Following the announcement of the Opposed Transaction, Ithaca shares trading on AIM closed down nearly 10% on significant selling volume. Ithaca shares closed down nearly 7% on the TSX following the transaction's announcement, shedding nearly $34 million in shareholder value in a single day.
The Ithaca Board has not created any shareholder value in over three years. We have significant, and now validated, concerns about the Ithaca Board's judgement, motivation, and competency. It should also be noted that the Ithaca Board owns, in aggregate, less than 0.73% of Ithaca and therefore has little at stake.
Dilution of Ithaca Shareholders
As disclosed in the Press Release, Ithaca will pay the approximate C$318 million purchase price (representing a premium of approximately 37% to the Valiant closing share price on February 28, 2013) by issuing shares to Valiant shareholders equal to approximately 22% of Ithaca's currently outstanding share capital. This is just shy of the 25% threshold requiring a shareholder vote as set by the TSX. JEC believes that this acquisition structure was intentionally designed to avoid a shareholder vote, with management of Ithaca resorting to expensive debt to make up the balance of the purchase price.
Disclosure regarding the cash compensation and the terms of the credit to be provided to Ithaca to finance the Opposed Transaction are buried in a schedule to the Press Release (at page 19), which discloses that the cash portion of the acquisition consideration will amount to approximately $200 million which will be funded in part by a new US$350 million 12-month bridge facility. The balance of the $150 million bridge facility will be used by Ithaca to satisfy approximately $150 million in existing Valiant debt.
On January 10, 2013, Ithaca publicly announced its 2013 Outlook. Prior to the Opposed Transaction, Ithaca had anticipated net capital expenditures in 2013 of US$360 million and net cash flow from operations of approximately US$125 million. Based on Ithaca's announced 2013 operating plan, it would begin 2013 with no debt and end 2013 with approximately US$235 million in debt. Taking into account debt related to the Opposed Transaction (US$350 million), potential incremental cash flow from the Opposed Transaction ($US275 million), and Valiant committed capital expenditures ($200 million), Ithaca now stands to end 2013 with over US$500 million in debt, leaving the Company highly leveraged and exposing shareholders to significant risk. Again, the Opposed Transaction was intentionally designed to avoid a shareholder vote and the result is a Company with a dangerously levered balance sheet.
Quite simply, the Opposed Transaction is extremely dilutive to Ithaca shareholders. In addition, when considering the size of the Opposed Transaction relative to the liquidity of Ithaca, the Opposed Transaction is also extremely expensive. These factors alone lead to the necessary conclusion that Ithaca's disinterested shareholders deserve an opportunity to vote on the Opposed Transaction.
Cross-Ownership Benefits Conflicted Ithaca Shareholders
The Opposed Transaction gives an unfair advantage to insiders and select joint shareholders of Ithaca and Valiant relative to non-insiders and arm's length shareholders.
On page 2 of the Press Release, Ithaca names a number of shareholders that have given letters of support to Ithaca in respect of the Opposed Transaction. Additionally, disclosure is made in the Press Release that Ithaca has received irrevocable undertakings and non-binding letters of support to the Opposed Transaction from a few large shareholders of Valiant, representing approximately 41% of the outstanding Valiant shares. JEC was able to determine, based on public disclosure and market research tools used in the industry, that the following named Ithaca shareholders who have given their support to Ithaca are also significant shareholders of Valiant:
Percentage Percentage Ownership OwnershipShareholder of Ithaca of Valiant(1) (1)(2)(3) (1)(2)(3)--------------------------------------------------------------------------------------------------------------------------------------------------------Artemis Investment Management Ltd 0.97% 5.14%GLG Partners LP 3.29% 9.83%HSBC Investment Funds (UK) Ltd. 1.45% 0.12%JP Morgan Asset Management UK 0.11% 6.69%% Total 5.82% 21.78%-----(1) Identities of shareholders and shares owned sourced from Bloomberg and Press Release.(2) Percentage ownership calculated based on total Ithaca shares outstanding of 259,953,336 (as disclosed in the Press Release per AIM requirements) and 40,945,225 for Valiant (as disclosed in the Press Release).(3) Bloomberg lists multiple entities for both HSBC and JP Morgan; table above reflects only entities with "UK" listed in the entity name.
