JZ Capital sells Water Treatment Industries to a fund advised by the managers – TWH Water Treatment Industries, Inc. (“Water Treatment Industries”), a subsidiary of one of JZ Capital Partners‘ portfolio companies, Triwater Holdings LLC has agreed to enter into a merger agreement with a newly incorporated subsidiary of DuBois Chemicals, Inc., a company controlled by Resolute Fund III, L.P.
The initial gross consideration of is US$148 million in cash on completion of the merger (subject to some for the net working capital of Water Treatment Industries and to reflect the amount of cash, debt and transaction expenses of the company at the time of closing), plus an additional contingent earn-out consideration of up to US$17 million in cash based on revenue targets of Water Treatment Industries. JZ Capital Partners holds a 35.45 per cent. ownership interest in Water Treatment Industries and expects to receive approximately US$32 million initially and maybe another US$5 million from the earn-out.
The transaction would be considered a related party transaction under Chapter 11 of the Listing Rules and so shareholder approval is required. Shareholder approval will be sought at an Extraordinary General Meeting. A shareholder circular containing further details and the notice convening the EGM will also be sent to shareholders as soon as practicable.
[QD comment: Frustratingly, the announcement makes no mention of the impact of the deal on JZCP’s NAV. JZCP was valuing Triwater Holdings at $39.126m as at the end of February 2018 but it also said at that time that it was in the process of selling part of that business, Paragon Water Systems, for $16.2m. On a ‘gross’ basis then, JZCP may have benefited handsomely from this deal but the management team will take a substantial chunk of the sale proceeds as an incentive fee.]
Water Treatment Industries
Water Treatment Industries is incorporated in Delaware and provides water treatment chemical supplies and services in the US and Canada. It has a number of subsidiaries, including Nashville Chemical & Equipment Company Inc., Klenzoid Canada Inc., Eldon Water Inc. and Chemco Products Inc. Water Treatment Industries. It had gross profits of approximately US$15.4 million and total gross assets of approximately US$49.2 million (including approximately US$26.7 million of intangible assets) for the 12 months ending 30 June 2018.
DuBois
The parent company of the counterparty to the Merger, DuBois is a portfolio company of Resolute Fund III, L.P. which has a 73.7 per cent. ownership interest in DuBois and is one of the funds managed by The Jordan Company, L.P. Each of David Zalaznick and Jay Jordan who together are the founders and principals of JZ Capital Partners’ investment adviser, Jordan/Zalaznick Advisers, Inc. are also the founders of The Jordan Company. In addition, Jay Jordan is the non-executive chairman of The Jordan Company. Both of them have an economic interest in Resolute Fund III or its affiliated funds by way of certain fee arrangements including consultancy or similar fees or income, and also receive carried interest in relation to such funds. This is why the deal is a related party transaction.
Shareholders should note that, whilst the Listing Rules provide that for a related party transaction written confirmation is to be obtained from a sponsor that its terms are fair and reasonable as far as shareholders are concerned, such a confirmation has not been received in relation to the Transaction. they say that this is because, as was the case with the Deflecto deal that the company did earlier this year, the company has “been unable to obtain a fair and reasonable written confirmation for the Transaction at a cost which can be justified relative to its size and within the time constraints needed to be met in order to transact on and complete the Transaction on the terms negotiated.” [NB: this is despite Jay Jordan and David Zalaznik being on both sides of the deal and therefore able to influence both the timing and the negotiating terms.] Instead, as was also the case with Deflecto, JZAI as the has instead provided written confirmation to the company that the terms of the Transaction are fair and reasonable as far as ordinary shareholders are concerned.
JZCP : JZ Capital sells Water Treatment Industries