On
September 17, 2007, Target Logistics, Inc., a Delaware corporation
(“
Target,
”
or
the
“
Company
”),
Mainfreight Limited, a New Zealand corporation (“
Mainfreight
”),
and
Saleyards Corp., a Delaware corporation and wholly owned subsidiary of
Mainfreight (“
Saleyards
”),
entered into an Agreement and Plan of Merger (the “
Merger
Agreement
”).
The
Merger Agreement provides that, upon the terms and subject to the conditions
set
forth in the Merger Agreement, Saleyards will merge with and into Target (the
“
Merger
”),
with
Target continuing as the surviving corporation and a wholly owned subsidiary
of
Mainfreight.
On
October 9, 2007, Target distributed a
Notice
of
Action by Written Consent and of Appraisal Rights
and an
Information Statement (the “
Information
Statement
”)
in
accordance with the General Corporation Law of the State of Delaware and
Regulation 14C promulgated by the Securities and Exchange Commission under
the
Securities Exchange Act of 1934.
Subsequently,
Target learned that a lawsuit had been filed prior to, and had been amended
after, October 9, 2007, by a single stockholder (seeking to represent a class
of
all stockholders other than the insiders who voted to approve the Merger)
alleging that the Merger consideration of $2.50 per Share is inadequate, and
that certain additional information is needed in order for stockholders to
have
sufficient information to decide whether to exercise their appraisal rights.
The
lawsuit is pending in the Circuit Court for Baltimore City, Maryland, and is
captioned
Schnipper
v. Target Logistics, Inc., et al., Case No. 24-C-07-07333-OT
.
While
Target is confident that the Merger consideration is fair, and that all material
information necessary for stockholders to make a decision whether to exercise
their appraisal rights has been set forth in the Information Statement, Target
is herein providing information in a “Q&A” format that is responsive to the
allegations in the lawsuit concerning the purported need for additional
information.
Are
Target stockholders obligated to accept the Merger
consideration?
No.
Target stockholders are entitled to appraisal rights under Delaware law. If
a
stockholder believes that the Merger consideration offered is less than the
fair
value of his or her Target Shares, an appraisal proceeding can be pursued as
explained in detail in the Information Statement.
Did
Target or Mainfreight have any prior relationship with Target’s financial
advisor, BB&T Capital Markets, a division of Scott & Stringfellow, Inc.
(“BB&T”)?
Mainfreight
has had no prior relationship with BB&T.
BB&T
has followed Target since 1997, and periodically Target has discussed business
opportunities with BB&T. Target believes that BB&T and its
transportation group have particular expertise and are uniquely qualified to
advise companies in the freight forwarding industry.
Prior
to
BB&T’s services to Target in connection with the Merger, Target had paid
BB&T a $25,000 consulting fee in 1998 in connection with a prospective
acquisition by Target which was aborted prior to finalization.
In
January 2006, BB&T arranged a meeting between Target and the “other
forwarder”
which
was
seeking to acquire a significant equity interest in Target, as explained in
the
Information Statement.
In
January 2007, in response to Target’s management’s request for a review of
strategic alternatives to maximize stockholder value, BB&T reviewed with
Target certain parameters of a possible sale of Target. As discussed below,
Target’s Board determined at that time that a sale of Target was not then in the
best interest of Target’s stockholders.
When
did Target first discuss with BB&T the potential Merger with
Mainfreight?
On
June
8, 2007, Target advised BB&T on a “no-name” basis that Target received
Mainfreight’s unsolicited offer. Target delayed formally engaging BB&T and
incurring a fee obligation until Mainfreight concluded its early due diligence
and the letter of intent with Mainfreight was negotiated.
Was
BB&T’s fee contingent on its opinion as to
the
fairness of the Merger consideration to Target’s stockholders from a financial
point of view
?
As
stated
in the Information Statement,
in
connection with BB&T’s services as the Board’s financial advisor (including
the rendering of a fairness opinion and conducting a market check), Target
paid
BB&T an aggregate fee of $200,000. Target was obligated to pay this fee
whether BB&T concluded that the Merger consideration was fair or not fair to
Target’s stockholders from a financial point of view.
What
data was used by BB&T to calculate Target’s diluted shares outstanding using
the treasury stock method?
As
noted
on page 15 of the Information Statement in the presentation to Target’s Board,
BB&T used the treasury stock method to calculate the diluted shares
outstanding for Target. This method assumes that the cash proceeds from the
exercise of options are used to buy back shares at the offer price. The
calculation adds the dilutive effect of options (as defined by the treasury
stock method) to the basic shares outstanding. The dilutive effect of options
is
calculated as the product of the number of options outstanding and the exercise
price divided by the offer price. The data for the options outstanding were
obtained from Target.
How
did BB&T identify comparable companies for its public company trading
multiples analysis, how did BB&T determine what multiples to apply, why did
BB&T use a size/liquidity discount, and did BB&T consider application of
any control premium to the comparable company value
indications?
In
its
public company trading multiples analysis, BB&T analyzed the companies it
deemed the most comparable to Target based on business model and
asset-orientation, and applied multiples it deemed most relevant for the
analysis. A size/liquidity discount was used as Target is much smaller than
the
companies in the comparable company group and has a much lower trading volume.
BB&T did not apply a control premium in its public company trading multiples
analysis as it does not believe there is a way to accurately quantify the value
of such a premium.
What
criteria, data, rationale, multiples and calculations did BB&T use in its
comparable acquisitions analysis, and why did BB&T apply a size discount in
its analysis?
In
its
comparable acquisitions analysis, BB&T reviewed the financial terms of eight
merger and acquisition transactions announced since January 11, 2001 in the
freight forwarding and transportation industries that BB&T deemed generally
comparable to Target and the Merger proposed by Mainfreight. BB&T believes
this time frame is appropriate because it includes transactions recent enough
to
provide a reasonable proxy for the current logistics merger and acquisitions
environment while extending far enough in the past to include transactions
through an economic cycle. These transactions (all of which are listed in the
Information Statement) were publicly announced and all of the underlying data
are publicly available through SEC filings, press releases, or publicly
accessible databases such as MergerStat or CapitalIQ. BB&T analyzed both
enterprise value/EBITDA and enterprise value/EBIT multiples in its analysis
and
believes that these multiples are the most relevant to its analysis. BB&T
applied a size discount as most of the acquired companies included in the
comparable acquisitions analysis were significantly larger than
Target.
Were
mean or median multiples used by BB&T in its public company trading
multiples analysis and comparable acquisitions analysis?
As
explained in the Information Statement, in connection with preparing its opinion
as to the fairness of the Merger consideration to Target’s stockholders from a
financial point of view, BB&T conducted (among other analyses) a public
company trading multiples analysis and a comparable acquisitions analysis.
As
part of those analyses, BB&T identified multiples for the selected peer
group companies and transactions described in the Information Statement.
BB&T then used the
median
multiples
for the selected companies and selected transactions, respectively, in order
to
produce an indicated valuation range for Target common stock.
In
separate charts on pages 15 and 16 of the Information Statement, the first
row
of data is identified as the “Peer Group Mean Multiple.” In each case, the first
row data should be identified as the “Peer Group Median Multiple”. As explained
in the text in the Information Statement that accompanies these two charts,
BB&T in each case used the
median
(not
the
mean) of the multiples drawn from the selected companies and selected
transactions.
In
its discounted cash flow analysis, how did BB&T calculate free cash flow,
did BB&T use a range of discount rates, what BETA was used for the peer
companies selected for the analysis, what equity risk premium was used, and
did
BB&T take into account potential future acquisition activities by
Target?
BB&T
calculated free cash flow and used a range of plus or minus 200 basis points
from Target’s weighted average cost of capital. BB&T used the two-year BETA
as provided by CapitalIQ. BB&T used a market premium of 10%, sourced from
Ibbotson Associates. Future acquisitions were not included in the financial
projections used in the discounted cash flow
analysis.
What
transactions, criteria, reasons and data did BB&T use in its premiums paid
analysis?
The
premiums paid analysis examined all publicly announced transactions where the
acquired company was a U.S. based public company, utilizing publicly-available
premiums data within the time and size frames indicated on page 17 of the
Information Statement. BB&T examined premiums five days prior to
announcement as five days is close enough to the merger announcement to
reasonably discount external market forces and conditions and five days is
also
far enough from the announcement date to reasonably discount any possible
acquisition rumors or insider trading. The data for all of the transactions
BB&T used were sourced from MergerStat and are publicly available. As
BB&T’s review utilized publicly-available premiums data, the number of
transactions in each category is publicly available. The sample size of each
category of transactions presented on page 17 of the Information Statement
is as
follows:
|
All
Transactions
:
|
Deal
Size <$100mm
:
|
Stock
Price <$5.00
:
|
|
1997-YTD
2007: 3,924
|
1997-YTD
2007: 2,257
|
1997-YTD
2007: 883
|
|
2003-YTD
2007: 1,478
|
2003-YTD
2007: 769
|
2003-YTD
2007: 328
|
Which
companies did BB&T contact for purposes of the market
check?
As
stated
in the Information Statement,
BB&T
contacted three potential strategic buyers (including the other forwarder
which
had
expressed an interest in acquiring a significant equity interest in Target
in
early 2006)
and
two
potential financial buyers. Each contact was interested in Target’s non-asset
based freight forwarding business model. The other forwarder, which had
previously received detailed information concerning Target’s business and
performance, was contacted in June 2007 (see below for more information about
earlier communications between Target and the other forwarder); the other
contacts were made in August 2007 on a “no name” basis, and BB&T provided
each of the other contacts with a high-level summary of Target’s business
profile and financial performance. None of the contacts (including the other
forwarder) remained interested upon hearing the required valuation levels to
compete with Mainfreight’s offer of $2.50 in cash per Target share.
Who
was Target’s legal counsel and when did Target engage counsel in connection with
the Merger?
As
noted
in the press release disseminated on September 17, 2007 and included in Target’s
Current Report on Form 8-K filed on September 20, 2007, the firm of Neuberger,
Quinn, Gielen, Rubin and Gibber, P.A., Baltimore, Maryland, and
Potter
Anderson & Corroon LLP, Wilmington, Delaware, served as legal advisors to
Target in connection with the Merger.
Attorneys from the Neuberger, Quinn, Gielen, Rubin and Gibber firm have served
as counsel to Target since Target’s formation in 1996.
Potter
Anderson & Corroon served as special Delaware counsel, and had performed
similar services for Target in connection with a 1998 transaction. Neither
firm
has had any prior relationship with Mainfreight.
Other
than representation by
the
Neuberger, Quinn, Gielen, Rubin and Gibber firm
of
Mr.
Dubato in 2005 on a personal matter completely unrelated to Target, neither
law
firm has represented any of the individual directors or officers of
Target.
Why
did Target’s Board of Directors decide to merge with Mainfreight’s
subsidiary?
As
stated
in the Information Statement,
Target’s
purpose for engaging in the Merger is to enable stockholders to realize the
value of their investment in Target through the receipt of the equivalent of
$2.50 in cash per Share, representing a premium of 36.6% above the closing
market price of Target’s common stock on the American Stock Exchange
on
September
17, 2007, the last trading day before Target publicly announced the
Merger
,
and a
multiple of 33x Target’s earnings per share for its fiscal year ended June 30,
2007. Please refer to pages 5 through 9 of the Information Statement for
additional factors considered by Target’s Board in approving the Merger and
recommending the Merger to Target’s stockholders.
Who
conducted the negotiations with Mainfreight on behalf of
Target?
Target’s
Board authorized Target’s President, Mr. Stuart Hettleman, to conduct
negotiations with Mainfreight on behalf of Target, subject to review and
approval by the Board. Target’s Board was continuously apprised at meetings and
in telephone calls between meetings of all discussions between Target and
Mainfreight and their respective advisors and all negotiations and negotiating
positions advanced by both sides. All material terms of the Merger, Merger
Agreement and ancillary documents were approved by Target’s Board.
Did
Mr. Hettleman have any contact with Mainfreight between January and June
2007?
As
stated
in the Information Statement, between January 3, 2007 (when Target was first
contacted with respect to Mainfreight’s interest) and June 5, 2007 (when
Mainfreight’s first verbal offer was made), Mr. Hettleman had two meetings with
representatives of Mainfreight; a meeting in January following the January
19
execution of the confidentiality agreement lasted two hours, and a meeting
in
April lasted three hours.
What
proposals and counterproposals were made in the negotiations between Target
and
Mainfreight?
Mainfreight’s
original June 5, 2007 non-binding proposal was to acquire Target in a merger
for
cash consideration equal to $2.42 per Share on a fully diluted basis. While
the
Board believed that, based on Target’s financial results, the price offered was
fair to the stockholders from a financial point of view, on June 8 the Board
authorized Mr. Hettleman to submit a counteroffer to Mainfreight of $2.70 in
cash per Share on a fully diluted basis. On July 18, Mainfreight responded
with
a revised offer of $2.50 in cash per Share on a fully diluted
basis.
Were
any other offers made for Target?
As
stated
in the Information Statement, Target had previously received an indication
of
interest from another freight forwarder to acquire
a
significant equity interest in Target. The discussions with the other forwarder
were held in January through April 2006 and were based on Target’s results of
operations through the first six months of Target’s fiscal year ended June 30,
2006. Target provided all requested information to the other forwarder during
those discussions and, based on all of the information provided, the other
forwarder suggested a potential price of approximately $2.60 per Share. Target’s
Board determined that the potential price was insufficient and the discussions
were terminated. In January 2007, following BB&T’s review of potential
strategic alternatives discussed above, Target’s Board authorized management to
ask BB&T to inquire if the other forwarder was interested in re-opening its
discussions with Target; although the Board determined
that
it
was
not in the best interest of Target’s stockholders to pursue a sale at that time,
the Board believed that it was prudent to obtain a market check from the other
forwarder because it had already conducted a review of Target in 2006. In
February 2007, the other forwarder responded that it was interested in pursuing
further discussions on the basis of a price range of $2.56 to $2.89 per Share
predicated on, among other things, Target achieving fiscal 2007 EBITDA of $6.83
million. (In fact, Target achieved fiscal 2007 EBITDA of $3.7 million.) In
May
2007, after the other forwarder reviewed Target’s fiscal year 2007 results to
date, the other forwarder informed Target that it did not wish to proceed with
further discussions until Target’s complete fiscal year 2007 results were
available. The other forwarder was also contacted in June (and was included
as
one of the potential strategic buyers included in BB&T’s market check) and
declined to make any proposal that would be competitive with the proposal
submitted by Mainfreight.
Why
did Target’s Board of Directors not engage in a public auction of Target or a
more widespread market check?
Target’s
management and Board believe very strongly that a public auction of Target
or a
confidential widespread bidding process could disrupt Target’s relationships
with its customers, independent agents and sales representatives, thereby
potentially seriously damaging Target’s ability to effectively compete in the
freight forwarding industry. Based on Target’s management’s knowledge of the
industry, earlier discussions with the other forwarder that had expressed an
interest in acquiring a significant equity interest in Target, and BB&T’s
views as to the likely potential buyers of Target, it was and is Target’s
management’s view that the market check performed by BB&T was adequate to
reasonably determine whether any other party would propose to enter into a
transaction more favorable to Target and its stockholders than that proposed
by
Mainfreight.
In
addition, Mainfreight indicated that it would rescind its offer to pay a
substantial premium over the market price for Target’s Shares if Target
conducted a public auction of the company. Target’s Board considered and
determined this restriction to be reasonable under the circumstances of
Mainfreight’s $2.50 per Target share cash offer.
In
view
of the downward trend in Target’s financial results during fiscal year 2007
prior to Mainfreight’s unsolicited offer, Target’s Board did not consider a sale
of Target to be
in
the
best interests of Target’s stockholders at that time
.
As
stated above and in the Information Statement, Mainfreight’s unsolicited offer
presented Target’s stockholders the opportunity to realize the value of their
investment in Target through the receipt of a cash payment representing a
premium of 36.6% above the closing market price of the Shares on the Amex on
September 17, 2007, the last trading day before Target publicly announced the
Merger, and a multiple of 33x of Target’s earnings per share for its fiscal year
ended June 30, 2007.
What
benefit did the owners of Swirnow Airways receive by entering into the Stock
Purchase Agreement?
As
set
forth on page 10 of the Information Statement, Swirnow Airways Corp., through
its indirect ownership of TIA, Inc., owns 42% of the outstanding voting stock
of
Target. As a result of selling a corporate entity, rather than shares of Target,
Swirnow Airways will avoid incurring two levels of taxation and will incur
only
one level of taxation. As explained on page 10 of the Information Statement,
this structuring will enable the beneficial owners of Swirnow Airways to receive
the Merger consideration with tax consequences similar to other Target
stockholders.
Are
there any conflicts of interest between the public stockholders and the
directors and executive officers of Target?
The
section of the Information Statement on pages 11 and 12 titled “Interests of
Directors and Executive Officers of the Company in the Merger” sets forth the
potential conflicts of interest that might exist. To the extent the directors
and executive officers of Target are direct or indirect stockholders of Target
or hold options to purchase Target Shares, they will receive the same Merger
consideration as all stockholders or option holders, as the case may
be.
As
stated
in the Information Statement, Target’s Board approved change in control
agreements for Messrs. Hettleman and Dubato. Each of these agreements provides
for the making of a severance payment in the event the respective individual
leaves the employ of Target upon
the
effectiveness of the Merger,
while
restricting each individual’s ability to compete with and solicit employees from
the surviving company following termination. Target’s Board believes that these
agreements are fair and commercially reasonable benefits which have been
provided to Target’s senior executive management in recognition of their
contributions in increasing stockholder value for the benefit of all of Target’s
stockholders, and in exchange for non-competition agreements.
As
further stated in the Information Statement, Target’s Board also approved an
employment agreement for Mr. Coppersmith to be effective upon the effectiveness
of the Merger. Mr. Coppersmith’s new employment agreement provides benefits
consistent with Mainfreight’s employment practices.
What
are Mainfreight’s plans for Target following
the
effectiveness of the Merger?
To
Target’s knowledge, Mainfreight intends to operate Target as its U.S. based
subsidiary following
the
effectiveness of the Merger.