Background of the Merger
In January 2004, management presented to our board of directors an outline of a preliminary business plan to expand the scope of our operations to include a commercial mortgage loan originations operation, which would be financed via the issuance of investment-grade commercial mortgage-backed securities (CMBS) backed by originated loans. At its meeting in January 2004, the board noted that the plan would require the investment of significant upfront and ongoing capital and other expenditures to attract and retain key employees and invest in necessary systems, which would likely depress corporate earnings for some time and involve a higher degree of risk than our operating as a portfolio investor. The board requested that
management develop more precise estimates of plan expenditures that could be expected as well as more precise forecasts of anticipated timing.
From January through June 2004, we were principally occupied in negotiating the terms of, and preparing for closing on, a refinancing of our then-outstanding recourse debt. The refinancing transaction closed in late June 2004. Following the closing, management began to examine in greater detail the actions that would have to be taken to implement the business plan, as well as the costs involved and the likely timeframe. We consulted technology and other service providers with respect to the current market for such products and services and, most importantly, management interviewed numerous potential candidates for various possible positions in a loan originations business, as well as candidates experienced in credit underwriting, loan closing and securitization.
In August through November of 2004, management, as a result of its investigation, shared with the board several trends and developments that had occurred in the CMBS marketplace, as well as a revised business plan that reflected these developments. These trends and developments included:
• significantly increased compensation levels for CMBS professionals of all disciplines, but particularly for experienced loan origination officers;
• decreased projected net interest margin from the plan as a result of increased price competition among established CMBS origination platforms; and
• deteriorating credit underwriting standards for loans made in securitization lending programs, again as a result of increased competition among established industry participants.
At the November board meeting, management also advised the board of several inquiries, including one by an affiliate of CDP Capital-Financing, that had been made concerning our interest in a merger, selling our assets or combining with another industry subordinated CMBS investment platform – with at least some of these inquiries driven by a favorable market environment and aggressive pricing for seasoned subordinate CMBS of the type that we own.
On the basis of the significant challenges presented to the implementation of the proposed plan in the then-current market, combined with the increased interest and favorable market conditions for our assets, the board decided that it would be prudent to examine strategic alternatives available to us before making any decision on investing the considerable amount of cash and time that it would take to implement the plan in an uncertain environment.
Accordingly, in December 2004, after interviewing a number of financial advisors we retained Citigroup Global Markets Inc. as our exclusive financial advisor, and Sidley Austin Brown & Wood LLP as our legal counsel, to assist us in our review of a range of possible strategic alternatives, including our sale, our continued operation as an independent entity or our liquidation.
Commencing in January 2005, at the request of our board of directors and on the basis of the preliminary views of management and Citigroup that a sale of the company could potentially maximize stockholder value, Citigroup contacted 28 potential purchasers. During January and February 2005, copies of a confidential information memorandum describing our business, securities portfolio, operations and financial condition were provided to 19 potential buyers that had expressed interest and entered into a confidentiality agreement with us. Copies of the information memorandum were also subsequently provided to other potential buyers during the course of the auction process, each of whom entered into a confidentiality agreement. All potential buyers were invited to submit written, non-binding indications of interest by February 22, 2005 for the potential acquisition, via a merger, of all our outstanding common stock.
By February 22, 2005, Citigroup received seven preliminary indications of interest, including:
• five bids for 100% of our outstanding common stock with prices ranging from $20.00 to $23.45 per share;
• a preliminary indication of interest from an affiliate of Brascan Corporation as discussed below; and
• one bid to acquire a 45% interest in us in a complex transaction at a value estimated by Citigroup to be between $18.86 and $20.43.
On February 23, 2005, we issued a press release announcing that we had engaged Citigroup as our exclusive financial advisor to assist us in undertaking a review of our various strategic alternatives, including a possible sale of the company. On the same date, Brascan Corporation (which as used in this proxy statement includes affiliates of Brascan Corporation, including BREF One, LLC (the beneficial owner of 1,212,617 shares of our common stock and of a warrant to acquire 336,835 shares of our common stock) and its predecessors) publicly disclosed that one of its affiliates had submitted a preliminary indication of interest for the purchase of all our outstanding common stock not owned by Brascan “at a significant premium to our adjusted book value as of December 31, 2004.” Mr. Blattman, who is a managing partner of Brascan Real Estate Financial Partners, LLC, which owns the managing partner of BREF One, recused himself from our board’s discussions with respect to this indication of interest and Citigroup’s receipt of the preliminary indications. Concurrently, our board directed Mr. Mark Jarrell, our President and Chief Operating Officer, to assume the lead management role in our strategic review process and our day-to-day interaction with Citigroup.
On February 28, Citigroup presented these results to the independent directors of our board identified in the following paragraph. The independent directors discussed the bids and directed Citigroup to invite all six bidders who expressed interest in acquiring the entire company to participate in the next phase of the potential sale process.
Our board of directors met on March 3, 2005 for its regular quarterly meeting. At that meeting, our board created a special committee consisting of all our independent directors: Messrs. Joshua Gillon, Arthur Haut, Robert Merrick, John Moody, Glenn Rufrano and Robert Woods. None of our independent directors has any affiliation with Brascan, an affiliate of which had participated in the first round of bidding and submitted a preliminary indication of interest relating to a possible acquisition of the entire company. See “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.” The special committee was authorized by the board of directors to review our strategic alternatives and to make recommendations to the full board of directors. Concurrently with the creation of the special committee, and until after Brascan withdrew as a potential bidder at the end of July, Mr. Blattman recused himself from all participation in our review of strategic alternatives, including any communications on our behalf with any of the bidders. Mr. Blattman instead assisted Brascan with its consideration of submitting a bid for us.
The special committee met on March 3, immediately following the meeting of our board of directors. That was the first of a total of 12 meetings that the special committee held over the course of the following seven months until the merger agreement with CDP Capital-Financing was executed. The special committee later elected Mr. Woods as its chairman.
At its March 3 meeting, the special committee reviewed all the preliminary bids that Citigroup had received and, based on the recommendations of management and Citigroup, directed Citigroup to continue the auction process with the six bidders for the entire company. Later that day, Citigroup sent a letter to those bidders, inviting them to continue their due diligence review, including discussions with members of our management. All six bidders accepted the opportunity, and through March and early April their representatives attended management presentations and were provided with access to information regarding our business, securities portfolio, operations, financial condition and other related matters.
In late March, the special committee met with management, Citigroup and Sidley to discuss whether, in light of the auction process, it would be appropriate to purchase a hedge instrument to limit the effect on our equity value from a possible rise in interest rates. We subsequently purchased successive limited hedges, expiring in May and July 2005, at the direction of the special committee.
On April 1, 2005, the special committee, a subset of which also comprised the board’s compensation committee, met with management, Citigroup and Sidley to discuss the status of the strategic review process and to determine appropriate target bonuses for certain members of management that would be payable upon the satisfaction of certain conditions, including the successful consummation of a sale of the company. On April 6, 2005, our board of directors met and adopted these target bonuses, which were subsequently updated on September 30, 2005, by the board to take into account the probability that any transaction would close in 2006 rather than 2005.
On April 15, 2005, Citigroup received two second-round written bids, including mark-ups of a form of merger agreement previously drafted by Sidley, for the acquisition of 100% of our common stock via a merger, consisting of:
• a proposal from CW Capital Investments LLC, on behalf of an affiliate of CDP Capital-Financing, for $23.60 per common share; and
• a joint proposal (which we refer to as the Alternative Proposal) from two other bidders (which we refer to as the Other Bidders) for $21.25 per common share.
CDP Capital-Financing’s proposal was subject to the approval of the board of directors of its ultimate parent company, Caisse de dépôt et placement du Québec. CDP Capital-Financing’s mark-up of the merger agreement also indicated that the closing of the merger would be subject to numerous conditions, including the consent of various third parties and the satisfactory completion by CDP Capital-Financing of further due diligence. In a later telephone conference between representatives of CDP Capital-Financing and Citigroup, CDP Capital-Financing advised Citigroup that it would be willing to negotiate with respect to the conditions previously contained in the mark-up of the merger agreement. The CDP Capital-Financing proposal also included a $10 million fee (plus reimbursement of up to $2 million of CDP Capital-Financing’s expenses) to be paid by us to CDP Capital-Financing if our board terminated the merger agreement to accept a superior proposal from another unsolicited bidder, and in certain other circumstances.
The Alternative Proposal contemplated that we would provide the Other Bidders with a four-week exclusivity period in which they would have an opportunity to negotiate the merger agreement as well as new employment agreements with members of our management, which they required as a condition to the closing of the merger. In addition to the Alternative Proposal’s lower price, the mark-up of the merger agreement accompanying the Alternative Proposal was significantly less favorable to us than the CDP Capital-Financing mark-up, particularly in terms of the certainty of closing.
Also on April 15, Brascan informed Citigroup that it would not be submitting a written proposal at that time. Brascan indicated, however, that it might be willing to further consider a purchase of us for a price as high as approximately $20.25 per common share if the special committee were interested in Brascan considering such a transaction and no other bidder were to offer a higher per share price.
On April 20, Citigroup gave a presentation to the special committee regarding the two written proposals and Brascan’s oral indication. At the meeting, the special committee directed Citigroup to continue discussions with the two bidders that had submitted written proposals. Discussions between management and Citigroup and these bidders continued for the next few weeks. In addition, during that period the chairman of the special committee had a call with representatives of CDP Capital-Financing with respect to their interest in pursuing a merger transaction.
In late April, the special committee met with senior management, Citigroup and Sidley to discuss the two proposals. The special committee considered CDP Capital-Financing’s higher per share price and the various contingencies in the two proposals, and determined that CDP Capital-Financing’s proposal was superior to the Alternative Proposal. The special committee then instructed management, Citigroup and Sidley to pursue a transaction with CDP Capital-Financing.
Citigroup then telephoned CDP Capital-Financing to inform it of the special committee’s decision, and advised CDP Capital-Financing that Sidley would prepare and distribute a revised draft of the merger agreement. Citigroup also telephoned the Other Bidders and told them we would be pursuing a transaction with another bidder, but that they should stand by in case we were unable to sign a transaction with the first bidder. Sidley later distributed to CDP Capital-Financing a revised draft of the merger agreement, which included a customary “no-shop” provision requiring us to cease soliciting other potential acquirors after the execution of the merger agreement.
On or around May 8, 2005, representatives of CDP Capital-Financing informed Citigroup that CDP Capital-Financing was withdrawing its proposal. Representatives of CDP Capital-Financing explained that CDP Capital-Financing and its affiliates needed to devote their attention to other matters, particularly a recently announced acquisition and, accordingly, would not be able to consider a transaction with us at that time or for the next few months.
On May 9, the special committee met to discuss CDP Capital-Financing’s withdrawal from the process. The special committee directed Citigroup to seek to negotiate the Alternative Proposal with the Other Bidders, including by granting them an exclusivity period, if necessary. The special committee also instructed Citigroup to encourage Brascan to make a written proposal at a competitive per share price.
On or around May 10, 2005, Citigroup had a telephonic meeting with the Other Bidders to discuss the Alternative Proposal. The Other Bidders indicated that they were concerned about certain tax issues, that had been previously disclosed in our public SEC filings and that had arisen during their due diligence investigation of us. On May 16, 2005, the Other Bidders and their counsel met with our management, Citigroup and Sidley to discuss those issues. The Other Bidders then indicated that they would consider the matter further and that they might propose a reduced purchase price as a result of their perception of these tax issues. The special committee met on May 9, May 19 and June 14 with management, Citigroup and Sidley to discuss the status of the process.
On July 7, 2005, the Other Bidders advised us that they were unwilling to proceed with a merger as a result of their perception of certain tax issues associated with us, but that they might be willing to acquire substantially all our assets for a price equivalent to $20.00 per common share.
Also on July 7, 2005, Brascan indicated to us that it had been exploring the feasibility of a transaction with consideration consisting of cash and preferred stock, representing “a significant premium to our adjusted book value as of December 31, 2004,” for our outstanding common stock.
On July 12, 2005, the special committee met with management, Citigroup and Sidley to evaluate our remaining strategic alternatives. Citigroup advised the special committee that, although it was possible that Brascan might wish to pursue a transaction, it did not appear that we would be able to execute a transaction involving a merger at an attractive price. Management, Citigroup and Sidley advised the special committee about the implications of two other strategic alternatives potentially available to us:
• a sale of substantially all our assets followed by our near-term liquidation; and
• a longer-term liquidation of the company involving the run-off of portions of our CMBS portfolio combined with opportunistic asset refinancing transactions.
Management, Citigroup and Sidley advised the special committee that either alternative would take substantially longer than a merger to complete and would involve more execution risk to us because of the need with either alternative to establish appropriate reserves for our liabilities, including our contingent liabilities, prior to making even an initial cash distribution to our stockholders. Based on the advice of management, Citigroup and Sidley, however, the special committee believed that the principal reason to consider an asset transaction was that it did not require an acquiror to accept any of our possible tax or other issues, particularly in light of concerns raised by certain of the bidders and therefore might be a structure for the transaction that was more attractive to potential bidders. The special committee advised management, Citigroup and Sidley to continue their analysis of our various alternatives.
On July 27, 2005, Brascan advised us in writing that it was no longer willing to acquire us or our assets because “the market had evolved significantly since February” and it believed that a strategic transaction between us and an entity with a core focus on the subordinated CMBS market would result in the best economic result for Brascan and our other stockholders. Thus, by July 27, 2005, we no longer had any active bids to acquire us via merger.
At a meeting of the board of directors on August 2, 2005, the directors other than the members of the special committee were excused. The special committee then determined that because Brascan had withdrawn from the bidding process, it was now appropriate for the entire board, including Mr. Blattman (our CEO) and the other two Brascan representatives, to participate in our strategic review process. Following Citigroup’s and management’s presentations to the board concerning various alternatives for us, the board determined that we had received no satisfactory bids for a merger and therefore instructed Citigroup to continue the strategic review process by soliciting bids for our principal assets under the continuing direction of the special committee.
At that meeting, our board considered the appropriateness of declaring a special cash dividend on our common stock, but determined to postpone a decision on a such a dividend until the conclusion of the asset sale process. Our board made this determination because it believed, among other things, that we should continue to conserve cash in preparation for the repayment of our senior subordinated secured debt, maturing in January 2006, and the intended redemption of our Series B Preferred Stock in August 2006. In addition, our board determined that payment of such a special dividend would be unusual during the asset sale process.
Later in August, a representative of CDP Capital-Financing approached us to request that we permit CDP Capital-Financing to renew its due diligence investigation of us, stating that CDP Capital-Financing was considering making another proposal to acquire us via a merger. We agreed to that request and CDP Capital-Financing began its due diligence investigation.
In late August, Citigroup commenced contacting 46 potential purchasers of our assets, 16 of which had been previously contacted in connection with a possible merger, and invited them to provide, by October 13, 2005, preliminary indications of interest in acquiring our principal assets. We entered into confidentiality agreements with 31 of the potential purchasers.
On September 9, 2005, representatives of CDP Capital-Financing contacted representatives of Citigroup and discussed a possible acquisition via a merger for approximately $21 cash per common share and the other principal economic terms set forth in the draft merger agreement previously negotiated, and that would be subject to consideration of the impact of Hurricane Katrina and confirmatory corporate and real estate due diligence. In a telephone communication shortly thereafter, Mr. Blattman indicated to CDP Capital-Financing that, because we were then engaged in conducting a process soliciting interest in a purchase of our principal assets, CDP Capital-Financing would need to increase its proposed purchase price in a merger in order for Mr. Blattman to recommend to the Board that the asset sale process be terminated to enter into a transaction with CDP Capital-Financing. On September 12, 2005, CDP Capital-Financing indicated that it would raise its price to $22 cash per share of common stock, and also indicated that it wanted BREF One, LLC—Series A to enter into a voting agreement pursuant to which it would agree to vote its shares of our common stock in favor of the proposed merger and would grant to CDP Capital-Financing an irrevocable proxy to vote those shares at the special meeting.
Negotiations of a merger agreement resumed between CDP Capital-Financing and us and our respective counsel. In addition, CDP Capital-Financing negotiated the terms of the voting agreement with BREF. Concurrently, CDP Capital-Financing continued its due diligence investigation of our business and portfolio, with particular focus on the extent of the estimated potential decrease in the value of our subordinated CMBS portfolio that could result from Hurricane Katrina, which had caused extensive damage in the Gulf Coast region in late August. On September 26, our board met to receive an update on the status of the negotiations from management, Citigroup and Sidley.
During the week of September 26, our board scheduled a meeting for September 30 to consider authorizing a merger agreement with CDP Capital-Financing at $22 cash per common share. During the evening of September 29, a representative of CDP Capital-Financing informed Mr. Blattman that CDP Capital-Financing was prepared to recommend to the board of directors of Caisse, the parent of CDP Capital-Financing, to pay $22 per share less an adjustment to account for recent developments affecting our CMBS portfolio, including CDP Capital-Financing’s estimate of our potential exposure to Hurricanes Katrina and Rita. In that conversation, CDP Capital-Financing had initially proposed a $1.25 per share reduction in the merger consideration, but in a later discussion that evening a representative of CDP Capital-Financing indicated that a $0.50 reduction might be acceptable, depending upon the results of continuing due diligence and the approval of the Caisse board. At that time, Mr. Blattman did not agree to recommend any price less than $22 per common share.
At its meeting on Friday, September 30, our board and the special committee, meeting jointly, received a presentation from management and Citigroup concerning CDP Capital-Financing’s proposal, including Citigroup’s oral opinion that, as of such date, a $21.50 per common share merger consideration was fair from a financial point of view to holders of our common stock. Sidley described to our board the material provisions of the proposed merger agreement, including that the agreement would require us to direct Citigroup to terminate the asset sale process and would require us to pay a $10 million termination fee to CDP Capital-Financing, plus reimburse it for up to $2 million of its transaction expenses, if our board terminated the merger agreement in order to accept an unsolicited “superior proposal” (as defined in the proposed merger agreement). The proposed merger agreement also specified that the effects of Hurricanes Katrina and Rita, among other matters, were specifically excluded from the definition of “material adverse effect” such that the merger agreement would require CDP Capital-Financing to close the merger regardless of the amount of actual damage suffered by our portfolio from the hurricanes, which damage could not then be reliably estimated due to the unavailability of accurate information.
In light of its expectations that Citigroup would likely receive preliminary indications of interest in the asset auction on October 13, the Board, upon the recommendation of the special committee, authorized Mr. Blattman to enter into a merger agreement on our behalf at a price of not less than $21.50 per share, provided that his authority to do so would terminate at the close of business on Monday, October 3, 2005.
Also on September 30, 2005, our Board and Compensation Committee approved minimum cash and stock bonuses for our executive officers and other members of our senior management. See “Interests of Certain Persons in the Merger” below.
On September 30, 2005, representatives of CDP Capital-Financing indicated to us and Citigroup that Caisse’s board of directors had lowered the price at which it was prepared to authorize a transaction to $20 per share of common stock, principally, we were told, as a result of the uncertainty surrounding damage from Hurricane Katrina, its concern over the costs
of hedging our portfolio in connection with signing a merger agreement and its desire to adopt a “more conservative” approach to the value of our CMBS portfolio. Mr. Blattman, after conferring with members of the special committee, responded that $20 per share of common stock was too low a price for us to be willing to terminate our asset sale process and that in order to enter into any merger agreement with CDP Capital-Financing at that price, an agreement would need to permit us to continue that process and not include the $10 million termination fee described above, so as not to inhibit the prospective asset bidders.
Over the next few days negotiations on those points and others continued between CDP Capital-Financing and us and our respective representatives. We requested that the merger consideration be increased above $20 per common share; CDP Capital-Financing refused. On October 5, CDP Capital-Financing agreed, with the merger consideration remaining at $20 per common share, to permit us to continue soliciting bids in the asset auction until December 1, 2005, so long as it would receive, if our board terminated the merger agreement to accept a superior proposal, reimbursement of its transaction expenses of up to $2 million, but no termination fee, and, if such termination occurred after January 1, 2006, it would receive the same expense reimbursement plus a termination fee in the amount of $8 million. In addition, CDP Capital-Financing requested that the merger agreement include a provision requiring us to enter into hedging arrangements to insulate our CMBS portfolio from the negative effects of interest rates rising in the future. Mr. Blattman indicated that he would recommend a merger agreement including those provisions to the special committee and the board at their next meeting.
On October 6, the special committee and our board held telephonic joint meetings. Our senior management and Sidley updated the special committee and the board on the status of the negotiations over the preceding week and the revised terms of the merger agreement, and related documents and issues were reviewed and discussed with the special committee and the board. At that meeting, Citigroup reviewed its financial analysis of the merger, answered questions from the board and provided the board its oral opinion that, as of such date, the $20 per common share merger consideration was fair from a financial point of view to holders of our common stock. Citigroup also advised the board that it believed that the hedging arrangements requested by CDP Capital-Financing were prudent and would not interfere with the continuation of the asset sale process. After additional discussions and deliberations, the special committee unanimously recommended to the board that the merger agreement be approved, and the board approved the merger agreement and certain related transactions and authorized and directed management to execute the merger agreement on behalf of the company, with no director dissenting. Jeffrey M. Blidner, who had not attended the meeting due to overseas travel, later confirmed his concurrence with that board action. Later that day, Citigroup confirmed its oral opinion by delivering a written opinion dated as of such date. A copy of that opinion is attached to this proxy statement as Appendix B.
Representatives of us and CDP Capital-Financing finalized the merger agreement and related documents and CDP Capital-Financing and we executed the merger agreement on October 6, 2005. We issued a press release announcing the execution of the merger agreement on the same day.
We continued our asset sale process, but did not receive any indication of interest on October 13, the scheduled bid return date. Since then, we have not received any bids in connection with our asset sale process, which we have terminated. |
