consideration being offered,
the parties' representations, warranties and covenants and the conditions to
their respective obligations;
(2) the financial condition, results of operations, cash flows and
prospects of the Company, as well as the Board of Directors' knowledge of
the business, operations, assets and properties of the Company on both a
historical and prospective basis;
(3) the recent and historical market prices and trading volume of the
Company Common Stock and the premium to such market prices represented by
the Offer Price;
(4) the current status of the industry in which the Company competes and
the Company's position in that industry;
(5) the financial condition and business reputation of Parent and the
ability of Parent and Purchaser to complete the Offer and the Merger in a
timely manner;
(6) the extensive arms-length negotiations between the Company and the
Parent that resulted in the Merger Agreement and the Offer Price;
(7) the fact that the Merger Agreement permits the Company's Board of
Directors, in the exercise of its fiduciary duties, to terminate the Merger
Agreement in favor of a Superior Proposal (Upon the consummation of
transaction resulting from a Superior Proposal, the Company must pay Parent
a topping fee of $7,000,000); and
(8) the oral opinion of Cleary Gull & Reiland Inc.("Cleary Gull")(which
opinion was confirmed by delivery of a written opinion dated February 22,
1999, the date of the Merger Agreement) to the
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effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein, the Offer Price to be received in the Offer
and the Merger by the holders of the Company Common Stock other than the
Investors and the Management Shareholders (the "Public Shareholders") was
fair, from a financial point of view, to such holders. See "Opinion of the
Company's Financial Advisor", below.
The foregoing discussion of factors considered by the Board of Directors is
not intended to be exhaustive. The Company's Board of Directors did not assign
relative weights to the above factors or determine that any factor was of
particular importance. Rather, the Board viewed its position and recommendations
as being based on the totality of the information presented and considered by
it. In addition, it is possible that different members of the Board assigned
different weights to the factors.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR.
The Company retained Cleary Gull to render an opinion, as to the fairness
from a financial point of view of the Offer Price to the Public Shareholders in
the Tender Offer and the Merger. The Tender Offer and the Merger are hereinafter
collectively referred to as the "Acquisition". Cleary Gull has delivered a
written opinion to the Board of Directors of the Company, dated February 22,
1999, to the effect that, subject to the various assumptions and limitations set
forth therein, as of the date thereof, the Offer Price to be received by the
Public Shareholders in the Acquisition is fair to the Public Shareholders from a
financial point of view. Cleary Gull's opinion is for the benefit and use of the
Company's Board of Directors in its consideration of the Offer and the Merger.
Cleary Gull was not requested to express a view, and its opinion does not
express a view, as to the fairness of the Offer Price to the Management
Shareholders and the Investors due to their obligations under the Subscription
Agreements and the Shareholders Agreement.
THE FULL TEXT OF THE WRITTEN OPINION OF CLEARY GULL DIRECTED TO THE COMPANY
BOARD DATED FEBRUARY 22, 1999, WHICH SETS FORTH, AMONG OTHER THINGS, THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS SCHEDULE
II AND IS INCORPORATED HEREIN BY REFERENCE. THE OPINION OF CLEARY GULL WAS
DELIVERED TO THE COMPANY BOARD FOR ITS USE IN CONNECTION WITH ITS CONSIDERATION
OF THE OFFER AND THE MERGER AND IS NOT INTENDED TO BE, AND DOES NOT CONSTITUTE,
A RECOMMENDATION TO ANY SHAREHOLDER OF THE COMPANY AS TO WHETHER SUCH
SHAREHOLDER SHOULD TENDER HIS SHARES IN THE OFFER OR VOTE IN FAVOR OF THE
MERGER, IF SUCH A VOTE OCCURS. THE FAIRNESS OPINION DOES NOT ADDRESS THE
COMPANY'S UNDERLYING BUSINESS DECISION TO PURSUE THE ACQUISITION. THE SUMMARY OF
THE OPINION OF CLEARY GULL SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE OPINION. PUBLIC SHAREHOLDERS ARE URGED TO, AND
SHOULD, READ THE OPINION OF CLEARY GULL CAREFULLY IN ITS ENTIRETY.
In connection with rendering its opinion, Cleary Gull among other things,
(i) reviewed and analyzed the financial terms and conditions of the Merger
Agreement; (ii) reviewed and analyzed certain publicly available business and
financial information relating to the Company; (iii) reviewed and analyzed
various operating and financial forecasts, projections and analyses provided by
the Company; (iv) reviewed and discussed the business, financial condition,
results of operations and prospects of the Company with representatives of the
Company's management; (v) reviewed and considered certain financial and stock
market data relating to the Company and compared that data with similar data for
certain other public companies that Cleary Gull believed might be relevant or
comparable in certain respects to the Company or one or more of its businesses
or assets; (vi) reviewed and considered the financial terms of certain recent
acquisitions and business combination transactions which Cleary Gull believed to
be reasonably comparable in certain respects to the Acquisition or otherwise
relevant to its analysis; (vii) calculated the value of the Shares based on an
unleveraged after-tax discounted cash flow analysis utilizing three different
five-year financial forecasts; (viii) calculated the value a financial investor
might be willing to pay to
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acquire the Shares if it were interested in pursuing such a transaction; (ix)
compared the purchase price premium to be paid for the Shares to premiums paid
in recent transactions believed by Cleary Gull to be reasonably comparable to
the Acquisition; and (x) performed such other financial studies, analyses and
investigations and reviewed such other financial, economic and market
information that Cleary Gull deemed appropriate. Although Cleary Gull evaluated
the financial terms of the Acquisition, Cleary Gull did not recommend the
specific consideration to be paid in the Acquisition. The consideration to be
received by the Shareholders as a result of the Offer and the Merger was
determined by negotiations between the Company and Parent. Cleary Gull did not
participate in those negotiations. No limitations were imposed by the Company
upon Cleary Gull with respect to the investigations made, procedures followed or
factors considered in rendering its opinion. In the context of its engagement,
Cleary Gull was not authorized to solicit and did not solicit alternative offers
for the Company or its assets, or investigate any other alternative transactions
which may have been available to the Company.
In its review and analysis and in formulating its opinion, Cleary Gull
assumed and relied on the accuracy and completeness of all the financial and
other information provided to or discussed with it or made publicly available,
without assuming any responsibility for independent verification of, or
expressing an opinion as to, any of such information. Cleary Gull relied upon
the management of the Company as to the reasonableness and achieveability of the
financial and operating projections (and the assumptions and bases therefor)
provided to it and, with the Company's consent, assumed that such projections
reflect the best currently available estimates and judgments of the Company's
management. Cleary Gull was not engaged to assess the achieveability of such
projections or the assumptions on which they were based and, as such, expresses
no view as to such projections or assumptions. Other than a tour of the
Company's Standish, Maine facility, Cleary Gull did not complete a physical
inspection of the properties or facilities of the Company and did not assume
responsibility for making or obtaining an independent valuation or appraisal of
the assets or liabilities of the Company, and no such independent valuation or
appraisal was provided to it. Cleary Gull did not evaluate the reasonableness,
adequacy or feasibility of Parent's plans for financing the Acquisition and its
opinion assumes that Parent has, or at closing will have, financing adequate to
complete the Acquisition in accordance with the Merger Agreement. Cleary Gull
has not been provided with nor has it reviewed any term sheets, engagement
letters, letters of intent or other documentation relating to such financing.
Finally, Cleary Gull has assumed that the Acquisition will be consummated on the
terms described in the Merger Agreement, without any waiver of any material term
or condition. Cleary Gull's opinion is based on economic, monetary and market
conditions existing on the date thereof.
The following is a summary of the various financial analyses utilized by
Cleary Gull and presented to the Company's Board of Directors in connection with
the delivery of its opinion on February 22, 1999.
COMPARABLE PUBLIC COMPANY TRADING ANALYSIS. Cleary Gull reviewed and
compared certain financial information of the Company to corresponding financial
information for twelve publicly traded companies that Cleary Gull believed were
comparable in certain respects to the Company: BEI Technologies, Inc.; Breed
Technologies, Inc.; The Cherry Corporation; CTS Corporation; Donnelly
Corporation; Dura Automotive Systems, Inc.; Littelfuse, Inc.; Methode
Electronics, Inc.; Optek Technology, Inc.; The Standard Products Company;
Stoneridge, Inc.; and Strattec Security Corp. (collectively, the "Auto OEM
Suppliers") and eight additional companies that are distributors of electrical
and industrial component parts used by original equipment manufacturers ("OEMs")
in the automotive, industrial and telecommunications markets (collectively, the
"Distribution Companies" and together with the Auto OEM Suppliers, the
"Comparable Companies"). The distribution and sale of electrical and industrial
component parts represent less than 25% of the Company's historic business mix.
Cleary Gull selected the Comparable Companies as companies that, based on
publicly available data, possess general business, operating and financial
characteristics representative of companies in the industries in which the
Company operates, although Cleary Gull recognizes that each of the Comparable
Companies is distinguishable from the Company in certain respects.
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For each of the Comparable Companies, Cleary Gull examined certain publicly
available financial data, including sales, operating income before interest,
taxes, depreciation and amortization ("EBITDA"), operating income before
interest and taxes ("EBIT"), net income, earnings per share ("EPS"), book value
and operating margins. Cleary Gull also examined balance sheet data and
published earnings forecasts for each of the Comparable Companies. Such
financial information was used to calculate the ratio of each Comparable
Company's "Enterprise Value" (the total equity market value based on the closing
stock price as of February 18, 1999 (the "Measurement Date"), plus the principal
amount of total debt and capitalized leases, less cash and marketable
securities) to that Comparable Company's sales, EBITDA and EBIT for the latest
twelve month ("LTM") period. In addition, Cleary Gull calculated the ratio of
each of the Comparable Company's stock price as of the Measurement Date to that
Comparable Company's EPS for the LTM period and for calendar years 1999 and 2000
and to the book value per share as of the most recent period. Finally, Cleary
Gull calculated the ratio of each of the Comparable Company's closing stock
price as of the Measurement Date divided by calendar year 2000 EPS to that
Comparable Company's consensus three to five year earnings growth rate (the "PEG
ratio"). All projected EPS numbers for calendar years 1999 and 2000 were derived
from I/B/E/S, a data service that monitors and publishes compilations of
earnings estimates from selected research analysts.
Cleary Gull compared the trading multiples derived for the Company assuming
a share price equal to the Offer Price to the trading multiples for the
Comparable Companies. Cleary Gull's analysis indicated that the Company traded
at an Enterprise Value equal to a multiple of (a) sales of 1.62x, as compared to
a range of 0.29x to 1.49x for the Auto OEM Suppliers and a range of 0.40x to
1.02x for the Distribution Companies; (b) EBITDA of 9.7x, as compared to a range
of 3.3x to 9.4x for the Auto OEM Suppliers and a range of 5.2x to 15.8x for the
Distribution Companies; and (c) EBIT of 12.4x, as compared to a range of 5.7x to
16.1x for the Auto OEM Suppliers and a range of 6.0x to 22.1x for the
Distribution Companies. Cleary Gull's analysis indicated that, at the Offer
Price, the Company traded at a share price equal to a multiple of (a) LTM EPS of
18.1x, as compared to arrange of 7.2x to 30.9x for the Auto OEM Suppliers and a
range of 6.9x to 42.3x for the Distribution Companies; (b) calendar 1999 EPS of
17.0x, as compared to a range of 6.6x to 17.1x for the Auto OEM Suppliers and a
range of 6.7x to 19.8x for the Distribution Companies; (c) calendar 2000 EPS of
14.3x, as compared to a range of 6.1x to 14.1x for the Auto OEM Supplies and a
range of 8.4x to 10.0x for the Distribution Companies; and (d) book value of
3.7x, as compared to a range of 0.8x to 5.7x for the Auto OEM Suppliers and a
range of 0.6x to 2.8x for the Distribution Companies. Cleary Gull's analysis
indicated that, at the Offer Price, the Company's PEG Ratio was 136.8% as
compared to a range of 32.4% to 110.1% for the Auto OEM Suppliers and a range of
27.9% to 66.5% for the Distribution Companies. Cleary Gull noted that the
derived multiples for the Company based on the Offer Price were either in the
range or in excess of the multiples for the Auto OEM Suppliers and the
Distribution Companies in every case.
SELECTED TRANSACTIONS ANALYSIS. Cleary Gull reviewed and analyzed the
aggregate consideration paid in 42 merger and acquisition transactions (the
"Transactions") completed or pending since March 31, 1995 in the automotive
component and electrical supply industries for which relevant information was
available. For each of the Transactions, Cleary Gull examined certain publicly
available financial data, including LTM sales, EBITDA, EBIT and total asset
value. Cleary Gull also examined balance sheet data and trading performance to
establish the aggregate consideration paid for the acquired company. Of the
Transactions, Cleary Gull focused on 17 acquisition targets deemed most similar
to the Company (the "Comparable Transactions") in terms of business focus, size
and profitability, although Cleary Gull recognizes that each of the Comparable
Transactions is distinguishable from the Acquisition in certain respects. Cleary
Gull noted, among other things, that (i) the reasons for, and circumstances
surrounding, each of the Comparable Transactions analyzed were diverse; (ii) the
characteristics of the companies involved were not necessarily comparable to the
Company and Parent; and (iii) premiums fluctuated based on perceived growth,
synergies, strategic value and other factors.
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Cleary Gull compared the trading multiples derived for the Company assuming
a share price equal to the Offer Price to the trading multiples for the
Comparable Transactions. Cleary Gull's analysis indicated that the Company was
trading at an Enterprise Value equal to a multiple of (a) LTM sales of 1.62x, as
compared to a range of 0.38x to 2.31x for the Comparable Transactions; (b) LTM
EBITDA of 9.7x, as compared to a range of 5.7x to 12.3x for the Comparable
Transactions; (c) LTM EBIT of 12.4x, as compared to a range of 9.2x to 18.8x for
the Comparable Transactions; and (d) total assets as of the most recent period
of 2.1x, as compared to a range of 0.7x to 2.9x for the Comparable Transactions.
Cleary Gull noted that the derived multiples for the Company based on the Per
Share Amount were in the range of the multiples for the Comparable Transactions
in every case.
DISCOUNTED CASH FLOW ANALYSIS. Cleary Gull analyzed the Company's per share
value based on an unleveraged after-tax discounted cash flow ("DCF") analysis of
the Company utilizing certain financial forecasts. The base case (the "Base
Case") considered by Cleary Gull was predicated on the forecasts for 1999
through 2003 that were developed by the Company's management and reflected the
elimination of certain expenses, including those related to being a public
company (the "Public Expenses"). For analytical purposes only, Cleary Gull also
considered two alternative cases (i) an upside case (the "Upside Case") which
was predicated on the Base Case and assumed an increase over Base Case net sales
of 5% beginning in 2000, a slight improvement in margins due to operating
leverage beginning in 2000 and a slightly lower effective income tax rate
beginning in 2000 and (ii) a downside case (the "Downside Case") which was
predicated on lower net sales and operating income from the Company's ceramics
business in all five projection years, a mild recession in 2001 and 2002 and a
return to historical growth and profitability levels in 2003. The management of
the Company reviewed the Upside and Downside Cases and indicated that they were
reasonable.
In performing the DCF analyses, Cleary Gull, using the forecasts described
above, discounted the unlevered free cash flows of the Company (net income, plus
depreciation and amortization, less changes in working capital and capital
expenditures) over the specified forecast period using a range of risk adjusted
discount rates between 12.0% and 14.5%. The sum of the present values of such
free cash flows for the Company was then added to the present value of the
Company's terminal value computed using a multiple range of EBITDA of 7.0x to
9.0x. Based on this analysis, Cleary Gull calculated implied price per share
ranges for the Company. The Base Case DCF analysis resulted in a per share
valuation range from (i) $14.10 to $16.45 using a discount rate of 14.5%; (ii)
$14.68 to $17.16 using a discount rate of 13.25%; and (iii) $15.30 to $17.92
using a discount rate of 12.0%. The Upside Case DCF analysis resulted in a per
share valuation range from (i) $15.44 to $18.05 using a discount rate of 14.5%;
(ii) $16.09 to $18.85 using a discount rate of 13.25%; and (iii) $16.78 to
$19.70 using a discount rate of 12.0%. The Downside Case DCF analysis resulted
in a per share valuation range from (i) $12.39 to $14.43 using a discount rate
of 14.5%; (ii) $12.89 to $15.04 using a discount rate of 13.25%; and (iii)
$13.42 to $15.69 using a discount rate of 12.0%. In all cases, these values were
calculated without giving any effect to any expense savings (other than the
elimination of the Public Expenses), or revenue enhancement opportunities that
may result from the Merger. Cleary Gull noted that the Offer Price was in the
per share range calculated in the Base and Upside Case DCF analyses (with the
exception of the Upside Case DCF analysis using a discount rate of 12.0%) and
was higher than the range calculated in the Downside Case DCF analysis.
The risk adjusted discount rates or weighted average cost of capital
("WACC") was calculated consistent with the Capital Asset Pricing Model. Cleary
Gull calculated the median two and one half year weekly S&P 500 equity beta for
the Auto OEM Suppliers. Cleary Gull calculated a range for the cost of equity
using a market risk premium range of 8.0% to 8.4% (based on published Ibbotson
data), a small company premium range of 3.0% to 3.5% (based on published
Ibbotson data) and a risk free rate of 5.25%. Cleary Gull calculated the cost of
equity to be between 13.9% and 15.5%. Cleary Gull estimated the Comparable
Companies' after-tax borrowing cost between 4.7% and 5.3% and long-term debt to
capital ratio between 10.0% and 20.0%. The WACC was then calculated as an
average of the cost of equity
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capital (weighted at 80.0% to 90.0%) and the cost of debt capital (weighted at
20.0% to 10%). Based on this analysis, Cleary Gull estimated the WACC to be
between 12.0% and 14.5%.
LEVERAGED BUYOUT ANALYSIS. Cleary Gull also analyzed a leveraged buyout
("LBO") of the Company as a means of comparing the Offer Price to the value of
the Company assuming that it were sold to a typical financial buyer. An LBO
involves the acquisition and recapitalization of a company financed primarily by
incurring indebtedness that is serviced by the post-LBO free cash flow of the
company. Cleary Gull used Base Case projections and assumed, for purposes of the
LBO analysis, a leveraged capital structure (49.8% senior debt, 17.7%
subordinated debt and 32.5% equity) based on financial ratios required by the
senior debt and high yield debt markets, current interest rates and market
required returns. The capital structure resulted in total debt divided by LTM
EBITDA less capital expenditures initially of 5.7x and LTM EBITDA less capital
expenditures divided by total interest expense of 1.8x. Assuming terminal values
at the end of the fifth year equal to a range of 7.0x to 9.0x EBITDA, this
methodology indicated that a leveraged buyout transaction could earn the equity
holders a market return (25% to 38%) on their investment at approximately $12.75
to $13.25 per share. Cleary Gull noted that the Offer Price exceeded the range
determined by the LBO analysis.
PURCHASE PRICE PREMIUM. Cleary Gull reviewed the purchase price premiums in
12 completed cash tender offers over the two year period ending February 17,
1999, for publicly-held, industrial manufacturers of electrical and electronic
components, communications, transportation, aerospace, measuring and
miscellaneous equipment and durable goods wholesalers which involved equity
consideration of $50 million to $500 million (the "Public Transactions"). For
each of the Public Transactions, Cleary Gull utilized information from
Securities Data Corporation to examine the purchase price premiums one day prior
to announcement date, one week prior to announcement date and four weeks prior
to announcement date. Cleary Gull noted that the Offer Price represents a
premium of (a) 18.2% over the closing price one day prior to the Measurement
Date as compared to a range of 7.0% to 108.7% for the Public Transactions; (b)
16.1% over the closing price one week prior to the Measurement Date as compared
to a range of 5.7% to 97.3% for the Public Transactions; and (iii) 8.3% over the
closing price four weeks prior to the Measurement Date as compared to a range of
10.8% to 100.0% for the Public Transactions. Although the Offer Price represents
a premium over the closing four weeks prior to the Measurement Date, the premium
falls below the range of the Public Transactions for that period. Since that
element of the purchase price premium analysis was only one of the analyses
performed and factors considered by Cleary Gull, this determination did not
affect Cleary Gull's conclusion as to the fairness of the Offer Price.
The summary set forth above does not purport to be a complete description of
the analyses performed by Cleary Gull in arriving at its opinion. The
preparation of a fairness opinion is a complex process not necessarily
susceptible to partial or summary description. Cleary Gull believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all such factors
and analyses, could create an incomplete or misleading view of the process
underlying the analyses performed in reaching its opinion. In addition, Cleary
Gull considered the results of all such analyses and did not assign relative
weights to any of the analyses, so that the ranges of valuations resulting from
any particular analysis described above should not be taken to be Cleary Gull's
view of the actual value of the Company.
The analyses considered by Cleary Gull in arriving at its opinion were
prepared solely for the purpose of providing its opinion as to the fairness from
a financial point of view of the Offer Price to the Public Shareholders and do
not purport to be appraisals or necessarily to reflect the prices at which
businesses or securities actually may be sold, which are inherently subject to
uncertainty and may be significantly more or less favorable than as set forth in
these analyses. None of the Comparable Companies is identical to the Company,
and none of the Comparable Transactions or the Public Transactions is identical
to the Acquisition. Accordingly, an analysis of publicly traded comparable
companies and comparable business combinations is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the Comparable Companies and the
companies
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involved in the Comparable Transactions and the Public Transactions and other
factors that could affect the public trading value of the Comparable Companies
or the company to which they are being compared, or the value of the Comparable
Transactions or the Public Transactions or the transaction to which they are
being compared. The discount rates, terminal values and multiples used in the
analyses were considered appropriate after consideration of current economic and
financial market conditions, including price earnings multiples and capital
structures of selected public companies and rates of return on debt and equity
investments in public and private companies and a qualitative judgment as to the
most relevant information and its application to the Company. In connection with
the analyses, Cleary Gull made numerous assumptions, and was provided with
estimates and forecasts by the Company's management, with respect to the
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company and its advisors.
Similarly, analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the Company or its advisors, none of the Company, Cleary Gull or any
other person assumes responsibility if future results or actual values are
materially different from these forecasts or assumptions. The opinion of Cleary
Gull was one of many factors taken into consideration by the Company Board in
making its determination to approve the Merger Agreement.
Cleary Gull was selected by the Company as its financial advisor in
connection with the Acquisition because of Cleary Gull's reputation and
expertise as an investment banking firm. Cleary Gull, as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements, leveraged buyouts, recapitalizations and valuations for
estate, corporate and other purposes.
Pursuant to the terms of a letter agreement, dated February 18, 1999 between
Cleary Gull and the Company (the "Cleary Gull Letter Agreement"), the Company
Board retained Cleary Gull to render a fairness opinion. The Company agreed to
pay Cleary Gull $50,000 upon signing the Cleary Gull Letter Agreement and
$150,000 upon delivery of the written fairness opinion to the Board of
Directors. Cleary Gull's fees were not contingent upon the content of the
opinion or the approval and consummation of the Offer and the Merger. If Cleary
Gull is requested to perform services in connection with this assignment after
delivery of the fairness opinion, then it will be compensated for its time. In
addition, the Company has agreed to reimburse Cleary Gull for its reasonable
out-of-pocket expenses (including the fees and disbursements of its attorneys)
up to $50,000 and to indemnify Cleary Gull and certain other persons affiliated
with Cleary Gull against certain liabilities arising out of its engagement,
including certain liabilities under the federal securities laws.
Cleary Gull was a co-manager of the Company's initial public offering in
October 1996. In the ordinary course of business, Cleary Gull and their
respective affiliates may actively trade in the securities of the Company for
their own account and for the accounts of their customers and, accordingly, may
at any time hold a long or short position in such securities. Cleary Gull
currently provides research coverage on the Company and makes a market in the
Shares on the Nasdaq National Market. Cleary Gull has never provided investment
banking services to Parent.
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SIGNATURES
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
DATE: March 18, 1999
CONTROL DEVICES, INC.
/S/ BRUCE D. ATKINSON
---------------------------------------------------------------
Name: Bruce D. Atkinson
Title: President and Chief
Executive Officer
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