A merger dispute between Forward Air and Omni Logistics will finally be heard in a courtroom on Friday. The Delaware Court of Chancery will be tasked with determining if Omni breached the deal agreement by failing to meet certain pre-closing conditions and if it misrepresented financial projections as Forward has alleged.

Omni filed suit against Forward at the end of October, saying the less-than-truckload company was seeking to unjustifiably terminate the merger because of the backlash it had received from investors, who were miffed they wouldn’t be afforded a vote on the deal prior to closing. Shortly after the Aug. 10 deal announcement, shares of Forward dropped more than 40% and are now just half the pre-deal value.

Omni claims Forward (NASDAQ: FWRD) has manufactured an alleged breach of contract by falsely accusing it of dragging its feet in response to requests for financial information. It also said Forward has misrepresented earnings projections it provided. It maintains it has acted in good faith and completed all pre-deal requirements.

Forward alleges Omni failed to provide timely disclosure of financial updates and that its 2023 projections are below those previously reaffirmed with lenders. Citing the alleged breaches, Forward has asked the court to let it out of the deal.

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Dispute over EBITDA forecasts; Omni’s ‘delays’ produce ‘inadequate’ deal financing

Much of the trial will center on financial projections and whether Omni was delinquent in providing required financial updates to Forward.

Forward told its lending group that it expected Omni to generate $167 million in adjusted earnings before interest, taxes, depreciation and amortization during 2023. The projection was reaffirmed to lenders on Oct. 2 as Forward was closing on a $725 million notes issuance, which is part of the $1.85 billion debt package needed to fund the transaction. However, Forward claims Omni CEO J.J. Schickel showed Forward Air CEO Tom Schmitt a slide displaying a 2023 EBITDA projection of just $111.2 million at a breakfast one day later.

Omni maintains it presented the Oct. 2 forecast as a “what-if” scenario with the expectation of “no growth” in the back half of the year. It said the slide also showed a projection of $147.2 million, which included $36 million in pro forma levers tied to various performance and cost-reduction scenarios. It said Forward has intentionally misrepresented the exchange as a way out of the deal.

Forward said the slide was presented without any disclaimer at the in-person meeting and that on Oct. 4 Omni sent the slide via email with the language added. Forward holds the $111.2 million number as Omni’s true forecast as the company had produced just $73 million in adjusted EBITDA during the first three quarters of the year. It said Omni revised numbers on Nov. 1, raising the amount it made in the first three quarters to $115 million, to make the bridge to its new full-year forecast of $160 million look more achievable.

Forward also claims Omni was slow in delivering July and August financial results despite numerous requests. It said Omni informed it on Oct. 12 that it wouldn’t be providing any further financial information until the deal closed. At the same time, it said Omni began to withhold “access to its data, facilities and personnel” from a third-party company tasked with integrating the two companies. Omni would later retract that refusal, court filings showed.

Omni said it made several inquiries to Forward, seeking help in determining how to prepare its financial results and forecasts as it had no experience as a public company. It also sought guidance on how to divide the anticipated EBITDA synergies the deal would produce. It said Forward never provided that guidance, which was the reason for the delay in producing financials.

Forward claims the reason for the delay was that Omni’s prior projections “had been misleading.”

Omni said it notified Forward on Oct. 26 that all conditions had been met and that the deal should close the next day. However, the same day, Forward made it public that it may terminate the transaction due to the alleged breaches even though it had just won a hearing in a Tennessee court where shareholders were attempting to block the deal.

Forward said Omni knew in September, when commitments with lenders were being cemented, that its full-year 2023 estimate needed to be reduced. It claims the delay in receiving financial data led to an “inadequate” financing structure as it will now be limited on what can be drawn on a $400 million revolving credit facility. That revolver was only intended to backstop the transaction, and its real intent was to provide future working capital to the combined entity.

Forward said the delays also resulted in unfavorable deal pricing and noted that it now potentially faces a credit downgrade, impairing its ability to obtain additional funds for the transaction if needed.

Omni denied the allegations in court filings, saying it “never misrepresented anything to the lenders” and that it stood by its prior EBITDA forecasts.

Other items of interest expected to be uncovered at trial

The deposition of Omni Chief Financial Officer Zhuo Chen may shed light on the alleged deal breaches. Forward filed a motion on Dec. 15 to depose Chen, who it said is “the gatekeeper of the financial information.” Forward said it was Chen who “was responsible for responding ­— or, in this case, not responding — to Forward Air’s requests.”

Forward also said Chen was the one reaffirming Omni’s $167 million EBITDA projection on due diligence calls. However, it said Chen didn’t show for the Oct. 2 call and that it was Omni’s general counsel that confirmed there were “no changes” to the forecast.

“In hindsight, Mr. Chen’s absence — whether deliberate or otherwise — was convenient for Omni. By October 2, Mr. Chen would undoubtedly have known that the previous projection of $167 million in adjusted EBITDA for FY 2023 was materially incorrect and required downward revision,” Forward alleged in the filing.

Forward said Omni offered only one day for Chen to be deposed, which was soon after Omni produced 70% of its required documents, leaving Forward’s counsel no time to prepare.

The trial will also likely provide more details around Omni’s claims that Schmitt withheld and destroyed requested documents tied to board meetings discussing the transaction. Omni claims the documents would have provided details on Forward’s efforts to avoid the transaction. It said some of the items continued to be destroyed after a litigation hold notice was issued.

Omni has also asked for production of Schmitt’s personal Blackberry and iPhone, which Forward has said is not required to be produced and that its search has revealed no work-related texts.

Forward said it has provided hundreds of text strings and more than 1,300 pages of Schmitt’s handwritten notes and other items pertaining to the merger. It noted that some of the requested documents centered on conversations with its investment bankers and were “prepared in anticipation of litigation” with Omni, protecting them from disclosure.

Also, Forward has not issued an update on interest and fees incurred as part of the deal’s financing. Interest expense, after netting out interest earned in an escrow account, on its 9.5% notes was expected to be roughly $100,000 per day. Fees to retain lender commitments for the $1.125 billion term loan facility were set to increase to nearly $310,000 per day after Nov. 23.

Shareholders revolt

Forward shocked Wall Street in August when it announced the merger with freight forwarder Omni. An initial price tag of $3.2 billion deal (roughly 18 times trailing adjusted EBITDA excluding deal synergies) drew the ire of investors, who weren’t allowed to vote on any part of the transaction until after it closed.

The debt-and-equity transaction would be 38% dilutive to existing shareholders and push Forward’s debt leverage (net debt-to-trailing 12 months’ adjusted EBITDA) to roughly four times at closing. The deal price is currently closer to $2.4 billion given the sell-off in Forward’s shares.

Large, institutional shareholder ClearBridge Investments openly criticized the merger, and court filings highlighted similar complaints from P. Schoenfeld Asset Management. Activist investor Ancora Holdings Group said it would look to remove the board and Schmitt as the deal was “intentionally structured to avoid a pre-closing shareholder vote.”

Two-thirds of the shares allocated at closing to Omni’s stakeholders — primarily private equity backers Ridgemont Equity Partners and EVE Partners — are nonvoting preferred shares, keeping the voting stock issued under the 20% threshold requiring a shareholder vote in Tennessee where Forward is headquartered. Forward’s shareholders will be allowed to vote on converting those shares into voting common stock after the transaction closes. However, if the conversion is declined, those units would be due a dividend of approximately 13%, defined as 3.5% above the yield on its most junior debt.

Further, if shareholders agree to convert the shares, Omni’s stakeholders will hold 38% of the voting rights. That voting block would also be required to vote in favor of board-nominated directors at future elections. Investors have also taken issue with Omni getting four seats on Forward’s board and the designation of Schickel as president and second in command.

A group of smaller shareholders, led by the company’s former chief financial officer, have attempted to block the deal in a Tennessee court, claiming damages and saying they should be given a vote. A temporary restraining order pausing the deal was dissolved in late October, but Forward’s management team has said the matter is still ongoing.

Forward originally said the acquisition of Omni, one of its current forwarding customers, would allow it to remove the middle man and boost margins. Some of Forward’s longtime customers initially questioned the deal’s impact as it positions Forward as both linehaul service provider and direct competitor. However, Forward said it has been able to grow volumes with those legacy forwarders since the announcement.

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The post Forward Air-Omni merger dustup heads to trial Friday appeared first on FreightWaves.

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