On the Deal Q&A: Nothing But Blue Sky

HNZ Group’s CEO won the bid to take his company private in a soaring three-party carve-out deal
Helicopter services company, HNZ Group found its path to liquidity: a go-private deal worth a whopping 43.3% premium to the pre-announcement share price. The winning bid seemed a perfect match — Don Wall, the CEO, would buy the core business, and long-time partner PHI would take over the Asia-Pacific division. But with its complex plan of arrangement, related-party bidder, multiple sources of financing and emergence of an unsolicited proposal, the devil was in the details for lawyers working to get the deal done.



LEXPERT:
I understand that CEO Don Wall made the best offer to purchase HNZ, after the Board initiated a strategic review. What inspired him to make an offer?
Clemens Mayr (McCarthy Tétrault LLP, for HNZ): Don is a great entrepreneur and operator. As is often the case, the fact of being a publicly listed company created pressures on short-term results versus long-term strategic objectives. This, together with the unsolicited approaches received by HNZ and the growing desire for some large shareholders to find a path to liquidity, led to an opportunity for Don to be part of a solution.
Colby Dewart (Burnet, Duckworth & Palmer LLP, for Don Wall): HNZ had a strong past working relationship with PHI prior to the transaction. As a result, Don was aware that PHI was interested in expanding to the international offshore markets in which HNZ was established. With Don’s interest in the other portion of the HNZ business, and given the fact that HNZ was considering all strategic alternatives, the proposal was welcomed by the HNZ special committee.

LEXPERT: Apart from the obvious cash premium, why was this proposal the best choice? How did the structure come about? Were other offers considered?
Mayr: Yes, the board received expressions of interest, both solicited and unsolicited, which were all examined independently and assessed accordingly. As is often the case, this transaction structure came about quite naturally as, in combination, the management bid with the PHI carve-out created superior value for HNZ’s shareholders.
Jacob Hoeppner (Burnet, Duckworth & Palmer LLP, for Don Wall): In this case, the HNZ special committee determined, after it considered all the proposals on the table, that the offer from Don Wall and PHI was the best one for the HNZ shareholders, which included taking the company private as one of its attributes. It was in this context that I believe the sale of the international offshore business made sense for HNZ — as a key part of the best proposal.

LEXPERT: Did the parties know each other? Did that make the negotiations easier?
Lance Bospflug, President and Chief Operating Officer, PHI, Inc.:  PHI and HNZ/CHL have worked together on various projects for many years and know each other very well. We have a great deal of confidence in each other — particularly in our operating, maintenance and safety standards — and that made the negotiations much easier and more collaborative.
Don Wall, President & Chief Executive Officer, HNZ/CHL: I agree completely.

LEXPERT: How did the parties manage the conflict of interest?
Hoeppner: The special committee and its advisors were intimately involved in negotiations given the conflict of interest resulting from Don Wall wearing hats of both CEO and bidder. In addition to other customary procedures … senior management of HNZ — including Don Wall — agreed to be bound by a defined set of process guidelines for the term of HNZ’s strategic review process.
Mayr: An independent committee was struck very early and management was excluded and dealings with potential bidders were handled by the independent committee and its independent advisors. A strict protocol was implemented to govern management’s conduct and involvement.

LEXPERT: Were there any concerns about shareholder dissent? What steps were taken to address them?
Hoeppner: It’s always possible that a shareholder doesn’t see the value of an offer endorsed by a company’s Board of Directors and elects to proceed with dissident proceedings. In this case, the parties attempted to mitigate that risk by securing shareholder support agreements for a material number of shares and including detailed and specific disclosure in the information circular about the background to the transaction, the terms of the other offers received by HNZ, and the formal valuation obtained for the HNZ shares.
Mayr: No real concerns. The value of the transaction was more than fair and adequate, hence the shareholder support.
Richard Turner (Blake, Cassels & Graydon LLP, for PHI): The significant premium and all-cash consideration, combined with the backing of a formal valuation and significant shareholder support by way of lock-up agreements, minimized the risk of shareholders exercising their dissent rights. … On the PHI side, we never got wind of any shareholder concern with the deal.

LEXPERT: How was the level of complexity?
Turner: As with most things, the devil is in the details. While the high-level business negotiations of the transaction were relatively easy to navigate, the plumbing to implement the two-step structure of PHI providing a loan to Don Wall to facilitate the initial purchase of all of the HNZ shares, followed by a sale of the international business to PHI, was certainly not standard and made for a lot of work. The lawyers and tax advisors spent a long time making sure that all of the steps to implement the transaction went off without a hitch, which was a big job given the number of jurisdictions involved and significant changes to the US tax laws announced right in the middle of the deal. There were more than a few late-night conference calls.
Hoeppner: Various additional transaction steps were required in order to balance the interests of each of HNZ and its various stakeholders, Don Wall and PHI, and ultimately to ensure that the business of HNZ could be efficiently conveyed to Don Wall and PHI in two separate parcels. A great deal of time was spent by the various deal teams coordinating the closing mechanics in advance. As a result, the implementation of the arrangement went very smoothly on closing following the shareholder and court approvals — in spite of the fact that the transaction closed between Christmas and New Year’s, where it is often difficult to contact third parties and regulatory representatives.
Mayr: It was fairly complex, more so than in other circumstances, as the HNZ business essentially had to be separated and cross-border tax implications required careful planning. All advisors and parties were, however, remarkably sophisticated and practical, so the entire process went very smoothly.

LEXPERT: What was the experience like working on this deal?
Donald Gray (Blake, Cassels & Graydon LLP, for PHI):  In my many years of negotiating aviation transactions, I can only rarely recall a situation where the principals had such confidence and trust in each other, and mutual respect for each other’s companies and operations. It made the negotiations much easier and more pleasant. All parties truly saw this as a “win/win,” right from the start.
Mayr: Very professional, practical and efficient. As in all auction-type processes, bidders had to move quickly and follow the process and timelines dictated by the independent committee.
Dewart: Once the key business points were determined and agreed, the working group was very collaborative.

LEXPERT:
It seems like going-private transactions are on the rise in Canada. Do you have a sense of why that might be?
Mayr: Generally, valuations tend to be very high and attractive for going-private transactions. This is fueled by a trend of consolidation in certain industries, availability of private funding looking for investment opportunities combined with a growing feeling that — unless you need to access public capital — the burden and potential liability associated with being a public company is less attractive in the current environment.
Hoeppner: More and more issuers are determining that their cost of capital is less in a private company setting. There is also an abundance of private equity available in the North American markets [and] the multiples being paid by private equity firms are rising as a result of the competition to deploy capital. We think issuers also believe that they can take a longer-term approach to the creation of value as a private company as compared to the public markets, which seem to place a greater emphasis on shorter-term milestones. We are also seeing a continued increase in the costs and resources required to maintain a public company, and additional shareholder activism and litigation in the public marketplace.
Turner: We’ve certainly seen an uptick in deals outside the traditional mining and oil and gas sectors. Consolidation in the cannabis sector in advance of legalization has been prevalent and Canadian technology companies have also been popular targets. Non-Canadian buyers, particularly those from the US, have been on the upswing.

LEXPERT: What’s next for the company?
Wall: HNZ has rebranded as Canadian Helicopters Ltd. and will continue to focus on its onshore helicopter services, maintenance and flight training operations, and servicing its Canadian offshore customers.

LEXPERT: What was the most memorable part of working on this deal?
Dewart: Aviation transactions always seem to have an exciting aura to them. The fact that this deal also involved the going private structure, a related-party bidder, the emergence of an unsolicited proposal, multiple financing sources, and a complex plan of arrangement made for a unique and memorable transaction.
Mayr: Having had the privilege of working with Don and his management team for many years, it was odd, to say the least, to take instructions solely from the committee of independent directors, as management had to be walled off from the process in the circumstances.
Gray: I have worked in the Canadian and international aviation sectors for more than 30 years, and I am quite well known to be an “aviation junkie.” For me, the most memorable part of the deal will be taking great satisfaction in playing a part in the historic combination of the world’s greatest helicopter operation with a very successful Canadian offshore operator. I am also an experienced pilot — although just now working on my transition to helicopters — and will always recall how many approaches it took before I could successfully land the HNZ Sikorsky S92 simulator on an offshore platform without bouncing it into the Gulf.
Turner: It’s always great when everyone can work together and thread the needle to come up with an unconventional structure that gets the deal done. That said, the most memorable moment working on this deal for me was getting to take a tour of PHI’s facilities and see a number of their helicopters and high-tech control room up close — my kids are still jealous!
Auriol Marasco (Blake, Cassels & Graydon LLP, for PHI):
The cooperation and collegiality from both sides was unprecedented. With such a solid foundation, I have no doubt that the future of this venture will be successful. Given the comradery, it was a pleasure working on this transaction. Also, as a pilot, being able to “geek out” at PHI’s facilities and test out HNZ’s simulators was pretty fantastic.
Trudy McConnaughhay, CFO, PHI: The three-party nature of the deal was quite unique to me, and as I reflect back on the time between offer acceptance and closing, I continue to be amazed at how smoothly the negotiations went. There were literally no contentious issues among the various parties to the agreement.
 
(Click here for a summary and full list of legal advisors)