UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): May 14, 2012
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware (State of Incorporation) |
000-51446 (Commission File Number) |
02-0636095 (IRS employer identification no.) |
| 121 South 17th Street Mattoon, Illinois (Address of principal executive offices) |
61938-3987 (Zip code) |
Registrant's telephone number, including area code: (217) 235-3311
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Item 7.01. Regulation FD Disclosure.
Consolidated Communications Holdings, Inc. (the "Company") hereby furnishes the following unaudited pro forma condensed combined financial statements that the Company has prepared to reflect the proposed combination of the Company and SureWest Communications and reflecting results through March 31, 2012. These unaudited pro forma condensed combined financial statements are attached hereto as Exhibit 99.1 and incorporated into this Item 7.01 by reference.
The information in this Form 8-K, including Exhibit 99.1, is being furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to the liabilities of that section, nor shall it be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise stated in such filing.
Item 9.01. Financial Statements and Exhibits.
| Exhibit No. | Description | ||
|---|---|---|---|
| 99.1 | Unaudited Pro Forma Condensed Combined Financial Statements | ||
Safe Harbor
Any statements other than statements of historical facts, including statements about management's beliefs and expectations, are forward-looking statements and should be evaluated as such. These statements are made on the basis of management's views and assumptions regarding future events and business performance. Words such as "estimate," "believe," "anticipate," "expect," "intend," "plan, "target," "project," "should," "may," "will" and similar expressions are intended to identify forward-looking statements. Forward-looking statements (including oral representations) involve risks and uncertainties that may cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. These risks and uncertainties include the ability of Consolidated Communications Holdings, Inc. (the "Company") to complete the acquisition of SureWest Communications ("SureWest"), successfully integrate the operations of SureWest and realize the synergies from the acquisition, as well as a number of other factors related to the businesses of the Company and SureWest, including various risks to stockholders of not receiving dividends and risks to the Company's ability to pursue growth opportunities if the Company continues to pay dividends according to the current dividend policy; various risks to the price and volatility of the Company's common stock; the substantial amount of debt and the Company's ability to repay or refinance it or incur additional debt in the future; the Company's need for a significant amount of cash to service and repay the debt and to pay dividends on the Company's common stock; changes in the valuation of pension plan assets; restrictions contained in the Company's debt agreements that limit the discretion of management in operating the business; regulatory changes, including changes to subsidies, rapid development and introduction of new technologies and intense competition in the telecommunications industry; risks associated with the Company's possible pursuit of acquisitions; economic conditions in the Company's and SureWest's service areas; system failures; losses of large customers or government contracts; risks associated with the rights-of-way for the network; disruptions in the relationship with third party vendors; losses of key management personnel and the inability to attract and retain highly qualified management and personnel in the future; changes in the extensive governmental legislation and regulations governing telecommunications providers and the provision of telecommunications services; telecommunications carriers disputing and/or avoiding their obligations to pay network access charges for use of the Company's or SureWest's network; high costs of regulatory compliance; the competitive impact of legislation and regulatory changes on the telecommunications industry; and liability and compliance costs regarding environmental regulations. These and other risks and
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uncertainties are discussed in more detail in the Company's and SureWest's filings with the Securities and Exchange Commission, including the companies' respective reports on Form 10-K and Form 10-Q.
Many of these risks are beyond management's ability to control or predict. All forward-looking statements attributable to the Company, SureWest or persons acting on behalf of each of them are expressly qualified in their entirety by the cautionary statements and risk factors contained in this communication and the companies' filings with the Securities and Exchange Commission. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the Securities and Exchange Commission, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: May 14, 2012
| Consolidated Communications Holdings, Inc. | ||||||
By: |
/s/ STEVEN L. CHILDERS |
|||||
| Name: | Steven L. Childers | |||||
| Title: | Chief Financial Officer | |||||
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| Exhibit No. | Description | ||
|---|---|---|---|
| 99.1 | Unaudited Pro Forma Condensed Combined Financial Statements | ||
5
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements ("pro forma financial statements") have been prepared to reflect the mergers (the "Mergers") contemplated by the Agreement and Plan of Merger by and among Consolidated Communications Holdings, Inc. ("Consolidated"), SureWest Communications ("SureWest"), WH Acquisition Corp. and WH Acquisition II Corp. dated as of February 5, 2012, based on the purchase method of accounting, with Consolidated treated as the acquirer. The pro forma financial statements utilize the historical consolidated financial statements of Consolidated and SureWest, which are included in Consolidated's Annual Report on Form 10-K for the year ended December 31, 2011, Consolidated's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, SureWest's Annual Report on Form 10-K for the year ended December 31, 2011 and SureWest's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (collectively, the "Reports"). The historical consolidated financial statements have been adjusted to give effect to pro forma events that are directly attributable to the Mergers and factually supportable and, in the case of the statements of income, that are expected to have a continuing impact. The unaudited pro forma condensed combined statements of operations, which have been prepared for the quarter and twelve months ended March 31, 2012 and the year ended December 31, 2011, give effect to the Mergers as if they had occurred on January 1, 2011. The unaudited pro forma condensed combined balance sheet has been prepared as of March 31, 2012 and gives effect to the Mergers as if they had occurred on that date.
As of May 14, 2012, Consolidated has not finalized the detailed valuation studies necessary to arrive at the required fair market value of the SureWest assets to be acquired and the liabilities to be assumed and the related allocations of the purchase price. As indicated in Note 1 to the pro forma financial statements, Consolidated has made certain pro forma adjustments to the historical book values of the assets and liabilities of SureWest to reflect certain preliminary estimates of the fair value of the net assets acquired, with the excess of the estimated purchase price over the estimated fair values of SureWest's acquired assets and assumed liabilities recorded as goodwill. Actual results are expected to differ from these preliminary estimates once Consolidated has determined the final purchase price (as determined by the average closing price of Consolidated common stock for the 20 consecutive trading days ending on the second day preceding the closing date of the Mergers) for SureWest and completed the valuation studies necessary to finalize the required purchase price allocations. There can be no assurances that such finalization of the valuation studies will not result in material changes. Consolidated performed a preliminary assessment of accounting policies and financial statement presentation which has identified certain adjustments necessary to conform information in SureWest's historical financial statements to Consolidated's combined accounting policies and presentation. The review of the accounting policies and presentation is not yet complete and additional policy differences may be identified when completed.
These pro forma financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes of Consolidated and SureWest included in the Reports.
The pro forma financial statements are not intended to represent or be indicative of the consolidated results of operations or financial condition of the combined company that would have been reported had the Mergers been completed as of the dates presented and should not be taken as representative of the future consolidated results of operations or financial condition of the combined company.
The pro forma financial statements do not include the realization of future cost savings or synergies or restructuring charges that are expected to result from Consolidated's acquisition of SureWest.
1
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED
MARCH 31, 2012
(amounts in thousands, except per share amounts)
| |
Consolidated Communications |
SureWest Communications |
Pro Forma Adjustments |
Note 4 | Pro Forma Condensed Combined Consolidated Communications and SureWest Communications |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating revenues |
$ | 93,364 | $ | 62,758 | $ | 138 | (a) | $ | 156,260 | ||||||
Operating expenses: |
|||||||||||||||
Operating expenses (exclusive of depreciation and amortization) |
55,392 | 45,714 | 138 | (a) | 101,244 | ||||||||||
Transaction costs |
4,822 | 3,292 | (8,114 | ) | (b) | — | |||||||||
Depreciation and amortization |
22,137 | 15,946 | 2,341 | (c) | 40,424 | ||||||||||
Total operating expenses |
82,351 | 64,952 | (5,635 | ) | 141,668 | ||||||||||
Operating income (loss) |
11,013 | (2,194 | ) | 5,773 | 14,592 | ||||||||||
Other income (expense): |
|||||||||||||||
Interest expense |
(14,600 | ) | (2,213 | ) | (1,533 | ) | (d) | (18,346 | ) | ||||||
Investment income |
6,466 | 25 | — | 6,491 | |||||||||||
Other, net |
14 | (154 | ) | — | (140 | ) | |||||||||
Income (loss) before income taxes |
2,893 | (4,536 | ) | 4,240 | 2,597 | ||||||||||
Income tax expense (benefit) |
1,009 | (622 | ) | 341 | (e) | 728 | |||||||||
Net income (loss) |
1,884 | (3,914 | ) | 3,899 | 1,869 | ||||||||||
Less: net income attributable to noncontrolling interest |
125 | — | — | 125 | |||||||||||
Net income (loss) attributable to common stockholders |
$ | 1,759 | $ | (3,914 | ) | $ | 3,899 | $ | 1,744 | ||||||
Net income (loss) per common share—basic |
$ | 0.06 | $ | (0.28 | ) | n/a | $ | 0.05 | |||||||
Net income (loss) per common share—diluted |
$ | 0.06 | $ | (0.28 | ) | n/a | $ | 0.05 | |||||||
Shares of common stock used to calculate earnings per share: |
|||||||||||||||
Basic |
29,689 | 14,036 | (5,350 | ) | (f) | 38,375 | |||||||||
Diluted |
29,689 | 14,036 | (5,350 | ) | (f) | 38,375 | |||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements.
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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS
ENDED MARCH 31, 2012
(amounts in thousands, except per share amounts)
| |
Consolidated Communications |
SureWest Communications |
Pro Forma Adjustments |
Note 4 | Pro Forma Condensed Combined Consolidated Communications and SureWest Communications |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating revenues |
$ | 372,186 | $ | 250,256 | $ | 940 | (a) | $ | 623,382 | ||||||
Operating expenses: |
|||||||||||||||
Operating expenses (exclusive of depreciation and amortization) |
221,972 | 172,285 | 940 | (a) | 395,197 | ||||||||||
Transaction costs |
4,822 | 3,292 | (8,114 | ) | (b) | — | |||||||||
Depreciation and amortization |
88,724 | 64,136 | 9,014 | (c) | 161,874 | ||||||||||
Total operating expenses |
315,518 | 239,713 | 1,840 | 557,071 | |||||||||||
Operating income |
56,668 | 10,543 | (900 | ) | 66,311 | ||||||||||
Other income (expense): |
|||||||||||||||
Interest expense |
(52,055 | ) | (9,383 | ) | (14,788 | ) | (d) | (76,226 | ) | ||||||
Investment income |
27,392 | 49 | — | 27,441 | |||||||||||
Other, net |
610 | (402 | ) | — | 208 | ||||||||||
Income before income taxes |
32,615 | 807 | (15,688 | ) | 17,734 | ||||||||||
Income tax expense |
11,246 | 1,275 | (6,833 | ) | (e) | 5,688 | |||||||||
Net income (loss) |
21,369 | (468 | ) | (8,855 | ) | 12,046 | |||||||||
Less: net income attributable to noncontrolling interest |
565 | — | — | 565 | |||||||||||
Net income (loss) attributable to common stockholders |
$ | 20,804 | $ | (468 | ) | $ | (8,855 | ) | $ | 11,481 | |||||
Net income (loss) per common share—basic |
$ | 0.70 | $ | (0.03 | ) | n/a | $ | 0.30 | |||||||
Net income (loss) per common share—diluted |
$ | 0.70 | $ | (0.03 | ) | n/a | $ | 0.30 | |||||||
Shares of common stock used to calculate earnings per share: |
|||||||||||||||
Basic |
29,624 | 13,938 | (5,252 | ) | (f) | 38,310 | |||||||||
Diluted |
29,624 | 13,938 | (5,252 | ) | (f) | 38,310 | |||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements.
3
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER
31, 2011
(amounts in thousands, except per share amounts)
| |
Consolidated Communications |
SureWest Communications |
Pro Forma Adjustments |
Note 4 | Pro Forma Condensed Combined Consolidated Communications and SureWest Communications |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating revenues |
$ | 374,263 | $ | 248,053 | $ | 1,274 | (a) | $ | 623,590 | ||||||
Operating expenses: |
|||||||||||||||
Operating expenses (exclusive of depreciation and amortization) |
222,963 | 169,363 | 1,274 | (a) | 393,600 | ||||||||||
Depreciation and amortization |
88,745 | 63,965 | 9,185 | (c) | 161,895 | ||||||||||
Total operating expenses |
311,708 | 233,328 | 10,459 | 555,495 | |||||||||||
Operating income |
62,555 | 14,725 | (9,185 | ) | 68,095 | ||||||||||
Other income (expense): |
|||||||||||||||
Interest expense |
(49,394 | ) | (11,586 | ) | (15,648 | ) | (d) | (76,628 | ) | ||||||
Investment income |
27,843 | 39 | — | 27,882 | |||||||||||
Other, net |
823 | (41 | ) | — | 782 | ||||||||||
Income before income taxes |
41,827 | 3,137 | (24,833 | ) | 20,131 | ||||||||||
Income tax expense |
14,845 | 1,335 | (8,940 | ) | (e) | 7,240 | |||||||||
Net income |
26,982 | 1,802 | (15,893 | ) | 12,891 | ||||||||||
Less: net income attributable to noncontrolling interest |
572 | — | — | 572 | |||||||||||
Net income attributable to common stockholders |
$ | 26,410 | $ | 1,802 | $ | (15,893 | ) | $ | 12,319 | ||||||
Net income per common share—basic |
$ | 0.88 | $ | 0.13 | n/a | $ | 0.32 | ||||||||
Net income per common share—diluted |
$ | 0.88 | $ | 0.13 | n/a | $ | 0.32 | ||||||||
Shares of common stock used to calculate earnings per share: |
|||||||||||||||
Basic |
29,600 | 13,876 | (5,190 | ) | (f) | 38,286 | |||||||||
Diluted |
29,600 | 13,936 | (5,250 | ) | (f) | 38,286 | |||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements.
4
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2012
(amounts in thousands)
| |
Consolidated Communications |
SureWest Communications |
Pro Forma Adjustments |
Note 5 | Pro Forma Condensed Combined Consolidated Communications and SureWest Communications |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||||||||
Current assets: |
|||||||||||||||
Cash and cash equivalents |
$ | 98,493 | $ | 5,446 | $ | (56,797 | ) | (b) | $ | 47,142 | |||||
Accounts receivable, net |
34,169 | 18,899 | — | 53,068 | |||||||||||
Inventories |
6,950 | — | 5,692 | (a) | 12,642 | ||||||||||
Income tax receivable |
11,730 | — | — | 11,730 | |||||||||||
Deferred income taxes |
4,825 | 2,422 | — | 7,247 | |||||||||||
Prepaid expenses and other current assets |
9,563 | 7,730 | 1,074 | (c) | 18,367 | ||||||||||
Total current assets |
165,730 | 34,497 | (50,031 | ) | 150,196 | ||||||||||
Property, plant and equipment, net |
326,550 | 523,012 | (5,692 | ) | (a) | 911,255 | |||||||||
|
67,385 | (c) | |||||||||||||
Investments |
98,559 | — | — | 98,559 | |||||||||||
Intangible and other assets: |
|||||||||||||||
Tradenames, indefinite life assets and goodwill |
532,909 | 45,814 | 24,096 | (c) | 602,819 | ||||||||||
Customer lists, net |
52,276 | 1,114 | 23,886 | (c) | 77,276 | ||||||||||
Deferred charges and other assets |
8,719 | 5,942 | 1,837 | (d) | 16,498 | ||||||||||
|
593,904 | 52,870 | 49,819 | 696,593 | |||||||||||
|
$ | 1,184,743 | $ | 610,379 | $ | 61,481 | $ | 1,856,603 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||||||||||
Current liabilities: |
|||||||||||||||
Accounts payable |
$ | 13,932 | $ | 3,443 | $ | — | $ | 17,375 | |||||||
Other accrued liabilities |
37,359 | 24,378 | (7,783 | ) | (e) | 53,954 | |||||||||
Advance billings and deferred revenues |
21,571 | 8,170 | — | 29,741 | |||||||||||
Dividends payable |
11,603 | — | — | 11,603 | |||||||||||
Current portion of long-term debt and capital lease obligations |
9,004 | 7,500 | (7,500 | ) | (f) | 9,004 | |||||||||
Current portion of pension and postretirement benefit obligations |
2,579 | — | — | 2,579 | |||||||||||
Total current liabilities |
96,048 | 43,491 | (15,283 | ) | 124,256 | ||||||||||
Long-term debt and capital lease obligations |
873,462 | 200,000 | 150,000 | (f) | 1,223,462 | ||||||||||
Deferred income taxes |
78,184 | 48,569 | 29,171 | (g) | 155,924 | ||||||||||
Accrued pension and other post-retirement benefits |
92,012 | 54,957 | — | 146,969 | |||||||||||
Other liabilities and deferred revenues |
4,990 | 6,662 | — | 11,652 | |||||||||||
Commitments and contingencies |
|||||||||||||||
Total stockholders' equity |
40,047 | 256,700 | (86,203 | ) | (h) | 194,340 | |||||||||
|
(16,204 | ) | (h) | ||||||||||||
|
$ | 1,184,743 | $ | 610,379 | $ | 61,481 | $ | 1,856,603 | |||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements.
5
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(amounts in thousands, except per share amounts)
1. Description of the Transaction
On February 5, 2012, Consolidated and SureWest Communications ("SureWest") entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Consolidated has agreed to acquire SureWest. The Merger Agreement provides for a two-step merger in which, first, a wholly-owned subsidiary of Consolidated will merge with and into SureWest, with SureWest as the surviving entity (the "First Merger"), and then SureWest will merge with and into a separate wholly-owned subsidiary of Consolidated (the "Second Merger" and together with the First Merger, the "Mergers"). As a result of these mergers, the separate corporate existence of SureWest will cease, and the wholly-owned subsidiary of Consolidated will continue as the surviving corporation and a wholly-owned subsidiary of Consolidated.
Pursuant to the terms of the Merger Agreement, SureWest shareholders may elect to exchange each share of SureWest common stock for either $23.00 in cash (without interest) or shares of Consolidated common stock having an equivalent value based on average trading prices for the 20-day period ending two days before the closing of the acquisition, subject to a collar so that there will be a maximum exchange ratio of 1.40565 shares of Consolidated common stock for each share of SureWest common stock and a minimum of 1.03896 shares of Consolidated common stock for each share of SureWest common stock. Overall elections are subject to proration so that 50% of the SureWest shares will be exchanged for cash and 50% for stock. The results of applying the collar and proration provisions are subject to adjustment to ensure the transaction will be treated as a tax-free reorganization for federal income tax purposes. Shares of SureWest with respect to which no election is timely made will be converted into the right to receive the cash consideration or the Consolidated common stock, as determined in accordance with the proration described in the Merger Agreement.
Consolidated will account for its acquisition of SureWest using the purchase method of accounting. The pro forma adjustments reflect preliminary estimates of the purchase price allocation, which are expected to change upon finalization of appraisals and other valuation studies. The final allocation will be based on the actual purchase price and the assets and liabilities that exist as of the date of the SureWest acquisition. The final adjustments could be materially different from the pro forma adjustments presented herein.
The unaudited pro forma condensed combined statement of operations includes certain accounting adjustments related to the acquisition that are expected to have a continuing impact on the combined results, such as increased depreciation and amortization on the acquired tangible and intangible assets, increased interest expense on the debt expected to be incurred to complete the acquisition, amortization of deferred financing fees incurred in connection with the new borrowings and the tax impact of these pro forma adjustments.
The unaudited pro forma condensed combined statement of operations does not reflect certain adjustments that are expected to result from the acquisition that may be significant, such as costs that may be incurred by Consolidated for integration and restructuring efforts, as well as payments under certain Change in Control Agreements with SureWest employees, because they are considered to be of a non-recurring nature.
Upon completion of the Mergers, various triggering events will have occurred which result in the payment of various Change in Control Agreements to certain SureWest employees. The estimated payments under these agreements will range from approximately $12,000 to $14,000. No adjustment has been included in the pro forma financial statements for these payments.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(amounts in thousands, except per share amounts)
1. Description of the Transaction (Continued)
Consolidated expects to realize synergies following the acquisition that are not reflected in the pro forma adjustments. The transaction is expected to generate annual operating synergies of approximately $25,000, which will be phased in over the first two years after closing as integration projects are completed. The transaction is also expected to generate annual capital expenditure synergies of $5,000 to $10,000, which are expected to be fully realized by the end of the first full year after close on a run-rate basis. Consolidated also expects to incur merger and integration costs, excluding closing costs, of approximately $20,000 to $25,000 over the first two fiscal years following the close. No assurance can be given with respect to the ultimate level of such synergies or the timing of their realization.
2. Estimated Purchase Price
The following is a preliminary estimate of the purchase price to be paid by Consolidated in the acquisition of SureWest:
Number of shares of SureWest common stock and equity awards estimated to be outstanding at the effective time of the First Merger(a) |
14,826 | ||||||
Number of shares convertible into Consolidated common stock(b) |
7,413 | ||||||
Exchange ratio(c) |
1.1717 | ||||||
Number of shares of Consolidated common stock to be issued to holders of SureWest common stock(d) |
8,686 | ||||||
Multiplied by cost per share of Consolidated common stock(e) |
$ | 19.63 | |||||
Stock portion of the merger consideration |
$ | 170,497 | |||||
Cash portion of the merger consideration(f) |
170,497 | ||||||
Repayment of outstanding SureWest debt |
207,500 | ||||||
Estimated purchase price |
$ | 548,494 | |||||
7
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(amounts in thousands, except per share amounts)
2. Estimated Purchase Price (Continued)
3. Estimated purchase price allocation
The estimated purchase price has been allocated to the estimated net tangible and intangible assets acquired and liabilities assumed on a preliminary basis as follows:
Estimated purchase price |
$ | 548,494 | |||||
Current assets |
41,263 | ||||||
Property, plant & equipment |
584,705 | ||||||
Customer lists |
25,000 | ||||||
Tradenames, indefinite life assets and goodwill |
69,910 | ||||||
Other assets |
2,966 | ||||||
Current liabilities |
(35,991 | ) | |||||
Pension & other postretirement benefit obligations |
(54,957 | ) | |||||
Deferred income taxes |
(77,740 | ) | |||||
Other liabilities |
(6,662 | ) | |||||
Net assets acquired |
$ | 548,494 | |||||
For purposes of preparing the pro forma financial statements, the estimated purchase price stated above has been allocated based on the preliminary estimates of the fair value of the assets acquired and liabilities assumed. The final purchase price allocation will be based on the estimated fair values at the completion of the Mergers and could vary significantly from the pro forma amounts due to various factors, including but not limited to, changes in the composition of SureWest's assets, liabilities, outstanding equity ownership shares, changes in the exchange ratio and changes in interest rates prior to the completion of the Mergers. Accordingly, the preliminary estimated fair values of the assets and liabilities recorded are subject to change pending additional information that may be developed by Consolidated and SureWest. Allocation of an increased portion of the purchase price to property, plant and equipment or any identifiable intangible asset with a finite life could reduce the amount of goodwill in the pro forma financial statements and may result in increased depreciation and/or amortization expense, which could be material.
4. Pro Forma Adjustments—Statements of Income
Following are pro forma adjustments included in the unaudited pro forma condensed combined statements of income for the quarter and twelve months ended March 31, 2012 and the year ended December 31, 2011 and gives effect to the Mergers as if it had occurred on January 1, 2011:
In connection with the Merger Agreement, a preliminary review of the accounting policies and presentation of the financial statements of SureWest has been performed to conform to those of Consolidated. Based on this review, certain amounts included in SureWest's historical financial statements have been reclassified to conform to Consolidated's accounting policies
8
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(amounts in thousands, except per share amounts)
4. Pro Forma Adjustments—Statements of Income (Continued)
and presentation. The pro forma adjustment reflects the reclassification of SureWest bad debt expense from operating revenues to operating expenses.
The final results of the complete review of accounting policies and presentation may result in additional differences. There can be no assurances that such finalization will not result in material differences.
In connection with the Merger Agreement, Consolidated and SureWest expect to incur estimated transaction costs of $21,200, of which $8,114 were incurred through March 31, 2012. These costs have been excluded from the unaudited pro forma condensed combined statements of income since they are considered to be of a non-recurring nature. The pro forma adjustment reflects the removal of transaction costs of $8,114 that were incurred by Consolidated and SureWest during the quarter and twelve months ended March 31, 2012.
The pro forma adjustments to depreciation and amortization reflect the removal of the historical basis of depreciation and amortization for the SureWest assets and the increase in depreciation and amortization expense for property and equipment and finite-lived intangible assets acquired in the SureWest acquisition, based on the write-up of these assets to their fair values in accordance with Statement of Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 805, Business Combinations. The following table summarizes the pro forma adjustments to depreciation and amortization:
| |
Quarter Ended March 31, 2012 |
Twelve Months Ended March 31, 2012 |
Year Ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Removing historical depreciation and amortization |
$ | (15,946 | ) | $ | (64,136 | ) | $ | (63,965 | ) | |
Recording new depreciation and amortization |
18,287 | 73,150 | 73,150 | |||||||
|
$ | 2,341 | $ | 9,014 | $ | 9,185 | ||||
The pro forma adjustments to interest expense, as summarized in the following table, reflect the removal of SureWest's historical interest expense and the additional interest expense resulting from the new borrowings to finance the acquisition. The pro forma adjustments are
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(amounts in thousands, except per share amounts)
4. Pro Forma Adjustments—Statements of Income (Continued)
based on the amounts borrowed and the interest rates assumed to be in effect at the closing of the Mergers.
| |
Estimated Principal Outstanding |
Estimated Interest Rate |
Quarter Ended March 31, 2012 |
Twelve Months Ended March 31, 2012 |
Year Ended December 31, 2011 |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Removal of historical interest expense: |
||||||||||||||||
SureWest interest expense |
$ | (2,213 | ) | $ | (9,383 | ) | $ | (11,586 | ) | |||||||
Consolidated amortization of debt issuance costs for bridge notes |
(3,063 | ) | (3,063 | ) | — | |||||||||||
Recording of new interest expense: |
||||||||||||||||
Notes |
$ | 350,000 | 7.50 | % | 6,563 | 26,250 | 26,250 | |||||||||
Amortization of debt issuance costs: |
||||||||||||||||
Notes |
246 | 984 | 984 | |||||||||||||
Net adjustment to interest expense |
$ | 1,533 | $ | 14,788 | $ | 15,648 | ||||||||||
The pro forma adjustments are based on the issuance of privately placed notes as if such issuance had occurred on January 1, 2011.
For all periods presented, pro forma interest expense includes the amortization of expected financing costs related to the private placement offering of $7,875 based on a term of eight years. Pro forma interest expense does not include amortization of financing costs of $3,063 incurred during the quarter ended March 31, 2012 related to the bridge facility commitment entered into in connection with the Mergers. An increase or decrease of 0.125% in the interest rate on the debt would change annual pro forma interest expense by $437.
The blended effective tax rate applied to the deductible pro forma adjustments related to the Mergers and related financing is 36% for the periods presented. The pro forma adjustments for transaction costs incurred in connection with the Mergers have been treated consistent with the historical deductibility for income tax purposes.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(amounts in thousands, except per share amounts)
4. Pro Forma Adjustments—Statements of Income (Continued)
The pro forma adjustment reflects the change in outstanding shares to calculate basic and dilutive earnings per share based on the Mergers:
| |
Quarter Ended March 31, 2012 |
Twelve Months Ended March 31, 2012 |
Year Ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Shares Used in Basic Earnings Per Share |
||||||||||
Cancellation of SureWest shares |
(14,036 | ) | (13,938 | ) | (13,876 | ) | ||||
Issuance of Consolidated shares |
8,686 | 8,686 | 8,686 | |||||||
|
(5,350 | ) | (5,252 | ) | (5,190 | ) | ||||
Shares Used in Diluted Earnings Per Share |
||||||||||
Cancellation of SureWest shares |
(14,036 | ) | (13,938 | ) | (13,936 | ) | ||||
Issuance of Consolidated shares |
8,686 | 8,686 | 8,686 | |||||||
|
(5,350 | ) | (5,252 | ) | (5,250 | ) | ||||
5. Pro Forma Adjustments—Balance Sheet
The following are the pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of March 31, 2012 and gives effect to the Mergers as if they had occurred on that date:
In connection with the Merger Agreement, a preliminary review of the accounting policies and presentation of the financial statements of SureWest has been performed to conform to those of Consolidated. Based on this review, certain amounts included in SureWest's historical financial statements have been reclassified to conform to Consolidated's accounting policies and presentation. The pro forma adjustment reflects the reclassification of SureWest construction inventory of $5,692 from property, plant and equipment to current assets.
The final results of the complete review of accounting policies and presentation may result in additional differences. There can be no assurances that such finalization will not result in material differences.
Pro forma adjustments to cash are the result of cash used to fund the acquisition of SureWest, estimated transaction costs to be paid after March 31, 2012, and costs associated with entering
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(amounts in thousands, except per share amounts)
5. Pro Forma Adjustments—Balance Sheet (Continued)
into the new credit facilities. Following is a preliminary estimate of net cash used for the Mergers:
Cash consideration for acquisition |
$ | (170,497 | ) | |
Estimated transaction costs—Consolidated |
(7,300 | ) | ||
Estimated transaction costs—SureWest |
(7,500 | ) | ||
Deferred financing costs |
(14,000 | ) | ||
Incremental borrowings |
142,500 | |||
Net cash used |
$ | (56,797 | ) | |
As of March 31, 2012, Consolidated and SureWest have paid approximately $3,900 and $2,700, respectively, in transaction costs, which are included in the historical cash balances as of March 31, 2012.
The pro forma adjustments reflect the preliminary purchase accounting fair value estimates for the net assets to be acquired. This is an estimate based on preliminary purchase price allocation which is subject to final allocation upon completion of the valuation process.
Increase to assets held for sale |
$ | 1,074 | ||
Increase to property, plant and equipment, net |
67,385 | |||
Increase to customer lists, net |
23,886 | |||
|
$ | 92,345 | ||
Tradenames, indefinite life assets and goodwill: |
||||
Increase to tradenames, indefinite life assets and goodwill |
$ | 69,910 | ||
Remove historical SureWest goodwill |
(45,814 | ) | ||
|
$ | 24,096 | ||
Consolidated expects to incur $7,875 of deferred financing costs related to privately placed notes, excluding legal and accounting fees. The pro forma adjustments to deferred financing costs are as follows:
Removal of SureWest deferred financing costs |
$ | (2,976 | ) | |
Removal of Consolidated deferred financing costs for bridge facility |
(3,062 | ) | ||
Recording of new deferred financing costs associated with privately placed notes |
7,875 | |||
|
$ | 1,837 | ||
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(amounts in thousands, except per share amounts)
5. Pro Forma Adjustments—Balance Sheet (Continued)
The pro forma adjustment reflects the cash payment of accrued transaction and financing costs included in Consolidated and SureWest's historical financial statements at March 31, 2012.
The pro forma adjustments reflect the payment and incurrence of debt as follows:
Non-current portion: |
||||
Repayment of existing SureWest credit facility |
$ | (200,000 | ) | |
Notes |
350,000 | |||
Adjustment to non-current portion of long-term debt |
$ | 150,000 | ||
Current portion: |
||||
Repayment of existing SureWest credit facility |
$ | (7,500 | ) | |
The pro forma adjustments reflect the income tax impact assuming a marginal combined state and federal tax rate of approximately 36% of the pro forma adjustments resulting from the Mergers. The pro forma adjustments to current deferred tax assets and long-term deferred tax liabilities reflect the change in fair value of the net assets to be acquired.
The pro forma stockholders' equity reflects the following adjustments:
Equity issued to SureWest shareholders |
$ | 170,497 | ||
Elimination of historical SureWest shareholders' equity |
(256,700 | ) | ||
|
$ | (86,203 | ) | |
In addition, retained earnings were reduced by $16,204 for estimated transaction and financing costs. The estimated transaction costs expected to be incurred in connection with the Mergers have not been assessed for deductibility for income tax purposes and accordingly are assumed to be nondeductible for pro forma purposes.
13