In The News

Flying J, Pilot merger crosses another major threshold

AN NEWS ANALYSIS

The merger between Flying J and Pilot Travel Centers has crossed another major threshold with Pilot completing its Due Diligence.

This automatically had extended the Exclusivity Period of the Letter of Intent so that Flying J was not permitted to enter into discussions with other acquirers until after Sept. 30.

The successful completion of Due Diligence is a significant stepping stone since Pilot, after extensive review and analysis of Flying J’s business, finances and legal affairs, agrees that it is willing to proceed with the deal unless there is a Material Adverse Change.

Likewise, Flying J is willing to proceed to the next step, the Acquisition and Stockholders Agreements.

These Agreements are corporate lawyers’ dreams, especially when they are paid by the hour.  They are long, complicated documents that outline the transaction and anticipate future problems and remedies.

The Acquisition Agreement has the standard boiler plate provisions relating to Representations and Warranties, Covenants, Indemnification, and Conditions required to close the Transaction by March 31, 2010 (the “Drop Dead Date”).  However, there are several interesting aspects.

For example, both parties “endeavor to structure the transaction in the most tax efficient manner possible (including a potential tax deferral on the equity consideration paid).” This is important because the Flying J shareholders do not want to pay cash taxes if they do not receive cash. The IRS does not want to own Pilot stock.

With respect to antitrust issues, both Pilot and Flying J agree to work together in “good faith” to solve any antitrust issues.  This may include the divestiture of certain locations where the government believes that combination of locations significantly lessens competition.

The Stockholders Agreement is essentially designed to protect the rights of the Flying J after the merger.  The Agreement will contain covenants against affiliated transactions. Flying J will also have representation on the Board of Directors depending on the level of ownership.  It will also grant Flying J certain rights so they can sell their shares in a public offering. There are also provisions which permit Flying J to sell a portion of its shares to Pilot and which permit Pilot, after six years, to buy the shares owned by Flying J.

Interestingly, at the closing, Flying J can require Pilot to buy $15 million of stock.  On the other hand, for one year after the closing, Flying J can buy $200 million of equity at the price established at the closing.

After the closing, there will be three major shareholders: the Haslam Family, which currently owns 52.5 percent, CVC Capital Partners, and Flying J.  The post closing ownership percentages are not yet determined, but each shareholder will want to protect its rights.  As they say, good contracts make for good friends. 

With the completion of the Acquisition and Stockholders Agreements, which should not present a major problem, the Exclusivity Period will be extended to Oct. 31.  And upon the receipt of the “Specified Consents” (primarily from ConocoPhillips and Shell Oil) by Oct. 31, the Exclusivity Period will be extended to the Drop Dead Date.

Provided there is not a Material Adverse Change, the major hurdles to the completion of the merger are antitrust approval and the arranging $300 to $500 million of debt financing.

Again, the hard work begins once the merger is completed.

Jack Humphreville can be contacted to comment on this article at [email protected] . He is also affiliated with Recycler Classifieds .

www.theTrucker.com