Capitol Investment Corp. IV, a public investment vehicle, Nesco Holdings, LP and Nesco Holdings I, Inc., a leading provider of specialty rental equipment to the electric utility, telecom and rail end-markets, today entered into an amendment to their previously announced merger agreement.
Pursuant to the amendment, the merger consideration to be issued to Nesco Owner was reduced and the sponsors of Capitol agreed to cancel an additional number of their initial shares in connection with the transaction, in addition to certain other amendments.
Based on the amended merger agreement and assuming no redemptions, the combined company will have an initial enterprise value of approximately $1,037 million, based on approximately 69.0 million fully diluted shares of common stock outstanding at $10.00, estimated net debt of approximately $405 million and an adjustment for certain net operating loss carryforwards. This is a reduction of $50 million compared to the initial enterprise value of approximately $1,087 million based on approximately 63.0 million fully diluted shares of common stock outstanding at $10.00 under the original terms of the transaction and based on updated net debt balances.
With the new adjustment in purchase price and after accounting for the business plan acceleration initiatives and the impact of an announced acquisition as outlined in a supplement to Capitol’s proxy statement/prospectus dated June 24, 2019, the implied multiple is 5.7x 2020 estimated Adjusted EBITDA of $190 million.
At closing, current stockholders of Capitol and current Nesco shareholders will hold approximately 67% and 33%, respectively, of the issued and outstanding shares of the combined company’s common stock, assuming no public shareholders of Capitol exercise redemption rights.
The following outlines the amendments to the merger agreement:
The $75,000,000 cash previously disclosed as payable to Nesco Owner out of the transaction proceeds was eliminated and replaced with common stock consideration at $10.00 per share, or 7,500,000 shares regardless of redemptions.
Excluding the 7,500,000 additional shares referred to above, the aggregate common stock consideration to Nesco Owner was reduced by 3,303,597 shares as Nesco Owner’s contribution to the $50 million enterprise value reduction.
Earnout consideration to Nesco Owner was increased by 1,651,798 shares. The incremental earnout shares will be forfeited if during the seven-year period following the closing of the transaction, the trading price of Capitol’s common stock exceeds $19.00 per share for any 20 trading days during a 30 consecutive trading day period or if a sale transaction of the combined company occurs in which the consideration paid per share to holders of common stock exceeds $19.00 per share. All earnout shares will be issued to Nesco Owner at the closing of the transaction, but will be forfeited if the applicable prices are not achieved.
The sponsors of Capitol have contributed to the enterprise value reduction by subjecting an additional 696,403 shares to cancellation or an additional lock-up.
Of that amount, 348,202 shares will be subject to an earn-out such that if during the seven-year period following the closing of the transaction, the trading price of Capitol’s common stock exceeds $19.00 per share for any 20 trading days during a 30 consecutive trading day period or if a sale transaction of the combined company occurs in which the consideration paid per share to holders of common stock exceeds $19.00 per share. If such trading price is not achieved or such sale transaction does not occur, in each case, during the seven-year period following the closing of the transaction, such incremental lock-up shares will be forfeited for no consideration.
Nesco Owner has agreed that it and/or one or more affiliates will purchase an aggregate of 2,500,000 shares of Capitol common stock at the closing of the transaction at a price per share of $10.00.
Nesco Owner will now have the right to designate up to four persons to be appointed or nominated for election to the board of directors of Capitol if it and its affiliates own at least 45% of the common shares, subject to reduction based on the aggregate ownership of Nesco Owner and its successors and assigns, as compared to the original right to designate up to three persons. The board will consist of between seven and nine members depending on Nesco Owner’s pro forma ownership.
Capitol and Nesco expect to enter into certain amendments to their agreements with their underwriters and financial advisors, reducing fees to such parties payable upon closing of the transaction by approximately $10 million. Under the amended merger agreement, up to $10 million of such fee reduction will be included as cash available to Capitol for purposes of satisfying the condition to closing of the transaction that Capitol have at least $265 million of cash available after giving effect to payment of amounts that Capitol may be required to pay to any redeeming shareholders upon consummation of the transaction.
Additionally, the sponsors of Capitol and Nesco Owner have indicated that they and/or their affiliates may purchase an additional number of Capitol shares from Capitol upon consummation of the transaction to meet the minimum cash closing condition or to better capitalize the company for its post-closing working capital or other needs. It would be in the Capitol sponsors’ and Nesco Owner’s discretion as to whether to make such purchases.
As announced previously, Nesco and Capitol entered into a definitive agreement in which Nesco will become a publicly listed company.