Business Context and Reporting Period
On November 8, 2010, Primoris Services Corporation (Primoris) entered into a definitive Agreement and Plan of Merger to acquire Rockford Holdings Corporation (Rockford), a privately-held Delaware corporation. Upon closing, Rockford will become a wholly-owned subsidiary of Primoris. This Form 8-K reports the entry into this material definitive agreement.
Key Financial Metrics and Transaction Structure
The transaction involves a total potential consideration of approximately $82.6 million, contingent on the achievement of earnout targets. The initial consideration of approximately $64.2 million is structured as follows:
- Cash: Approximately $35 million payable at closing.
- Unregistered Common Stock: Shares valued at approximately $12.5 million, subject to a price collar between $6.82 and $8.34 per share.
- Subordinated Convertible Promissory Note: A note with a principal amount of approximately $16.7 million, maturing on October 31, 2013.
Debt and Liquidity Implications: The $16.7 million Note is subordinated to Primoris's senior lender, bonding agency, and a prior note related to the James Construction Group acquisition. The Note bears interest rates escalating from 5% to 8% over its term and includes mandatory prepayment provisions tied to future equity financings or debt incurrences.
Material Changes and Earnout Provisions
Primoris has agreed to pay an additional $18.4 million in earnout consideration if Rockford achieves specific EBITDA targets for fiscal years ending December 31, 2010, 2011, and 2012. The earnout structure is as follows:
- 2010 Period (Oct 1 - Dec 31): Target EBITDA of $9.0 million triggers $4.6 million in stock.
- 2011 Period (Oct 1, 2010 - Dec 31, 2011): Target EBITDA of $34.0 million triggers $4.6 million (cash and stock); target of $38.0 million triggers $6.9 million (cash and stock).
- 2012 Period (Jan 1 - Dec 31): Target EBITDA of $14.0 million triggers approximately $6.9 million in cash.
Share Cap: The aggregate number of shares issued (closing shares, earnout shares, and converted note shares) cannot exceed 9.9% of Primoris's currently outstanding common stock. Any excess earnout value is paid in cash.
Guidance, Risks, and Contingencies
Closing Conditions: The merger is subject to customary closing conditions and may be terminated if not closed by December 31, 2010, unless the delay is caused by the party seeking termination.
Adjustments and Holdbacks:
- The consideration may be reduced dollar-for-dollar if Rockford's stockholders' equity is less than $39.0 million at closing. A $400,000 holdback from the cash portion secures this adjustment.
- An additional $400,000 is placed in escrow for 18 months or until the release of audited financial statements for the fiscal year ended December 31, 2011, to cover indemnity claims.
Restrictions: While the Note is outstanding, Primoris is restricted from incurring new seller financing without subordination, paying subordinated debt, declaring dividends (except regular quarterly), or repurchasing common stock (unless the Note balance is under $10 million).
Investor Verification Checklist
- Verify the closing date and whether the December 31, 2010 termination deadline was met.
- Confirm the actual stockholders' equity of Rockford at closing to determine if the $39.0 million threshold was met and if the consideration was reduced.
- Monitor Rockford's EBITDA performance for the 2010, 2011, and 2012 periods to assess the likelihood of the $18.4 million earnout payout.
- Review Primoris's future capital raising activities, as equity financings over $10 million trigger mandatory prepayments of the $16.7 million Note.
- Check the impact of the 9.9% share cap on the final mix of cash versus stock compensation for the earnout.