Business Context and Reporting Period
Company: Advanced Emissions Solutions, Inc. (ADES)
Filing Type: Form 8-K (Current Report)
Date of Report: November 15, 2018
Event: Entry into a Material Definitive Agreement to acquire ADA Carbon Solutions, LLC ("Carbon Solutions") and execution of a financing commitment letter.
Key Financial Metrics and Transaction Details
- Acquisition Price: $75.0 million plus fees for 100% equity interest in Carbon Solutions.
- Financing Structure:
- $70.0 million secured term loan (less original issue discount).
- $10.0 million assumed capital leases.
- Escrow Deposit: $2.0 million deposited at signing, payable as a break-up fee if the acquisition fails to close due to the Company.
- Loan Terms (Proposed):
- Lender: Apollo Global Management, LLC affiliates.
- Term: 36 months.
- Interest Rate: 3-month LIBOR (1.5% floor) + 4.75% per annum.
- Principal Repayment: Quarterly payments of $6 million beginning March 1, 2019.
- Collateral: Substantially all assets of ADES and subsidiaries (including acquired assets), excluding equity interests in Tinuum Entities.
Material Changes and Strategic Context
The Company is re-entering the activated carbon market through the acquisition of Carbon Solutions, a North American leader in mercury capture using powder activated carbon for coal-fired power plants, industrial, and water treatment markets. Carbon Solutions also owns an associated lignite mine for raw material supply.
Historical Context: Carbon Solutions was originally formed in 2008 as a 50/50 joint venture between ADES and Energy Capital Partners LLC. ADES relinquished its ownership in 2011 following a legal settlement. At the time of this agreement, there was no relationship between the Company and the Sellers.
Outlook, Risks, and Contingencies
- Closing Timeline: The Company expects to close the acquisition on or before December 28, 2018 (Termination Date).
- Conditions Precedent: The transaction is subject to usual and customary conditions, including the Company's obligation to use commercially reasonable efforts to obtain financing.
- Financing Contingency: The $70 million loan commitment from Apollo is subject to customary conditions and a 21-day exclusivity negotiation period. Definitive loan documentation is expected to be executed concurrently with the acquisition closing.
- Covenants: The proposed facility includes financial covenants (minimum expected future net cash flows from refined coal business and minimum unrestricted cash) and affirmative/negative covenants. Management expects these terms to allow for continued capital allocation, including dividends and share repurchases.
- Risk of Termination: If the acquisition does not close by the Termination Date due to the Company's failure, the $2.0 million escrow deposit will be forfeited as a break-up fee.
Investor Verification Checklist
- Verify the final negotiated terms of the Apollo loan facility, as current terms are subject to negotiation.
- Confirm the successful closing of the transaction by the December 28, 2018 deadline to avoid the $2.0 million break-up fee.
- Review the definitive Purchase and Sale Agreement (Exhibit 2.1) for specific representations, warranties, and indemnification clauses.
- Assess the impact of the new debt load ($70 million term loan + $10 million leases) on the Company's liquidity and ability to meet quarterly principal payments starting March 2019.
- Examine the Investor Presentation (Exhibit 99.2) for projected synergies and financial performance of the combined entity.