Forward Air may terminate Omni deal even as court steps aside

Forward Air said Thursday it may terminate its planned merger with Omni Logistics even though a Tennessee court cleared the path for the company to proceed with the deal.

Citing Omni’s failure to comply with certain obligations of the merger agreement and the likelihood closing conditions won’t be satisfied, Forward said it’s not obligated to carry through with the transaction. Forward’s statement said Omni has failed to comply with the “pre-closing access to information; confidentiality” and “financing” sections of the contract.

“As a result, Forward is considering its rights and obligations under the Merger Agreement, including potentially exercising its right to terminate the Merger Agreement,” a news release said.

Three current shareholders, who are also former employees of Forward (NASDAQ: FWRD), filed a complaint with the 3rd District Chancery Court in Greeneville, Tennessee, where Forward is headquartered, saying their shareholder rights were violated when they weren’t allowed to vote on the acquisition. The plaintiffs said the deal structure, which would transfer all of the company’s assets to a subsidiary and result in more than 20% dilution to existing shareholders, requires a vote under Tennessee law.

The court granted a temporary restraining order at the end of September and then extended the order for another 15 days on Oct. 11 to contemplate further injunctive action, which could have ultimately resulted in a hearing to determine if shareholders were due a vote. However, on Wednesday the court denied a motion for a temporary injunction blocking the deal and dissolved the existing temporary restraining order.

The shareholder plaintiffs filed for an appeal on Thursday.

A Thursday news release from Omni said the company has “fully complied with all the required provisions” and “any attempt by Forward Air to suggest otherwise is unfounded and has no basis.”

“Omni believes the Merger Agreement is legally binding and intends to enforce the Merger Agreement and close the transaction as expeditiously as possible,” the statement read.

Other shareholders apply pressure to kill deal

Institutional holders like P. Schoenfeld Asset Management and ClearBridge Investments previously asked the company to terminate the deal. Most recently, activist investor Ancora Holdings Group said it would look to oust the current board and Chairman, President and CEO Tom Schmitt if the court ruled in favor of shareholders.

Other than being upset about not getting a chance to vote on the proposed transaction, shareholders also took issue with the purchase price, the amount of leverage Forward needs to take on to fund the deal and a perceived shift in voting control away from existing shareholders, among other things.

The announced purchase price of $3.2 billion includes only $150 million in cash, requiring Forward to give Omni stakeholders a 38% equity position and assume its $1.4 billion in net debt. The deal price is roughly 18 times adjusted earnings before interest taxes, depreciation and amortization and net leverage at closing would be roughly four times EBITDA, although Forward has said it will cut that in half within two years of closing.

The terms of the transaction also provision four board seats to Omni’s stakeholders as well as the role of president. Omni and its private equity backers, Ridgemont Equity Partners and EVE Partners, would end up with 38% of the voting rights if the transaction proceeds.

However, Forward has contended that shareholders have a vote in the matter as they will be asked to approve the conversion of the nonvoting preferred shares issued to voting common stock after the deal closes. 

Omni is due just 16.5% of the company’s equity at closing, with the remaining equity interest to be issued in the form of preferred shares. Existing Forward shareholders will have the last say on whether or not those units are converted. However, if the shares aren’t converted, Forward will be required to pay their holders a steep dividend.

Further, even if the conversion was voted down, Omni’s stakeholders would still control the largest voting block at Forward. Omni’s new equity stake would also require them to vote in favor of any board-chosen directors at future elections.

Members of Ancora’s executive team provided a more conciliatory tone on Thursday.

“Given that the proposed transaction has faced legal challenges and overwhelming market opposition, the Board of Directors is right to be diligent in holding Omni accountable for any and all non-compliance with the agreement’s terms,” said Frederick DiSanto, Ancora’s chairman and CEO, and James Chadwick, president of Ancora Alternatives, in a joint statement. “We urge the Board of Directors to take whatever steps are needed to protect the long-term interests of the enterprise while restoring and preserving shareholder value. In our view, terminating the prospective transaction with Omni is a logical and necessary step at this point in time.” 

What’s the fallout for Forward?

No breakup fee is specified in the agreement, which requires mutual consent for termination unless one of the parties breaches deal terms. If Forward is able to terminate the deal, it will have to appease more than just its shareholders.

Several of Forward’s existing forwarding customers are upset with the transaction. Omni is a freight forwarder and a competitor to Forward’s existing customers. Some have concerns over how they will fit into Forward’s future plans and if they will be competing on a level playing ground when the company is both partner and competitor.

In addition to due diligence, legal and other deal costs, Forward has been incurring interest expenses as it closed on a debt package to fund the acquisition in early October.

Court filings show Forward is paying $100,694 per day in net interest expense on $725 million of notes issued. The funds are being held in an interest-bearing escrow account until the deal closes, but the interest earned is much lower than the interest accrued on the 9.5% debt.

Filings also show retention of lender commitments for a $1.1 billion term loan began accruing interest expense of $70,313 per day on Monday.

The Thursday news release didn’t speak to how quickly the company will look to unwind these debt facilities. In the release, Forward said it has withdrawn its 2024 adjusted EBITDA guidance for the combined entity.

“We believe today’s news that FWRD wants to exit the Omni deal after stridently defending it for months materially raises the probability of the Omni deal being canceled, and should drive FWRD shares materially higher today,” Susquehanna Financial Group analyst Bascome Majors said in a Thursday note to clients.

Shares of FWRD gapped more than 40% lower following the transaction’s announcement from a pre-deal price of $110. Shares opened Thursday up more than 5% but were up just 2.4% to $74.76 at 10:31 a.m. EDT. The S&P 500 was down 0.6% at the time.

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