Wenzel Downhole Tools Ltd. Sets the Record Straight And Encourages Shareholders to Vote for Plan of Arrangement
CALGARY, ALBERTA--(Marketwired - July 25, 2013) - Wenzel Downhole Tools Ltd. (WZL.TO) ("Wenzel" or the "Company") wishes to refute inaccurate and misleading statements regarding the proposed plan of arrangement (the "Arrangement") involving Wenzel, Basin Tools L.P. ("Basin") and 1748017 Alberta Ltd. (the "Purchaser") contained in recent news releases published by Perlus Investment Management LLC ("Perlus"), a minority shareholder of Wenzel.
The Company wishes to thank shareholders for their strong support and encourages those who have yet to cast a vote to do so in favour of the Arrangement. To be effective, proxies must be voted in advance of the Wenzel shareholder meeting and, in the case of non-registered or beneficial shareholders, no later than 10:00 a.m. (Calgary time) on July 26, 2013.
Perlus is soliciting proxies with misleading and unsubstantiated information. Perlus falsely claims that:
Basin has orchestrated the review. In fact, the Board of Directors has gone to great lengths to ensure that Basin played no part in the review;
Wenzel has ignored Perlus' requests. In fact, Wenzel has responded to each of Perlus' inaccuracies, shortly after they have been published;
Basin forced Wenzel to agree to a non-solicitation clause. In fact, a non-solicitation clause was negotiated with the Special Committee for the reasons set out below. Basin was never in a position to force Wenzel to agree to anything; and
Wenzel was effectively denied the latitude to explore or to even entertain alternative offers. In fact, as noted below, Wenzel has always been in a position to entertain alternative offers.
The Special Committee is concerned that Perlus' continuing efforts to publish false statements may mislead shareholders, and the Special Committee strongly urges shareholders to read the information circular mailed to them earlier.
Shareholders are also asked to consider the following facts refuting the inaccurate claims of Perlus:
The review process was comprehensive and independent:
when Basin advised the Company's Board of Directors of its interest in acquiring the Company, a Special Committee of independent directors unrelated to Basin was immediately formed to review the process;
the Special Committee promptly retained independent legal counsel and Raymond James Ltd. ("Raymond James") as an independent financial advisor to prepare a valuation as required by law;
Basin and its nominee directors were at no time in any way involved in the review process and it is a fact that Basin never, nor could it have, "orchestrated" the review process as Perlus alleges;
the unanimous recommendation of the Company's Board of Directors was made with the Basin nominee directors abstaining;
the suggestion by Perlus that Raymond James is not independent by virtue of the fact that Basin is responsible for paying Raymond James' fee, or because of the non solicitation restriction, is without any basis whatsoever and Basin played no part in selecting or instructing Raymond James; and
Canadian securities laws require that a valuation be prepared and expressly state that a valuator that is paid by an interested party to prepare a valuation for the transaction is not, by virtue of that fact alone, not independent.
Perlus has no factual basis for its claim that the valuation is critically flawed:
on July 10, 2013 the Company announced a technical correction to the valuation that resulted in a less then 4% revision to the valuation range;
the Special Committee and the Board of Directors each confirmed its recommendation in favour of the Arrangement following review of the technical correction to the valuation;
in order to give shareholders sufficient opportunity to consider this technical correction, the shareholder meeting was adjourned to July 30, 2013 and information related to the technical correction was mailed to shareholders as approved by an Order of the Court;
Basin's offer of $2.25 per Common Share is within the revised valuation range; and
on July 11, 2013, the Company issued a press release pointing out the inaccuracies in, and responding to, each criticism of Raymond James' valuation that was publicly announced by Perlus on July 10, 2013. Below, the Company responds to each further criticism raised by Perlus and publicly announced on July 22, 2013. Perlus has no valid criticisms of the Raymond James valuation.
The Board of Directors has the ability to consider, accept and enter into other proposals in circumstances common for such transactions:
the Arrangement Agreement permits the Board of Directors to consider a superior proposal subject to certain restrictions common to transactions of this nature;
the Special Committee believes that it was unlikely that a superior proposal could emerge given Basin's substantial equity and voting interest in the Company;
the Special Committee is of the view that the break fee would not have an impact on whether or not a third party would choose to make an offer;
Perlus has not provided a viable alternative to the Arrangement and has only expressed unsubstantiated predictions about the future; and
Perlus purports to speak for Basin by saying that in the event no other strategic alternative is found then the transaction with Basin could still be pursued. This should not be assumed. Halting the Arrangement to seek alternatives would result in a delay to the process that could cause Basin to determine not to complete the Arrangement.
A leading independent proxy advisory firm relied upon by many major institutional investment firms continues to recommend that shareholders vote in favour of the Arrangement:
on July 3, 2013 and on July 18, 2013, following the technical correction to the valuation, Institutional Shareholder Services continues to recommend that its clients vote FOR the Arrangement.
On July 23, 2013 Perlus published its letter (the "Second Perlus Letter") that, like its published July 10, 2013 letter, also contained inaccurate and misleading statements about the valuation that the Company wishes to address. The Special Committee has obtained the advice of Raymond James, in its capacity as independent financial advisor to the Special Committee. Accordingly, the responses set forth below are provided on the basis of such advice.
Perlus Claim: The overstatement of the tax rate by 4% impacts 2014 earnings in the base case by $1.1 million and throughout the time period by more than $10 million.
Wenzel's response: | ||
The Valuation utilized tax treatment and statutory tax rates that are consistent with prior tax filings of the Company. |
Perlus Claim: Raymond James uses $5.8 million in working capital change for 2014 where it should be closer to $1.5 - 1.8 million as it is for the subsequent years.
Wenzel's response: | ||
The Valuation took into account a number of considerations in evaluating the working capital requirements of the Company for the purposes of the discounted cash flow analysis. These considerations include, but are not limited to, the risk associated with accounts receivable more than 90 days past due; the requirement to pre-fund the significant growth in revenues forecast for the Company in the discounted cash flow analysis; and the increased working capital requirements associated with an initially higher growth rate in internationally generated revenues relative to North American revenues. |
Perlus Claim: The selected companies used to determine an appropriate multiple seem peculiar and in Perlus' opinion do not represent an appropriate sample.
Wenzel's response: | ||
The Valuation, which was based on the professional judgment of Raymond James, a leading financial advisor in the Canadian oil and gas services sector, considers relevant transactions for the precedent transaction approach, including consideration for transactions specific to the downhole tools subsection of the oilfield services sector. The Valuation is based on the consideration of a broad universe of transactions, including the rejection of transactions which did not reflect similar product suites, sensitivities to economic conditions and business environments. The Company understands that broadening the sample of precedent transactions to consider general Canadian oilfield services transactions would have the effect of lowering, not raising, the multiple arrived at in the precedent transactions analysis. | ||
Perlus Claim: Perlus raised other concerns in the Second Perlus Letter relating to one-time adjustments, the trailing twelve month EBITDA of the Company and the nature of the data used in measuring the multiple associated with the precedent transactions approach.
Wenzel's response: | ||
The Valuation was prepared after a review of publicly available information with respect to precedent transactions in the energy services sector and transactions which are most directly applicable to Wenzel. For each of the selected transactions, the transaction multiple was calculated based on available public information as well as calculations, estimates and assumptions made with regards to the selected transactions. Raymond James used its professional judgment in applying this information in the valuation presented in the Valuation. |
Basin, which holds approximately 37% of the outstanding shares of the Company (on the basis of the conversion of each series 1 preferred share for one common share in accordance with the terms of the series 1 preferred shares), has specifically advised the Special Committee that the consideration of $2.25 per common share offered under the Arrangement will not be increased. This amount was arrived at after negotiation with the Special Committee and remains within the valuation range, as revised on July 10, 2013. This cash consideration represents a 30.8% premium to the last three months' volume weighted average trading price of Wenzel's common shares on the Toronto Stock Exchange prior to the announcement of the transaction on May 14, 2013.
The Board of Directors and the Special Committee have worked diligently to address and refute Perlus' concerns. Perlus' assumptions and misstatements involve significant risks that the Arrangement will not close and would prevent securityholders from receiving immediate and fair value for their investment.
About Wenzel Downhole Tools Ltd.
The Company is a designer, manufacturer, seller and renter of drilling tools used in oil and gas exploration, that operates in Canada, the United States and internationally; its common shares trade on the Toronto Stock Exchange under the symbol "WZL".
The Company's Canadian sales, manufacturing and servicing facilities are located in Edmonton, Alberta and its US sales and servicing facilities are located in Conroe, Texas; Odessa, Texas; Morgantown, West Virginia; Casper, Wyoming and Oklahoma City, Oklahoma. It also has a sales and service facility in Celle, Germany. The main corporate office is located in Calgary, Alberta.
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