Mr. Lucas Skoczkowski of Redknee reports
REDKNEE SOLUTIONS INC. ANNOUNCES US$80 MILLION PRIVATE PLACEMENT
Redknee Solutions Inc. has entered into an agreement with a subsidiary of Constellation Software Inc., providing for an investment of $80-million (U.S.) in Redknee.
The Constellation agreement reflects the outcome of the process announced by Redknee on Aug. 22, 2016, to consider various strategic and financing alternatives potentially available to the company to enhance shareholder value. A special committee of independent members of the company's board of directors undertook an extensive review of alternatives with potential strategic and financial partners. Following negotiations with Constellation Software, and consultation with management of the company and financial and legal advisers, the special committee recommended that the board of directors approve the Constellation agreement as the most attractive alternative identified during its process, providing financial flexibility, the opportunity for the company's shareholders to participate in the company's future and a strong strategic partner. Following consideration of the special committee's recommendation and the process undertaken, the board of directors approved the Constellation agreement.
The net proceeds of the transaction will be used to repay the indebtedness of the company of approximately $53-million (U.S.) under the company's senior secured credit facility, and to finance previously announced restructuring costs and working capital needs going forward.
Completion of the investment will be subject to approval of holders of common shares of Redknee at a meeting of shareholders expected to be held in late January, 2017. Redknee's largest investor, Invesco Canada Ltd., which holds common shares representing approximately 19.9 per cent of the outstanding common shares, has agreed to vote its shares in favour of the transaction. In addition, all directors and certain officers of the company holding common shares representing in aggregate approximately 16 per cent of the outstanding common shares have also agreed to vote their shares in favour of the transaction. The company expects to prepare and mail a management proxy circular, including background to the proposed transaction and the recommendation of the board of directors, to shareholders on or about Dec. 23, 2016.
Pursuant to the Constellation agreement, the investor, as the holder of a new class of preferred shares of the company, will be entitled to elect a number of directors that will be a majority of the board of directors, with the holders of common shares being entitled to elect the balance of the directors. Initially, the number of directors on the board of directors will be set at seven, and the investor will have the right to elect four individuals to the board of directors, with the balance of the board of directors consisting of two independent directors and Redknee's chief executive officer.
"The investment by Constellation will put Redknee on solid financial footing for the future and provide a long-term strategic partner for the business, allowing Redknee to continue as a market leading independent billing software solutions company. We look forward to the expertise that this involvement will bring to the board of directors and Constellation's input on our business going forward. We see significant upside in the future, which as part of this transaction, our shareholders will be able to participate in," said Kent Thexton, chair of the board of directors and the special committee.
"With the conclusion of the strategic review, management can return its sole focus to servicing customers and delivering against its business plans for the benefit of all shareholders," said Lucas Skoczkowski, Redknee's chief executive officer.
The material terms of the Constellation agreement are discussed below.
Material terms of Constellation agreement
Description of the securities to be issued
Pursuant to the Constellation agreement, Redknee has agreed to complete a private placement of Series A preferred shares of the company and a common share purchase warrant to the investor for gross proceeds of $80-million (U.S.).
The holders of a majority of the outstanding preferred shares will be entitled to nominate for and elect to the board of directors a majority of the number of directors of the company at a meeting of preferred shareholders. The preferred shareholder nominees will be subject to approval by the two directors elected by the holders of common shares other than the chief executive officer. The preferred shareholder will not otherwise be entitled to receive notice of, attend or vote at any meeting of shareholders of the company, except as otherwise provided by law and except for meetings of the holders of preferred shares as a class or series.
Dividends on the preferred shares if, as and when declared by the board of directors, will be payable quarterly on the last business day of each calendar quarter at the rate of 10.0 per cent per annum on the original issue price of $100 (U.S.) per preferred share, provided that to the extent such dividends are not declared and paid, dividends shall accrue at the annual dividend rate and compound monthly.
In the event of any liquidation, dissolution or winding up of the company, whether voluntary or involuntary, or any other distribution of assets of the company among its shareholders for the purpose of winding up its affairs, each preferred shareholder will be entitled to be paid out of the assets of the company available for distribution to shareholders an amount equal to the issue price per preferred share, plus an amount equal to all accrued and unpaid dividends on the preferred shares, subject to the prior satisfaction of the claims of all creditors of the company and before any payment to the shareholders.
All or any part of the preferred shares will be redeemable by the company from time to time. The aggregate redemption price for the preferred shares will be equal to:
- The liquidation preference plus a 20-per-cent premium if redeemed in the first year following the date of closing of the transaction;
- The liquidation preference plus a 15-per-cent premium if redeemed in the second year following the closing date;
- The liquidation preference plus a 10-per-cent premium if redeemed in the third year following the closing date;
- The liquidation preference plus a 5-per-cent premium if redeemed in the fourth year following the closing date;
- Thereafter, the liquidation preference.
The preferred shares will not be redeemable at the election of the preferred shareholder until 10 years following the closing date. Thereafter, the preferred shares will be redeemable by the preferred shareholder for an amount equal to the liquidation preference, less any tax required to be deducted and withheld by the company.
On the occurrence of a change of control of the company, the company will have the right, without the consent of the preferred shareholder to require that the preferred shares be purchased or otherwise acquired from the preferred shareholder pursuant to an agreement entered into by the company with the purchaser pursuant to the transaction giving rise to the change in control for the aggregate sum of the then applicable corporation redemption price and a make-whole payment for any taxes incurred by a preferred shareholder in connection with such sale that would be incremental to taxes arising in connection with a redemption of the preferred shares in connection with a change of control.
The warrant will entitle the investor to acquire a number of common shares equal to $120-million (U.S.) divided by the exercise price per warrant share for a period of 10 years from the closing date. The warrant exercise price will be determined on the closing date and equal to the lower of: (i) the U.S.-dollar equivalent on the closing date of the volume-weighted average trading price of the common shares over the period of 10 trading days on the Toronto Stock Exchange ending in the second trading day prior to the closing date; and (ii) $1.43 (U.S.), provided that the warrant exercise price shall not be less than $1.09 (U.S.). The warrant will provide for a cashless exercise feature and will contain customary anti-dilution provisions, including anti-dilution provisions for issuances of common shares below the warrant exercise price.
The warrant will not be transferrable by the investor other than to affiliates of Constellation.
Upon the occurrence of a change of control of the company, the warrant will terminate in consideration for the payment by the company in cash to the holder of the warrant of an amount equal to the fair market value equivalent (as determined by the board of directors) of such payment as the holder would have been entitled upon the consummation of the change of control if the holder had exercised the warrant immediately prior thereto, less the warrant exercise price.
Completion of the transaction is subject to approval by the shareholders of:
- The issuance of the preferred shares and the warrants, as required pursuant to the rules of the Toronto Stock Exchange;
- The termination of Redknee's shareholder rights plan dated March 9, 2016.
The transaction resolution requires approval by a simple majority of the votes cast at the company meeting by the shareholders (other than Constellation), whether in person, by proxy or otherwise, and the shareholder rights plan termination resolution requires approval by a simple majority of the votes cast at the company meeting by the independent shareholders (as defined under Redknee's shareholder right's plan), whether in person, by proxy or otherwise. Closing of the transaction is also subject to approval of the TSX and closing conditions usual for a transaction of this nature.
The Constellation agreement provides for, among other things, a non-solicitation covenant on the part of Redknee, subject to customary fiduciary-out provisions that entitle Redknee to consider and accept a superior proposal prior to the company meeting, a right for the investor to amend its proposal to match any superior proposal and the payment of a break fee on termination as set out below.
Pursuant to the Constellation agreement, following the closing date and for as long as the preferred shares remain outstanding, the company will not (and, where applicable, will not permit any of its subsidiaries to), without the affirmative vote of the holders of 51 per cent of the then outstanding preferred shares:
- Amend or modify its articles or bylaws in any manner that adversely affects the rights, privileges, restrictions or conditions of the holders of the preferred shares;
Amend or modify the articles of amendment creating the preferred shares;
- Authorize the issuance of preferred shares other than the preferred shares issued to the investor or authorize the issuance of any preferred shares ranking in priority to the preferred shares;
- Declare or pay any dividends on any share capital of the company other than dividends on the preferred shares;
- Enter into any contract that would prohibit or restrict the company's ability to perform any of its obligations with respect to the preferred shares;
- Effect any liquidation, dissolution or winding up of the company;
- Incur indebtedness for borrowed money in excess of $15-million (U.S.).
The Constellation agreement further provides that, following the closing date, the company and the investor will have certain rights, including but not limited to:
- Customary registration rights in favour of the investor with regard to the warrant shares;
At such time as the preferred shares cease to be outstanding and the investor continues to hold less than 50 per cent of the outstanding common shares, the investor shall have the right to: (i) nominate one director for election to the board of directors, subject to it holding 10 per cent or more of the common shares outstanding on a fully diluted basis after giving effect to the exercise of the warrant; and (ii) a second nominee provided that its holding of common shares outstanding on a fully diluted basis after giving effect to the exercise of the warrant is 20 per cent or more;
- Rights in favour of the investor permitting it to participate in equity offerings by the company to maintain its proportionate interest in the common shares outstanding on a fully diluted basis after giving effect to the exercise of the warrant;
- For a period of four years following the closing date, a drag-along right in favour of the company pursuant to which the investor agrees to participate in any change of control transaction approved by the board of directors and a specified threshold of other shareholders, for so long as the investor continues to hold 20 per cent or more of the common shares outstanding on a fully diluted basis after giving effect to the exercise of the warrant and provided the consideration per share to be paid to the shareholders is at least 120 per cent of the warrant exercise price then in effect;
- For as long as the investor has a nominee on the board of directors and the investor continues to hold less than 50 per cent of the outstanding common shares, the investor and its affiliates have agreed to vote (or abstain from voting) all of their shares in favour of all nominees recommended by the board of directors and proposed by the company for election as directors.
Preferred shares directors
Directors elected by the preferred shareholder shall have one vote on all matters submitted to the board of directors, other than the following matters that shall be subject to the approval of the directors elected by the shareholders: (A) any redemption of preferred shares and any financing necessary to finance the redemption of the preferred shares; and (B) for a period of four years after closing of the transaction and provided that Constellation does not own in excess of 50 per cent of the outstanding common shares, any change of control transaction for which the value of the consideration per common share to be paid is in excess of 120 per cent of the warrant exercise price then in effect.
Termination rights and break fee
The Constellation agreement is terminable in the following circumstances:
- By either the company or the investor, if:
- The transaction has not been completed by Feb. 28, 2017;
- Any law is enacted that makes completion of the transaction illegal or otherwise prohibited or enjoins the company or the investor from completing the transaction;
- Shareholders fail to approve the necessary resolutions at the company meeting;
- By the investor, if prior to the time of the company meeting, the company breaches in any material respect its obligations under the Constellation agreement not to solicit an alternative transaction or participate in any discussions regarding an alternative transaction or change the recommendation of the board of directors to shareholders to approve the transaction;
- By the company or the investor, if prior to obtaining shareholder approval for the transaction, the board of directors authorizes the company to enter into a written agreement concerning a superior transaction proposal.
In the event that the Constellation agreement is terminated by: (A) either the company or the investor if the transaction has not been completed by Feb. 28, 2017, or shareholders fail to approve the necessary resolutions at the company meeting or terminated by the investor as a result of a company breach, the company will be obligated to pay the investor a break fee of $1,625,000 (U.S.), which break fee would increase to $3.2-million (U.S.) if following such termination and within six months of the date thereof Redknee consummates a transaction proposal (as such term is defined in the Constellation agreement) or enters into a contract in respect of a transaction proposal which is later consummated (whether or not within six months after such termination); and (B) the company or the investor due to a superior transaction proposal, the company will be obligated to pay a break fee of $3.2-million (U.S.).
The foregoing description of the transaction and the terms of the Constellation agreement are a summary only, are not complete and are qualified in their entirety by reference to the full text of the Constellation agreement, which will be filed on SEDAR.
The special committee of the board of directors was advised by TD Securities Inc. and Goodmans LLP. Blake, Cassels & Graydon LLP acted as legal adviser to Redknee and TD Securities Inc. acted as sole placement agent for the private placement.
Fourth quarter results and conference call
Redknee also announced that it will hold a conference call to discuss the results for its fourth quarter ended Sept. 30, 2016. The call will be hosted by Mr. Skoczkowski and David Charron, chief financial officer, on Tuesday, Dec. 13, 2016, at 8:30 a.m. ET followed by a question-and-answer period. All interested parties are invited to participate. The company expects to report its financial results for the fourth quarter after the close of markets on Dec. 12, 2016.
Conference call details
Date: Tuesday, Dec. 13, 2016
Time: 8:30 a.m. ET
Dial-in numbers: 647-427-7450/888-231-8191
Conference ID: 4579855
Taped replay: 416-849-0833 or 855-859-2056,
available until 12 a.m. ET on Tuesday, Dec. 20, 2016
Reference No.: 4579855
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