Business Context and Reporting Period
This Form 8-K, filed on February 13, 2020, by Gardner Denver Holdings, Inc. (GDI), serves as a supplement to the Proxy Statement/Prospectus-Information Statement regarding the proposed merger with Ingersoll Rand Industrial. The filing addresses supplemental disclosures necessitated by transaction litigation, updates to the 2017 Equity Plan, and revised financial projections and valuation analyses used to determine the merger exchange ratio.
Key Financial Metrics and Valuation Data
The filing provides specific financial projections and valuation inputs utilized by financial advisor Baird for the merger analysis:
- Ingersoll Rand Industrial Projections: Projected Unlevered Free Cash Flows range from $530 million (2019) to $759 million (2023). Projected Adjusted EBITDA (including asbestos and HQ costs) ranges from $713 million (2019) to $1,003 million (2023).
- Gardner Denver Valuation: Implied enterprise value calculated at $7,343 million, derived from equity value, debt of $1,672 million, OPEB liabilities of $75 million, and cash of $221 million.
- Discounted Cash Flow (DCF) Assumptions: Discount rates ranged from 10.5% to 12.5%. Terminal values were assumed at 10.0x to 12.0x of 2023 EBITDA.
- Implied Enterprise Value Ranges: Ingersoll Rand Industrial Business: $7,926.0 million to $9,794.6 million. Gardner Denver: Based on 2023 EBITDA of approximately $814 million.
- Advisor Fees: Baird to receive a transaction fee of approximately $5 million ($2 million contingent on consummation) and a $3 million opinion fee.
Material Changes and Updates
The filing details several material updates to previously disclosed information:
- Merger Consideration Calculation: The illustrative share count for Gardner Denver was updated from 210,500,000 to 210,398,480 shares (as of January 31, 2020). Consequently, the illustrative exchange ratio was revised from 1.0040 to approximately 0.8861.
- Equity Plan Amendment: The Board approved an amendment to the 2017 Equity Plan to prohibit dividend equivalents for options and stock appreciation rights, aligning with ISS guidelines. Dividends on other awards are now payable only upon vesting.
- Valuation Methodology Disclosure: Additional details were added regarding the specific multiples used for comparable companies and the specific inputs for the DCF analysis, including the inclusion of asbestos legal costs in Adjusted EBITDA projections.
Guidance, Risks, and Contingencies
Litigation Status: Two purported class action lawsuits (Kent Action and Rubin Action) were filed alleging material omissions regarding financial projections and advisor conflicts. Plaintiffs have agreed to voluntarily dismiss these actions. Gardner Denver denies any wrongdoing but provided supplemental disclosures to eliminate litigation burdens.
Risks and Uncertainties: The filing reiterates standard forward-looking statement risks, including the possibility that closing conditions may not be satisfied, the transaction may not be completed on expected terms, and the combined company may fail to realize anticipated synergies or retain key personnel. Specific risks include stockholder litigation costs and evolving regulatory regimes.
Investor Verification Checklist
- Verify the final exchange ratio of approximately 0.8861 based on the updated share counts as of January 31, 2020.
- Confirm the status of the voluntary dismissal of the Kent and Rubin class action lawsuits.
- Review the specific adjustments made to Ingersoll Rand's Adjusted EBITDA projections, specifically the inclusion of asbestos legal costs and headquarters costs.
- Examine the amended 2017 Equity Plan (Exhibit 99.1) to understand the new restrictions on dividend equivalents for stock options.
- Assess the sensitivity of the merger valuation to the DCF assumptions, particularly the 10.5% to 12.5% discount rates and 10.0x to 12.0x terminal multiples.