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Massey Acquires Sunair… We’ll Know by Monday

Download Massey / Sunair LOI - 12.05.08

Download Massey / Sunair LOI - 01.15.09

At this point, I don’t know which one is crazier, the board of Sunair Services or the board of Massey Services.

The saga began in the fall of 2008 when the Special Committee of the Board of Directors of Sunair rejected Massey’s all cash offer for 100% of Sunair’s stock. Throughout the fall, Massey Services continued buying Sunair stock, ultimately amassing a 9.6% stake in the company by the end of October.

Fast forward to December 2008, Massey offers a net $3.00 per share, which, at that time, was a 71.4% premium to the publicly traded stock price. Sunair responded by demanding a $5M non-refundable deposit, no financing contingencies and the ability to “shop the deal.”

Fast forward once again to last Friday, the 16th of January. Massey submits, what appears to be, its best and final offer:

1. Purchase Price : A purchase price of $3.00 per share in cash for all of the outstanding shares in Sunair (based on 13,091,088 shares outstanding). This purchase price would not be subject to any adjustments following execution of definitive agreements. This purchase price would be a premium of 109.8% to today’s closing share price. We should note this price also takes into account our review of Sunair’s recently filed Form 10-K which indicated an increase in liabilities over assets of $2,499,626, or $0.19 per share, as of September 30, 2008 (effectively increasing the gross share price offered to $4.58).

2. Structure : A reverse merger of Sunair into a wholly-owned subsidiary of Massey.

3. Escrow : At the time of signing a definitive agreement, Massey will deposit into escrow $1 million in cash and one million shares of common stock of Sunair and this escrow will serve as the break-up fee in the event the deal is not consummated due to the financing sources not funding their commitments.

4. Due Diligence : Massey, the financing sources and their representatives will have four weeks to complete their due diligence.

5. Fiduciary Out : Sunair will have a 20-day “go-shop” period following execution of the definitive agreement.

6. Break-Up Fee : Sunair shall be obligated to pay a break-up fee in the amount of 3% of the enterprise value in the event Sunair exercises its “fiduciary out.”

7. Conditions : In addition to negotiating acceptable definitive agreements incorporating the terms discussed above, final agreement on any transaction would require satisfactory completion of our due diligence, final approval by both the Massey and Sunair Board of Directors and approval of Sunair shareholders. The parties will proceed to immediately begin negotiating a definitive agreement with the goal of execution upon completion of due diligence and the satisfaction of each party.

Per the latest offer letter, Massey gave Sunair until January 26, 2009 to respond. As of today, January 20th, Sunair hired a local investment bank to represent the company in a sale.

As of the close of business today, Massey is offering Sunair almost twice its $1.59 share price. Might not be a bad investment to buy a truckload of Sunair stock today if you think Massey will be successful… and that’s a big IF.

So will the board decide to pull the trigger with Massey? As of today it’s not looking so good.

What’s the Beef?

This is a classic example of shareholder activism on the part of some significant shareholders who blame Richard Rochon and Mario Ferrari for running the company into the ground. According to the shareholder group:

“[We] are considering all available options, including pressuring the Board of Directors or replacing it with persons who either are not self-interested or not willing to overlook the track record of Richard Rochon, Sunair’s Chairman, and his associates.

[We] believe that Sunair’s management and its Chairman of the Board and another director who provide management services through RPC have utterly failed to produce shareholder value as evidenced by the decline in its Common Stock price from $14.05 in early 2005 to $2.005 (on very low volume) as of October 20, 2008. RPC has provided management services since February 8, 2005, which is the date when an affiliate of RPC and the two directors referred to above purchased 5,000,000 units (including 5,000,000 shares of Common Stock) at $5.00 per unit.”

The shareholders are bent out of shape with the fact that the company, which has spent close to $100M on acquisitions this decade, now has a market capitalization of $19M. The illustration below says 1,000 words as to Sunair’s financial performance over the last five years:

Sunair Financials

Is this a good deal for Massey?
Massey’s lastest bid for Sunair is a hefty price tag of $59.95M, for a company that generated $56.6M in sales and ($2.3M) in operating income - what are they thinking? I’ll tell you what they are thinking: “even if we have to overpay for this company, we can do a reverse merger thereby taking Massey Services public without having to go through the lengthy and expensive process of taking ourselves public.”

Now that Sunair is shopping the company, who will buy it?

There has been speculation in the market for a long time now that Rollins would swoop in and pick this company up - they certainly have the financial means to write the check. Whether you like them or not, Rollins, Inc. is a well-managed, stable, and profitable pest control company and I find it very unlikely that they would buy a company whose service mix is 58.2% lawn care, 20.6% general pest, and 21.2% termite. Rollins is focused on general pest, primarily commercial general pest control.

What is Sunair Thinking?

Although the equity markets have continued to deteriorate, the M&A market for pest control companies is still rather robust (though I do believe an end is in site). Since Massey’s offer is borderline ludicrous, I would be surprised to see anyone come in and outbid them, especially strategic acquirers. If it makes any sense to a buyer, it would most likely be a private equity firm that is looking to establish a platform in the industry, and at this pricing, even that’s pushing it.

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