Item 8.01. Other Events.
As previously announced, on February 21, 2022, Meritor, Inc., an Indiana
corporation (the "Company"), Cummins Inc., an Indiana corporation ("Parent"),
and Rose NewCo Inc., an Indiana corporation ("Merger Sub"), entered into an
Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among
other things, Merger Sub will merge with and into the Company (the "Merger"),
with the Company surviving the Merger as a wholly owned subsidiary of Parent. In
connection with the Merger Agreement, on April 18, 2022, the Company filed a
definitive proxy statement (the "Proxy Statement") with the U.S. Securities and
Exchange Commission (the "SEC").
As previously disclosed in the Proxy Statement, three lawsuits had been filed by
purported Company stockholders and one demand letter had been sent to the
Company in connection with the Merger. On March 22, 2022, a purported Company
stockholder filed a lawsuit against the Company and the current members of the
Company's board of directors (the "Board") alleging that the preliminary proxy
statement contained alleged material misstatements and/or omissions in violation
of federal law. The lawsuit is captioned O'Dell v. Meritor, Inc., et al., No.
1:22-cv-02322, and is pending in the U.S. District Court for the Southern
District of New York. On March 24, 2022, another lawsuit was filed against the
same defendants asserting similar claims. The lawsuit is captioned Whitfield v.
Meritor, Inc., et al., No. 1:22-cv-01636, and is pending in the U.S. District
Court for the Eastern District of New York. In addition, on March 31, 2022,
another lawsuit was filed against the same defendants, also asserting similar
claims. The lawsuit is captioned Fitzurka v. Meritor, Inc., et al., No.
1:22-cv-01793, and is pending in the U.S. District Court for the Eastern
District of New York. Also on March 31, 2022, counsel for Shiva Stein, a
purported Company shareholder, sent a demand letter including similar
allegations against the Company and the current members of the Board.
Following the filing of the Proxy Statement with the SEC, two additional
lawsuits were filed and three additional demand letters were sent in connection
with the Merger, asserting similar claims against the Company and the current
members of the Board. The first lawsuit, filed on April 18, 2022, is captioned
Justice, II v. Meritor, Inc., et al., No. 2:22-cv-01496, and is pending in the
U.S. District Court for the Eastern District of Pennsylvania. The second
lawsuit, filed on May 10, 2022, is captioned Coffman v. Meritor, Inc., et al.,
No. 1:22-cv-03797, and is pending in the U.S. District Court for the Southern
District of New York. On May 12, 2022, counsel for Susan Finger and counsel for
Richard Lawrence, both purported Company shareholders, and on May 16, 2022,
counsel for John Jones, another alleged Company shareholder, each sent their own
demand letter including similar allegations against the Company and the current
members of the Board. If additional similar lawsuits or demand letters are filed
or made, absent new or different allegations that are material, the Company will
not necessarily publicly disclose them.
The complaints and demand letters generally allege that the proxy statement
filed by the Company in connection with the Merger fails to disclose purportedly
material information in violation of Sections 14(a) and 20(a) of the Securities
Exchange Act of 1934 and Rule 14a-9 promulgated thereunder. The alleged
omissions relate to (i) certain of the Company's financial projections, (ii)
certain financial analyses of the Company's financial advisor, (iii) the
financial benefits to the Company's executives and members of the Board from the
Merger, and (iv) certain statements concerning the sale process. Plaintiffs
generally seek, among other things, to enjoin the Company from consummating the
Merger, or in the alternative, rescission of the Merger and/or compensatory
damages, as well as attorney's fees.
The Company believes that the allegations in the complaints and demand letters
are without merit and that no supplemental disclosures are required under
applicable laws. However, to moot the unmeritorious disclosure claims, to avoid
the risk of the actions described above delaying or adversely affecting the
Merger, and to minimize the costs, risks and uncertainties inherent in
litigation, without admitting any liability or wrongdoing, the Company has
determined to voluntarily make the following supplemental disclosures to the
Proxy Statement as described in this Current Report on Form 8-K. Nothing in
these supplemental disclosures shall be deemed an admission of the legal
necessity or materiality under applicable laws of any of the supplemental
disclosures set forth herein.
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Supplemental Disclosures
The following supplemental disclosures should be read in conjunction with the
Proxy Statement, which in turn should be read in its entirety. To the extent
that information herein differs from or updates information contained in the
Proxy Statement, the information contained herein supersedes the information
contained in the Proxy Statement. All page references are to pages in the Proxy
Statement, and defined terms used but not defined herein have the meanings set
forth in the Proxy Statement.
Amending and restating the first full paragraph on page 23 as follows:
In November 2020, as part of the Company's planned succession planning
processes, Meritor announced that Jay Craig, Chief Executive Officer and
President of Meritor, would transition to the role of Executive Chairman of the
Meritor Board on February 28, 2021, and that Chris Villavarayan, Executive Vice
President and Chief Operating Officer, would succeed Mr. Craig as Chief
Executive Officer and President at that time and would join the Meritor Board.
Such transition occurred, with Mr. Villavarayan becoming Chief Executive Officer
and joining the Meritor Board as a director. Meritor's then-current independent
Chairman, William R. Newlin, became lead independent director of the Meritor
Board in March 2021 as part of this transition plan, and later resumed his
position as Non-Executive Chairman in connection with Mr. Craig's subsequent
decision to step down and depart the Company after more than 15 years of service
to Meritor. These matters were announced by Meritor on November 12, 2021, with
Mr. Newlin's election to Non-Executive Chairman becoming effective December 31,
2021.
Amending and restating the second full paragraph on page 23 as follows:
Separately, on November 12, 2021, Tom Linebarger, Chairman and Chief Executive
Officer of Parent, contacted Mr. Craig to request a call, and on November 14,
2021, Tom Linebarger conveyed to Mr. Craig that Parent was interested in
re-engaging in discussions to acquire Meritor. Mr. Craig indicated that he would
apprise the Meritor Board, and would expect that any actual offer would need to
be provided in writing for the Meritor Board to consider. The Meritor Board was
then alerted of the development (and convened on November 18, 2021 regarding the
foregoing), and the Company's financial and legal advisors at J.P. Morgan and
Wachtell Lipton were also apprised, with future meetings of the Meritor Board to
be scheduled at which the Meritor Board would deliberate and receive the advice
of J.P. Morgan and Wachtell Lipton, including in the event that Parent were to
provide a specific proposal and indicative valuation that could warrant further
investigation, potential negotiation and consideration.
Amending and restating the fourth full paragraph on page 23 as follows:
On November 18, 2021, Parent and Meritor entered into a confidentiality and
standstill agreement (the "New Confidentiality Agreement") with substantially
similar terms as those of the Original Confidentiality Agreement, which the
Meritor Board had determined as a next step at its November 18, 2021 meeting.
Amending and restating the sixth full paragraph on page 23 as follows:
On November 22, 2021, Meritor provided Parent with an advance copy of materials
it planned to publicly disclose at its December 7, 2021 Strategy Day, pursuant
to the New Confidentiality Agreement, and Parent confirmed who it had retained
as its financial advisor for this matter (which was the same financial advisor
that had been previously involved in advising Parent with respect to its
interest in Meritor). On November 24, 2021, Parent's financial advisor conveyed
to Meritor's financial advisor that a proposal would be forthcoming. Meritor
then responded to certain follow-up questions from Parent on December 8, 2021.
Amending and restating the seventh full paragraph on page 23 as follows:
On December 14, 2021, Mr. Linebarger conveyed to Mr. Craig that Parent was
interested in acquiring Meritor and sent a letter to Messrs. Villavarayan and
Craig setting forth a non-binding proposal (the "December Proposal") for Parent
to acquire all of the outstanding common stock of Meritor for $33.50 per share
in cash. The December Proposal noted that the proposal would not be contingent
on financing. The December Proposal also indicated that Parent expected to be
able to complete its due diligence of Meritor within a period of weeks.
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Amending and restating the eighth full paragraph on page 23 as follows:
On December 20, 2021, the Meritor Board held a meeting during which members of
Meritor's senior management and representatives of Wachtell Lipton and J.P.
Morgan were present. At the meeting, the Meritor Board reviewed the December
Proposal, discussed the foregoing interactions with Parent and Parent's
financial advisor and discussed and assessed the December Proposal, including in
the context of financial analyses and alternatives presented by J.P. Morgan to
the Meritor Board. A representative of Wachtell Lipton provided an overview of
the Meritor Board's fiduciary duties in the context of the consideration of a
proposal to acquire Meritor. The Meritor Board discussed potential options and
next steps, and directed Meritor to provide Parent with a short period of
limited due diligence in order to seek an increase in the $33.50 per share offer
price, which the Meritor Board believed undervalued Meritor, its prospects and
its plans.
Amending and restating the first full paragraph on page 24 as follows:
On January 14, 2022, Mr. Linebarger submitted a letter to Messrs. Villavarayan
and Newlin (who had by then succeeded Mr. Craig as Chairman of the Meritor
Board) containing a non-binding proposal (the "First January Proposal") for
Parent to acquire all of the outstanding common stock of Meritor for $35.00 per
share in cash. The First January Proposal noted the transaction would not be
contingent on financing. The First January Proposal also indicated that Parent
expected to be able to complete its remaining due diligence of Meritor within
approximately three weeks.
Amending and restating the second full paragraph on page 24 as follows:
On January 18, 2022, the Meritor Board held a meeting during which members of
Meritor's senior management and representatives of Wachtell Lipton and J.P.
Morgan were present. At the meeting, representatives of J.P. Morgan described
the due diligence process with Parent, as well as the financial terms of the
First January Proposal and J.P. Morgan's financial analysis of the proposed
merger consideration set forth in the First January Proposal. A representative
of Wachtell Lipton discussed legal matters, including an overview of the Meritor
Board's fiduciary duties in the context of the Meritor Board's consideration of
the First January Proposal. The Meritor Board discussed various options and next
steps, and directed Meritor to provide Parent with additional due diligence
information in order to seek an increase in the offer price, which the Meritor
Board believed continued to undervalue Meritor, taking into account such factors
as the Meritor Board deemed relevant, including Meritor's business prospects and
financial analysis provided by J.P. Morgan. The Meritor Board also considered
whether to solicit indications of interest from other potential financial
sponsors or strategic buyers and concluded, with the benefit of advice from J.P.
Morgan and Wachtell Lipton, not to do so at this time, while reserving ultimate
judgment on the matter, taking into account the risk of leaks, the damage and
disruption to Meritor and its stakeholders, including employees and customer
relationships, were a leak to occur in the absence of a definitive transaction
announcement, the uncertainty as to whether alternative compelling third-party
bids would emerge (and the Meritor Board's believed low likelihood of such bids
emerging) and the benefits from continuing to see if Parent could present a
compelling proposal.
Amending and restating the fourth full paragraph on page 24 as follows:
After representatives of Parent indicated that Parent would be willing to
consider a potential increase to the extent justified, Meritor provided Parent
with additional financial and business due diligence information, and an
additional meeting was held between senior management of Meritor and senior
management of Parent, which facilitated productive discussions highlighting
areas of additional value in the transaction that would justify Parent
increasing its offer price.
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Amending and restating the sixth full paragraph on page 24 as follows:
On January 27, 2022, the Meritor Board held a meeting during which members of
Meritor's senior management and representatives of Wachtell Lipton and J.P.
Morgan were present. At the meeting, representatives of J.P. Morgan described
the interactions with Parent since the January 18, 2022 Meritor Board meeting
and the financial terms of the Second January Proposal, as well as J.P. Morgan's
financial analysis of the proposed merger consideration set forth in the Second
January Proposal. A representative of Wachtell Lipton discussed legal matters,
including the Meritor Board's fiduciary duties in the context of the Meritor
Board's consideration of the Second January Proposal. The Meritor Board next
discussed the Second January Proposal, including in comparison to Meritor's
standalone prospects, as well as whether other potential bidders would be
capable of and willing to offer a more attractive value than Parent's $36.50 per
share all-cash proposal. Meritor was not in receipt of acquisition proposals
from any other third parties, and the Meritor Board determined not to solicit
alternative third-party interest at this time due to, among other things,
potential impact on Parent's proposal and the risk of a leak, as well as the
management's assessment of the low likelihood of obtaining a superior offer for
Meritor. After discussing the terms of the Second January Proposal and various
options, the Meritor Board authorized management to continue to explore a
transaction with Parent by moving forward with due diligence and negotiation of
definitive documentation, without entering into an exclusivity agreement with
Parent (including in order to preserve Meritor's leverage), to enable the
Meritor Board to have the opportunity to consider a complete proposal and forms
of definitive agreements inclusive of all material terms, including those that
would be customarily reflected in a fully negotiated merger agreement and
address, among other things, certainty of closing, fiduciary flexibility,
termination provisions and fees and interim operating restrictions and
flexibility.
Amending and restating the fifth full paragraph on page 25 as follows:
Also on February 10, 2022, Messrs. Villavarayan and Linebarger, along with other
members of management, discussed organizational matters, synergies and
opportunities for the combined company, as well as certain key issues in the
merger agreement, including with respect to provisions relating to certainty of
closing, fiduciary flexibility and termination provisions and fees.
Amending and restating the second full paragraph on page 33 as follows:
J.P. Morgan calculated the present value of the future standalone unlevered
after-tax free cash flows for the three fiscal quarters ending October 2, 2022
and for fiscal year 2023 through fiscal year 2025 based upon the Projections
(the "DCF Projection Period"). J.P. Morgan also calculated a range of terminal
values for Meritor by applying a range of perpetuity growth rates, as provided
by management of Meritor, ranging from 1.0% to 2.0% of the unlevered free cash
flows of Meritor during the final year of the DCF Projection Period. The
unlevered free cash flows and the range of terminal values were then discounted
from September 30 of each year to present values as of December 31, 2021 using a
mid-year convention and a range of discount rates from 9.75% to 10.75%. The
discount rate range was selected by J.P. Morgan based on J.P. Morgan's analysis
of the weighted average cost of capital for Meritor. As inputs to the weighted
average cost of capital, J.P. Morgan took into account, among other things,
risk-free rate, equity risk premium, levered beta, pre-tax cost of debt,
post-tax cost of debt, and target debt to total capitalization ratio.
Amending and restating the third full paragraph on page 33 as follows:
In addition, as directed by management of Meritor, J.P. Morgan calculated the
present value of certain tax credits expected to be utilized by Meritor through
fiscal year 2029, which were discounted from September 30 of each year to
present values as of December 31, 2021 using the same mid-year convention and a
discount range of 9.75% to 10.75%. The total tax credit utilization amounts
provided by management of Meritor were $28 million for the three fiscal quarters
ending October 2, 2022, and $32 million, $28 million, $31 million, $29 million,
$11 million, $15 million and $15 million, for each of fiscal years 2023 through
2029, respectively. The present values were then added together with the present
values derived based on the unlevered free cash flows to derive a range of firm
values for Meritor, which was then adjusted to take into account Meritor's net
debt, non-controlling interest and receivables factoring balance totaling $1,349
million in the aggregate as of December 31, 2021, and then divided by the number
of fully diluted shares of Common Stock outstanding of approximately 73.05
million, as provided by Meritor management on February 20, 2022, to derive a
range of implied equity values for Meritor.
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Amending and restating the sixth full paragraph on page 33 as follows:
Analyst Price Targets. For reference only and not as a component of its fairness
analysis, J.P. Morgan reviewed certain publicly available equity research
analyst price targets for the Common Stock available as of February 18, 2022
from FactSet Research Systems, equity research reports and Bloomberg, and noted
that such price target range was $26.00 per share to $34.00 per share, and
compared that price target range to (a) the closing price per share of Common
Stock of $24.67 as of February 18, 2022, and (b) the proposed Merger
Consideration of $36.50 per share of Common Stock.
Amending and restating the third full paragraph on page 34 as follows:
J.P. Morgan received a fee from Meritor of $5.0 million for delivery of its
opinion. Meritor has agreed to pay J.P. Morgan a transaction fee equal to 1.0%
of the Merger Consideration upon the closing of the transaction, that is
estimated, based on information available as of May 4, 2022, to be approximately
$38 million, against which the opinion fee will be credited. In addition,
Meritor has agreed to reimburse J.P. Morgan for its reasonable, documented and
out-of-pocket expenses incurred in connection with its services, including the
reasonable fees and disbursements of external counsel, and will indemnify J.P.
Morgan against certain liabilities arising out of J.P. Morgan's engagement.
During the two years preceding the date of J.P. Morgan's opinion, J.P. Morgan
and its affiliates have had commercial or investment banking relationships with
Meritor and Parent for which J.P. Morgan and such affiliates have received
customary compensation. Such services during such period have included acting as
joint lead arranger on Parent's credit facilities, which closed in August 2021,
joint lead bookrunner on Meritor's offerings of debt securities, which closed in
June 2020 and November 2020, and joint lead active bookrunner on Parent's
offering of debt securities, which closed in August 2020. During the two year
period preceding the delivery of its opinion ending on February 21, 2022, the
aggregate fees recognized by J.P. Morgan from Meritor were approximately $2.0
million and from Parent were approximately $9.5 million. In the ordinary course
of their businesses, J.P. Morgan and its affiliates may actively trade the debt
and equity securities or financial instruments (including derivatives, bank
loans or other obligations) of Meritor or Parent for their own accounts or for
the accounts of customers and, accordingly, they may at any time hold long or
short positions in such securities or other financial instruments.
Amending and restating the last paragraph on page 35 and the first full
paragraph on page 36 as follows:
The following is a summary of the unaudited Meritor prospective financial
information for the nine months ending October 2, 2022 and fiscal years 2022
through 2025 that was prepared by the Company's management. The Projections were
prepared by Meritor's management in December 2021 and were provided to the
Meritor Board in connection with its consideration and evaluation of a potential
transaction with Parent. The Projections were also provided to J.P Morgan in
connection with its financial analysis and opinion, as discussed in the section
entitled "- Opinion of Meritor's Financial Advisor." The Projections are based
solely on the information available to Meritor's management at those times, and
do not give effect to the Merger. The summary of the Projections included in
this proxy statement are presented to give Meritor shareholders access to the
financial projections that were made available to the Meritor Board and J.P
Morgan. Such information may not be appropriate for other purposes, and is not
included to influence your decision, if you are a Meritor shareholder, to vote
for the Merger Proposal, the Compensation Proposal or the Adjournment Proposal.
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The following table presents a summary of the Projections, with dollars in
millions:
Nine months ending
October 2, 2022 2022E 2023E 2024E 2025E
Revenue $3,253 $4,237 $4,496 $4,580 $4,950
Adj. EBITDA(1) $417 $530 $572 $594 $673
D&A ($79) ($104) ($108) ($113) ($118)
Adj. EBIT $293 $368 $413 $426 $510
Taxes ($77) ($96) ($106) ($106) ($126)
Capex $107 $125 $135 $137 $149
Unlevered free cash flow(2) $412 $226 $188 $223 $219
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Note: Meritor's fiscal year ends on
the Sunday nearest to September
30.
(1) Adjusted EBITDA is defined as income (loss) from continuing operations before
interest, income taxes, depreciation and amortization, non-controlling interests in
consolidated joint ventures, loss on sale of receivables, restructuring expenses,
asset impairment charges and other special items as determined by management.
(2) Unlevered free cash flow was calculated as adjusted EBITDA (excluding pension and
OPEB benefit) less taxes, non-cash earnings from joint ventures, capital
expenditures, after-tax pension and OPEB contributions and cash restructuring
expense, plus dividends from joint ventures, less/plus increase/(decrease) in net
working capital and other items.
Cautionary Language Regarding Forward-Looking Statements
This communication contains statements relating to future results of the Company
(including certain outlooks, projections and business trends) that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are typically identified by words
or phrases such as "expects," "anticipates," "believes," "estimates," "intends,"
"plans to," "ought," "could," "will," "should," "likely," "appears," "projects,"
"forecasts," "outlook" and similar expressions. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including but not limited to the duration and severity of the COVID-19 pandemic
and its effects on public health, the global economy, and financial markets, as
well as the Company's industry, customers, operations, workforce, supply chains,
distribution systems and demand for its products; reliance on major OEM
customers and possible negative outcomes from contract negotiations with major
customers, including failure to negotiate acceptable terms in contract renewal
negotiations and the ability to obtain new customers; the outcome of actual and
potential product liability, warranty and recall claims; the ability to
successfully manage rapidly changing volumes in the commercial truck markets and
work with customers to manage demand expectations in view of rapid changes in
production levels; global economic and market cycles and conditions;
availability and sharply rising costs of raw materials, including steel,
transportation and labor, and the ability to manage or recover such costs;
technological changes in the Company's industry as a result of the trends toward
electrified drivetrains and the integration of advanced electronics and the
impact on the demand for products and services; the ability to manage possible
adverse effects on European markets or European operations, or financing
arrangements related thereto in the event one or more countries exit the
European monetary union; risks inherent in operating abroad (including foreign
currency exchange rates, restrictive government actions regarding trade,
implications of foreign regulations relating to pensions and potential
disruption of production and supply due to terrorist attacks or acts of
aggression); risks related to joint ventures; the ability to achieve the
expected benefits of strategic initiatives and restructuring actions; the demand
for commercial and specialty vehicles for which products are supplied; whether
liquidity will be affected by declining vehicle production in the future; OEM
program delays; demand for and market acceptance of new and existing products;
successful development and launch of new products; labor relations of the
Company, suppliers and customers, including potential disruptions in supply of
parts to facilities or demand for products due to work stoppages; the financial
condition of suppliers and customers, including potential bankruptcies; possible
adverse effects of any future suspension of normal trade credit terms by
suppliers; potential impairment of long-lived assets, including goodwill;
potential adjustment of the value of deferred tax assets; competitive product
and pricing pressures; the amount of the Company's debt; the ability to continue
to comply with covenants in the Company's financing agreements; the Company's
ability to access capital markets; credit ratings of the Company's debt; the
outcome of existing and any future legal proceedings, including any proceedings
or related liabilities with respect to environmental, asbestos-related, or other
matters; rising costs of pension benefits; possible changes in accounting rules;
the ongoing conflict between Russia and Ukraine; the occurrence of any event,
change or other circumstances that could give rise to the termination of the
Merger Agreement; the failure to obtain the Company Shareholder Approval, the
failure to obtain certain required regulatory approvals or the failure to
satisfy any of the other closing conditions to the completion of the Merger
within the expected timeframes or at all; risks related to disruption of
management's attention from ongoing business operations due to the Merger; the
effect of the announcement of the Merger on the ability to retain and hire key
personnel and maintain relationships with customers, suppliers and others with
whom the Company does business, or on operating results and business generally;
the ability to meet expectations regarding the timing and completion of the
Merger; risks associated with transaction-related litigation; and the other
risks listed from time to time in the Company's filings with the SEC and other
substantial costs, risks and uncertainties, including but not limited to those
detailed in the Company's Annual Report on Form 10-K for the year ended October
. . .
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