Notable Mergers and Acquisitions 2/26: (HON)/(UTX) (ARI)/(AMTG) (ABR)

February 26, 2016 10:11 AM EST

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*** Honeywell (NYSE: HON) has received a number of inquiries from investors regarding its proposal to acquire United Technologies (NYSE: UTX). In order to help investors understand the proposal, attached is a presentation that Honeywell Chairman and CEO, Dave Cote, shared with United Technologies Chairman, Edward A. Kangas, and United Technologies CEO, Gregory J. Hayes, at their meeting on February 19, 2016. This presentation provides details regarding Honeywell's offer.

The deal was for $108 per share with $36 billion immediate cash benefit. Click here for more color.

UPDATE - Additional details follow:

Consideration:

  • UTX Shareholders Receive $42.63/Share In Cash, Plus 0.614shares of HON per current UTX share

Value Creation:

  • Over $39B In Value Creation for UTX Shareholders
  • Over $72B In Value Creation To All Shareholders
  • $3.5B Estimated Cost Synergies; ~$20/share in Synergy Value

Capital Structure:

  • Pro Forma 3.5x Net Debt / EBITDA Ratio With ~$36B New Debt Raised
  • Strong Investment Grade Credit Rating With Rapid De-leveraging Profile

Leadership and Governance:

  • Chairman/CEO: David M. Cote
  • “Best Of Both, Best Athlete” Management Philosophy For CombinedBoard of Directors and Management Team

*** Apollo Commercial Real Estate Finance, Inc. (NYSE: ARI) and Apollo Residential Mortgage, Inc. (NYSE: AMTG) announced the signing of a definitive merger agreement (the “Agreement”) under which ARI will acquire AMTG for consideration to be paid in cash and shares of ARI common stock, which would value AMTG at approximately $14.59 per share of common stock based upon the closing price of ARI’s shares of common stock on February 25, 2016 and assuming AMTG’s book value per share of common stock on December 31, 2015. The value of the consideration represents a premium of approximately 44% to the closing price of AMTG’s shares of common stock as of February 25, 2016.

In this transaction, AMTG stockholders will receive approximately 0.417 ARI shares of common stock per AMTG share of common stock and approximately $7.53 per share in cash, based upon AMTG’s book value per share of common stock on December 31, 2015 of $16.40. The cash portion of the consideration, and thus the total purchase price, is subject to adjustment based upon fluctuations in AMTG’s book value. The adjustment will be based upon 89.25% of any change in AMTG’s book value between December 31, 2015 and a future determination date prior to the mailing of the definitive proxy statement to AMTG stockholders with respect to the transaction. In aggregate, based upon the closing price of ARI’s shares of common stock on February 25, 2016 and assuming AMTG’s book value per share of common stock on December 31, 2015, the transaction values AMTG at approximately $641 million, including ARI’s assumption of $172.5 million of AMTG’s 8.0% Series A Cumulative Redeemable Perpetual Preferred Stock (the “8.0% Preferred Stock”). The book value based adjustment mechanism described above, which is uncapped, could result in a lower or higher valuation.

It is expected that the transaction will be accretive to ARI’s book value per share of common stock in 2016.

The transaction has been approved by the board of directors of each company upon the unanimous recommendation of a special committee of independent directors of each board of directors. The transaction will be subject to approval by the holders of at least a majority of (i) the outstanding common shares of AMTG and (ii) the outstanding common shares of AMTG that are beneficially owned by persons unaffiliated with Apollo Global Management, LLC (“Apollo”).

As of December 31, 2015, AMTG’s portfolio of Agency and non-Agency Residential Mortgage Backed Securities (“RMBS”), residential mortgage loans and other investments totaled approximately $3.4 billion.

Thomas D. Christopoul, Chairman of the special committee of AMTG’s board of directors, said: “The residential mortgage REIT sector has faced significant headwinds over the past several quarters. As a result, AMTG’s board of directors has undergone a process to review strategic alternatives to enhance stockholder value. Following this review and working with our independent financial and legal advisors, we are pleased to have reached a definitive agreement with ARI that we believe serves the best interests of our stockholders. This transaction offers AMTG stockholders an opportunity to receive a significant premium to the recent and current trading value of the common stock and, importantly, an opportunity to participate in ARI’s future growth through ownership of ARI common stock. We believe the transaction will provide an excellent outcome for AMTG stockholders and is the alternative that will offer the most attractive value.”

Jeffrey M. Gault, Chairman of the board of directors of ARI and Chairman of ARI’s special committee of the board of directors, said: “ARI’s accretive acquisition of AMTG will enable both companies’ stockholders to participate in ARI’s future growth. As we indicated on our earnings call a few weeks ago, ARI continues to see compelling investment opportunities in our core commercial real estate lending business. Upon successful closure of the AMTG transaction, ARI intends to redeploy the capital from the transaction to fund ARI’s current investment pipeline and pursue attractive new commercial real estate debt opportunities expected to drive earnings growth. We are confident that this transaction will significantly enhance ARI’s ability to build long-term stockholder value.”

Transaction Highlights

The proposed transaction presents several compelling benefits to the stockholders of both companies.

Benefits to AMTG Stockholders

  • Significant premium to AMTG’s common stock price – The value of the consideration represents a premium of approximately 44% to the closing price of AMTG’s shares of common stock as of February 25, 2016, assuming AMTG’s book value per share of common stock on December 31, 2015 and ARI’s closing stock price on February 25, 2016.
  • Enhanced trading liquidity and attractive dividend yield – In connection with the transaction, AMTG’s common stockholders will receive 13.4 million shares of ARI common stock in the aggregate. Over the past twelve months, ARI’s trading volume has been approximately $9.2 million per day versus approximately $3.5 million per day for AMTG. In addition, for the quarter ended December 31, 2015, ARI paid a quarterly dividend of $0.46 per share of common stock, which represents a 10.9% annualized dividend yield based upon ARI’s closing price of $16.93 on February 25, 2016.
  • Ability to participate in ongoing growth of ARI’s business – Through the ownership of ARI shares of common stock, AMTG stockholders will have the opportunity to participate in ARI’s ongoing growth and success, which is expected to be enhanced through this transaction. At December 31, 2015, ARI’s investment portfolio totaled approximately $2.5 billion and the company’s market capitalization totaled approximately $1.4 billion.

Benefits to ARI Stockholders

  • Ability to expand the balance sheet in a cost effective and accretive manner at a time when ARI’s management believes there is significant opportunity to deploy capital into commercial real estate debt investments at attractive returns
    • In connection with the transaction, ARI will issue 13.4 million shares at $16.75 per share of common stock. This transaction allows ARI to issue common stock at a premium to ARI’s book value per share of common stock at December 31, 2015, without taking market risk or paying an underwriting fee.
    • ARI also will assume $172.5 million of AMTG’s 8.0% Preferred Stock, which ARI’s management believes is an attractive rate that would be difficult to replicate in the current market environment.
    • Over time, ARI intends to re-deploy the capital from the transaction into ARI’s target assets. ARI has a robust pipeline of commercial real estate debt investments with attractive risk-adjusted returns in which to invest the incremental capital from the acquisition, in addition to $86 million of fundings for previously closed transactions that are scheduled throughout 2016. ARI does not intend to enter the residential mortgage investment business.
  • Agreement with Athene for financing, future sale of select assets and stock liquidity – In connection with the transaction, ARI has entered into an agreement with certain subsidiaries of Athene Holding Ltd. (“Athene”), an insurance holding company whose operating subsidiaries’ business is primarily issuing and reinsuring retirement savings products, to sell approximately $1.2 billion of primarily non-Agency RMBS securities, subject to increase or decrease in certain circumstances, at a price to be set (based upon a pre-agreed methodology) prior to the date that the proxy statement for the transaction is first mailed to AMTG stockholders. In addition, a subsidiary of Athene will provide a short-term $200 million credit facility to ARI to finance the cash portion of the merger consideration, which is required to be repaid with the proceeds of the sale to Athene’s subsidiaries of such RMBS securities. Finally, a subsidiary of Athene has committed to acquire up to $20 million of ARI shares of common stock if ARI’s common stock price falls below the per share price at which such shares are issued to AMTG stockholders during the 30 trading days following the closing of the acquisition, which is expected to provide for additional liquidity to ARI stockholders. Each of these transactions is subject to certain closing conditions.

Additional Details

Under the terms of the Agreement, AMTG may solicit, receive, evaluate and enter into negotiations with respect to alternative proposals from third parties for a period of 35 calendar days, continuing through April 1, 2016. The special committee of the board of directors of AMTG, with the assistance of its independent advisors, will actively solicit alternative proposals during this period. There can be no assurance that this process will result in receipt of a superior offer or that any other transactions may be approved or consummated.

AMTG stockholders will receive an ordinary course dividend per share of common stock for the quarter ended March 31, 2016, subject to the approval of the AMTG board of directors.

Completion of the transaction, which is expected in either the second or third quarter of 2016, is subject to, among other things, the approval by the holders of at least a majority of (i) the outstanding common shares of AMTG and (ii) the outstanding common shares of AMTG that are beneficially owned by persons unaffiliated with Apollo, as well as obtaining customary regulatory approvals and the satisfaction of customary closing conditions.

Houlihan Lokey is serving as independent financial advisor and Fried, Frank, Harris, Shriver & Jacobson LLP is serving as independent legal advisor to the special committee of the board of directors of ARI; Morgan Stanley & Co. LLC is serving as independent financial advisor and Latham & Watkins LLP is serving as independent legal advisor to the special committee of the board of directors of AMTG. Sidley Austin LLP is serving as Athene’s legal advisor.

*** Arbor Realty Trust, Inc. (NYSE: ABR) announced today that it has entered into a definitive agreement to acquire the agency platform (the “Acquired Businesses”) of Arbor Commercial Mortgage LLC (“Arbor Commercial Mortgage” or “ACM”) for $250 million. The purchase price is to be paid 50% in stock and 50% in cash with the stock component to be paid with 19.23 million Operating Partnership Units, which was based on a stock price of $6.50 per share. The purchase price is subject to potential adjustment based on changes in the value of the acquired servicing portfolio on the closing date. The Company has the option, at the discretion of the Special Committee of the Board of Directors of Arbor Realty Trust, to utilize up to $50 million of seller financing to satisfy a portion of the cash consideration. All of the employees directly related to the Acquired Businesses will become a part of the Company following the consummation of the transaction.

The Acquired Businesses represent a leading national multifamily agency loan origination and servicing platform with over 200 direct employees, including 20 originators in eight states and have over 20 years of experience. The Acquired Businesses originated over $3 billion in loans in 2015, the vast majority of which were government sponsored loans through Fannie Mae Delegated Underwriting and Servicing (DUS ®) program, Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae). The Acquired Businesses have a servicing portfolio of approximately $11 billion of unpaid principal balance as of January 31, 2016 and has the distinction of being one of the 25 Fannie Mae DUS® licensed lenders as well as a top 10 multifamily DUS® lender for nine consecutive years. The Acquired Businesses were the top small loan lender for Fannie Mae in 2014 and the top small balance lender for Freddie Mac in 2015 by origination volume.

“We are extremely excited to have reached an agreement to purchase ACM’s significant agency platform,” said Ivan Kaufman, Chief Executive Officer. “We believe this will be a transformational transaction that will benefit our shareholders greatly, and we expect the transaction to be immediately accretive to our earnings and dividends.”

“This transaction represents a significant milestone for the Company. The acquisition provides the Company with new origination verticals and provides a stable and predictable servicing fee revenue stream. This transaction will also broaden our product offerings and increase our size and scale creating a fully integrated franchise,” said Bill Green, Lead Independent Director.

Arbor Realty Trust expects the transaction to be accretive to its earnings and provide several strategic benefits for shareholders:

  • Diversification and predictability of earnings streams: The acquisition of a long dated prepayment protected servicing portfolio will result in a consistent and recurring cash flow stream in a diversified stable annuity of servicing income.
  • Creates fully integrated franchise: The Acquired Businesses add significant new origination and servicing verticals to Arbor Realty Trust that complement existing commercial real estate lending products. These new business lines also provide a strong foothold in the GSE multifamily sector with high barriers to entry providing natural limitations on competition and will meaningfully increase the size and scale of the Company.
  • Comprehensive product offering: Following consummation of the transaction, the Company will be able to meet the multiple needs of its clients with products for short-term and long-term commercial real estate financing needs.
  • Larger more efficient Company: The acquisition will result in a significant increased equity base and market cap, creating a larger, more efficient vehicle to access capital.
  • Full alignment with shareholders: Experienced management team that is fully aligned with shareholders through significant stock ownership.

In addition, the Company has obtained a two year option to purchase for $25 million the existing management contract and fully internalize the management structure. The exercise of this option is at the discretion of the Special Committee of the Board of Directors of Arbor Realty Trust, which has no obligation to exercise its option.

The transaction will require certain government and GSE approvals as well as a shareholder vote and other third party approvals. The transaction is expected to close during the third quarter of 2016, however, there can be no assurances that the transaction will be completed during this period or at all.

The independent members of the Board of Directors of Arbor Realty Trust acting on the recommendation of a Special Committee of independent directors unanimously approved the asset purchase agreement relating to this acquisition. The Special Committee of the Board of Directors retained J.P. Morgan Securities, LLC as financial advisor and Willkie Farr & Gallagher LLP as legal advisor with respect to the acquisition. Skadden, Arps, Slate, Meagher & Flom LLP acted as legal advisor to Arbor Realty Trust, Inc. Wells Fargo Securities, LLC and Dechert LLP acted as ACM’s financial and legal advisors.

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