defm14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
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Preliminary Proxy Statement |
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
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Definitive Proxy Statement |
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Definitive Additional Materials |
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Soliciting Material Pursuant to §240.14a-12 |
Universal Compression Holdings, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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No fee required. |
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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Title of each class of securities to which transaction applies: |
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Aggregate number of securities to which transaction applies: |
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act
Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was
determined): |
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Proposed maximum aggregate value of transaction: |
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Total fee paid: |
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Fee paid previously with preliminary materials. |
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the Form or Schedule and the date of its
filing. |
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Amount Previously Paid: |
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Form, Schedule or Registration Statement No.: |
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Filing Party: |
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Date Filed: |
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MERGERS
PROPOSED YOUR VOTE IS VERY IMPORTANT
Dear Hanover and Universal Stockholders:
As we previously announced, the boards of directors of Hanover
Compressor Company and Universal Compression Holdings, Inc. have
each unanimously approved mergers combining Hanover and
Universal in what we intend to be a merger of
equals. Exterran Holdings, Inc., or Holdings, a new
company incorporated in Delaware, will hold what today are
Hanovers and Universals independent businesses. Upon
consummation of the mergers, Holdings common stock is
expected to be listed on the New York Stock Exchange under the
symbol EXH.
If the mergers are consummated, Hanover stockholders will
receive 0.325 shares of the common stock of Holdings for
each share of Hanover common stock held, and Universal
stockholders will receive one share of common stock of Holdings
for each share of Universal common stock held.
Based on the number of shares of common stock of Hanover and
Universal outstanding on February 2, 2007, the last trading
day prior to the public announcement of the merger, former
Hanover stockholders will own approximately 53% of the common
stock of Holdings and former Universal stockholders will own
approximately 47% of the common stock of Holdings.
Each of Hanover and Universal is holding its annual meeting of
stockholders on August 16, 2007 to adopt the merger
agreement and approve certain equity incentive plans to be used
by Holdings if the mergers are completed. Each companys
stockholders will also elect directors and act on other matters
normally considered at each companys annual meeting.
Information about these meetings and the mergers is contained in
this joint proxy statement/prospectus. We encourage you to read
this entire joint proxy statement/prospectus, as well as the
annexes and information incorporated by reference, carefully.
The boards of directors of Hanover and Universal each
unanimously recommend that their respective stockholders vote
FOR the proposal to adopt the merger agreement.
In considering the recommendation of your companys board
of directors, you should be aware that directors and officers of
Hanover and Universal have interests in the mergers that are
different from, or are in addition to, the interests of Hanover
and Universal stockholders generally, and that these directors
and officers will directly benefit if the mergers are
consummated. These interests and benefits are described in this
joint proxy statement/prospectus.
This joint proxy statement/prospectus describes the annual
meetings, the proposals to be considered and voted upon at the
annual meetings and related matters. Every vote is important.
Whether or not you plan to attend your companys annual
meeting, please take the time to vote by following the
instructions on your proxy card.
We enthusiastically support this combination of our companies
and join with our boards in recommending that you vote
FOR the adoption of the merger agreement. Thank
you for your continued interest in and support for our companies.
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Sincerely,
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Sincerely,
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John E. Jackson
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Stephen A. Snider
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President and Chief Executive
Officer
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President and Chief Executive
Officer
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Hanover Compressor Company
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Universal Compression Holdings,
Inc.
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For a discussion of risk factors you should consider in
evaluating the mergers, see Risk Factors beginning
on page 22.
Based on the number of Hanover and Universal shares outstanding
on June 28, 2007, there would be 65,785,525 shares of
Holdings common stock, par value $0.01 per share,
issued in connection with the mergers.
Neither the Securities and Exchange Commission nor any state
securities regulator has approved or disapproved the mergers and
other transactions described in this joint proxy
statement/prospectus nor have they approved or disapproved the
issuance of Holdings common stock in connection with the
mergers, or determined if this joint proxy statement/prospectus
is accurate or adequate. Any representation to the contrary is a
criminal offense.
This joint proxy statement/prospectus is dated July 6,
2007, and, together with the accompanying proxy card, is first
being mailed to stockholders of Hanover and Universal on or
about July 13, 2007.
UNIVERSAL COMPRESSION HOLDINGS,
INC.
NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
AUGUST 16, 2007
To the Stockholders of Universal Compression Holdings, Inc.:
We cordially invite you to our 2007 Annual Meeting of
Stockholders. The meeting will be held on Thursday,
August 16, 2007, at 9:00 a.m., local time, at the
Hilton Houston Westchase, 9999 Westheimer Road, Houston,
Texas 77042. At this years meeting, you will be asked to:
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adopt the Agreement and Plan of Merger, dated as of
February 5, 2007, among Hanover Compressor Company,
Universal Compression Holdings, Inc., Exterran Holdings, Inc.
(formerly known as Iliad Holdings, Inc.), Hector Sub, Inc. and
Ulysses Sub, Inc., as amended, a composite copy of which is
attached as Annex A to this joint proxy
statement/prospectus;
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approve the Holdings 2007 Stock Incentive Plan, a copy of which
is attached as Annex D to this joint proxy
statement/prospectus, to be used by Holdings following the
consummation of the mergers;
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approve the Holdings Employee Stock Purchase Plan, a copy of
which is attached as Annex E to this joint proxy
statement/prospectus, to be used by Holdings following the
consummation of the mergers;
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re-elect directors Thomas C. Case, Janet F. Clark and Uriel E.
Dutton, each for a three-year term ending 2010;
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ratify the reappointment of Deloitte & Touche LLP as
Universals independent registered public accounting firm
for fiscal year 2007; and
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transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
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If the Agreement and Plan of Merger is adopted and the mergers
are consummated, the Universal directors elected pursuant to the
proposal in the fourth bullet above will serve only until the
mergers are consummated. Also, the proposals described in the
second and third bullets will be implemented only if the
Agreement and Plan of Merger is adopted. For more information
about the proposals and the annual meeting, please review the
accompanying joint proxy statement/prospectus.
Universal will transact no other business at its annual meeting,
except for business properly brought before the annual meeting
or any adjournment or postponement thereof.
Only holders of record of shares of Universal common stock at
the close of business on June 28, 2007, the record date for
the annual meeting, are entitled to notice of, and a vote at,
the annual meeting and any adjournments or postponements of the
annual meeting.
Your vote is important. We encourage you to sign and return your
proxy card, or use the telephone or Internet voting procedures,
before the annual meeting, so that your shares will be
represented and voted at the annual meeting even if you cannot
attend in person.
Please do not send any share certificates at this time. If the
mergers are consummated, we will notify you of the procedures
for exchanging Universal share certificates for shares of
Holdings.
STEPHEN A. SNIDER
President and Chief Executive Officer
Houston, Texas
July 6, 2007
HOW TO
OBTAIN ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important
business and financial information about Hanover and Universal
from other documents that are not included in or delivered with
this joint proxy statement/prospectus. See Where You Can
Find More Information beginning on page 219 for a
listing of documents incorporated by reference. This information
is available for you to review at the public reference room of
the Securities and Exchange Commission, or SEC, located at 100 F
Street, N.E., Room 1580, Washington, DC 20549, and through
the SECs website, www.sec.gov. You can also obtain
those documents incorporated by reference in this joint proxy
statement/prospectus by requesting them in writing or by
telephone from the appropriate company at the following
addresses and telephone numbers:
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Hanover Compressor
Company
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Universal Compression Holdings,
Inc.
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12001 N. Houston Rosslyn
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4444 Brittmoore
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Houston, Texas 77086
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Houston, Texas 77041
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(281) 447-8787
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(713)
335-7000
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Attention: Investor Relations
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Attention: Investor Relations
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www.hanover-co.com
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www.universalcompression.com
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You may also obtain documents incorporated by reference in this
joint proxy statement/prospectus by requesting them in writing
or by telephone from D.F. King & Co., Inc.,
Hanovers proxy solicitor, or Georgeson Inc.,
Universals proxy solicitor, at the following addresses and
telephone numbers:
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D.F. King & Co.,
Inc.
48 Wall Street
New York, New York 10005
(800) 859-8508
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Georgeson Inc.
17 State Street
New York, New York 10004
(877) 278-9673
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If you would like to request documents, please do so by
August 9, 2007 in order to receive them before the annual
meetings.
VOTING BY
INTERNET, TELEPHONE OR MAIL
If you hold your shares through a bank, broker, custodian or
other recordholder, please refer to your proxy card or voting
instruction form or the information forwarded by your bank,
broker, custodian or other recordholder to see which options are
available to you.
Hanover stockholders of record may submit their proxies
by:
Internet. You can vote over the Internet by
accessing the website listed on your proxy card and following
the instructions on the website prior to 11:59 EST on Wednesday,
August 15, 2007. Internet voting is available 24 hours
a day. If you vote over the Internet, do not return your proxy
card(s).
Telephone. You can vote by telephone by
calling the toll-free number listed on your proxy card in the
United States, Canada or Puerto Rico on a touch-tone phone prior
to 11:59 EST on Wednesday, August 15, 2007. You will then
be prompted to enter the control number printed on your proxy
card and to follow the subsequent instructions. Telephone voting
is available 24 hours a day. If you vote by telephone, do
not return your proxy card(s).
Mail. You can vote by mail by completing,
signing, dating and mailing your proxy card(s) in the
postage-paid envelope included with this joint proxy
statement/prospectus.
Universal stockholders of record may submit their proxies
by:
Internet. You can vote over the Internet by
accessing the website listed on your proxy card and following
the instructions on the website prior to 11:59 EST on Wednesday,
August 15, 2007. Internet voting is available 24 hours
a day. If you vote over the Internet, do not return your proxy
card(s).
Telephone. You can vote by telephone by
calling the toll-free number listed on your proxy card in the
United States, Canada or Puerto Rico on a touch-tone phone prior
to 11:59 EST on Wednesday, August 15, 2007. You will then
be prompted to enter the control number printed on your proxy
card and to follow subsequent instructions. Telephone voting is
available 24 hours a day. If you vote by telephone, do not
return your proxy card(s).
Mail. You can vote by mail by completing,
signing, dating and mailing your proxy card(s) in the
postage-paid envelope included with this joint proxy
statement/prospectus.
i
TABLE OF
CONTENTS
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1
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1
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9
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10
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219
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F-1
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F-2
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F-3
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ANNEXES:
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Agreement and Plan
of Merger
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A-1
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Exhibit 2.1.1 Restated
Certificate of Incorporation of Universal
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A-49
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Exhibit 2.1.2
Certificate of Incorporation of Hanover
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A-50
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Exhibit 2.2.1 Second
Restated Bylaws of Universal
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A-51
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Exhibit 2.2.2 Second
Amended and Restated Bylaws of Hanover
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A-60
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Exhibit 2.3.1
Restated Certificate of Incorporation of Holdings
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A-69
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Exhibit 2.3.2
Amended and Restated Bylaws of Holdings
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A-73
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Exhibit 7.11 Form
of Rule 145 Affiliate Letter
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A-87
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Exhibit 8.1(i)
Consents
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A-89
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Opinion of Credit Suisse
Securities (USA) LLC
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B-1
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Opinion of Goldman,
Sachs & Co.
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C-1
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Holdings 2007 Stock Incentive
Plan
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D-1
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Holdings Employee Stock Purchase
Plan
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E-1
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Excerpt from Hanovers
Governance Principles Concerning Shareholder Election of
Directors
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F-1
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Excerpt from Hanovers
Governance Principles Concerning Independence Standards for
Hanover Directors
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G-1
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Universal Compensation Committee
Charter
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H-1
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iv
SUMMARY
This summary highlights selected information contained in
this joint proxy statement/prospectus and may not contain all
the information that is important to you. Hanover and Universal
urge you to read carefully this joint proxy statement/prospectus
in its entirety, as well as the annexes. Additional important
information is also contained in the documents incorporated by
reference into this joint proxy statement/prospectus. See
Where You Can Find More Information beginning on
page 219. We have included page references parenthetically
to direct you to a more complete description of the topics
presented in this summary.
In this joint proxy statement/prospectus,
Holdings refers to Exterran Holdings, Inc.,
Hanover refers to Hanover Compressor Company and its
consolidated subsidiaries, Universal refers to
Universal Compression Holdings, Inc. and its consolidated
subsidiaries and the merger agreement refers to the
Agreement and Plan of Merger, dated February 5, 2007, as
amended by Amendment No. 1 thereto, dated June 25,
2007, by and among Hanover, Universal, Holdings, Hector Sub,
Inc. and Ulysses Sub, Inc., a composite copy of which is
attached as Annex A to this joint proxy
statement/prospectus.
Questions
and Answers About the Meetings
Below are brief answers to questions you may have concerning the
transactions described in this joint proxy statement/prospectus
and the annual meetings of Hanover and Universal. These
questions and answers do not, and are not intended to, address
all of the information that may be important to you. You should
read carefully this entire joint proxy statement/prospectus and
the other documents to which we refer you.
GENERAL
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Why am I receiving this document? |
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This is a joint proxy statement being used by both the Hanover
and Universal boards of directors to solicit proxies of Hanover
and Universal stockholders in connection with the proposed
mergers involving Hanover and Universal and the annual meetings
of Hanover and Universal. In addition, this document is a
prospectus being delivered to Hanover and Universal stockholders
because Holdings is offering shares of its common stock to be
issued in exchange for shares of Hanover common stock and
Universal common stock if the mergers are completed. |
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When and where are the meetings of the stockholders? |
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The annual meeting of Hanover stockholders will take place at
9:00 a.m., local time, on Thursday, August 16, 2007,
at the InterContinental Hotel Houston, 2222 West Loop
South, Houston, Texas 77027. The annual meeting of Universal
stockholders will take place at 9:00 a.m., local time, on
Thursday, August 16, 2007, at the Hilton Houston Westchase,
9999 Westheimer Road, Houston, Texas 77042. Additional
information relating to the Hanover and Universal annual
meetings is set forth beginning on pages 108 and 156,
respectively. |
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Who can answer any questions I may have about the annual
meetings or the mergers? |
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Hanover has retained D.F. King & Co., Inc. to serve as
an information agent and proxy solicitor in connection with its
annual meeting and the mergers. Hanover stockholders may call
D.F. King & Co. toll-free at (800) 859-8508 with
any questions they may have. Banks and brokers may call collect
at (212) 659-5550. |
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Universal has retained Georgeson Inc. to serve as an information
agent and proxy solicitor in connection with its annual meeting
and the mergers. Universal stockholders may call Georgeson Inc.
toll-free at (877) 278-9673 with any questions they may have.
Banks and brokers may call at (212) 440-9800. |
CONCERNING
THE MERGERS
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What will happen in the proposed mergers? |
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Prior to entering into the merger agreement, Universal formed a
new Delaware corporation, Iliad Holdings, Inc., which has since
been renamed Exterran Holdings, Inc., and which we refer to in
this joint proxy statement/prospectus as Holdings.
When the transactions are consummated, Holdings two newly
created, wholly owned subsidiaries, Hector Sub, Inc. and Ulysses
Sub, Inc., will merge with and into Hanover and Universal,
respectively. As a result of these mergers, which we call the
Hanover merger and the Universal merger,
respectively, each of Hanover and Universal will become wholly
owned subsidiaries of Holdings. We refer to the Hanover merger
and the Universal merger collectively in this joint proxy
statement/prospectus as the mergers. After the
mergers, the current stockholders of Hanover and Universal will
be the stockholders of Holdings. |
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Additional information on the mergers is set forth beginning on
page 34. |
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Why are Hanover and Universal proposing the mergers? |
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Hanover and Universal believe the mergers will provide
substantial strategic and financial benefits to Hanover and
Universal and their respective stockholders, employees and
customers, including: |
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the combination of complementary strengths,
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improved operating efficiencies and reliability as
well as a broader and deeper array of experienced and skilled
technicians and service specialists,
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a larger pool of U.S. contract compression contracts
and assets that can be offered for sale over time to Universal
Compression Partners, L.P., a publicly traded master limited
partnership that is a subsidiary of Universal and that we refer
to as the Universal Partnership. The Universal
Partnership will be renamed Exterran Partners, L.P. upon
the consummation of the mergers.
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stronger and more stable earnings and cash flow as a
result of business line diversification,
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an expanded international platform, and
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significant cost savings and synergies.
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Additional information on the strategic and financial rationale
for the mergers, as well as each of Hanovers and
Universals reasons for the mergers, is set forth beginning
on pages 43, 44 and 48, respectively. |
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What will I receive for my shares? |
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As a result of the mergers, each holder of shares of Hanover
common stock will have the right to receive 0.325 shares of
Holdings common stock in exchange for each share of Hanover
common stock the holder owns. Holders of Hanover common stock
will have the right to receive cash for any fractional shares of
Holdings common stock that they would otherwise be entitled to
receive in the Hanover merger. The amount of cash payable for
any fractional shares of Holdings common stock will be
determined based on the average closing price of a share of
Universal common stock during the 15 trading days ending on the
third trading day immediately preceding the effective time of
the Hanover merger. Each holder of shares of Universal common
stock will have the right to receive one share of Holdings
common stock in exchange for each share of Universal common
stock the holder owns. Based on the number of shares of Hanover
and Universal common stock outstanding on February 2, 2007,
the last trading day prior to the announcement of the execution
of the merger agreement by the parties, former Hanover
stockholders will own approximately 53% of Holdings and former
Universal stockholders will own approximately 47% of Holdings. |
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Additional information on the consideration to be received in
the mergers is set forth beginning on page 82. |
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What are my U.S. federal income tax consequences as a
result of the mergers? |
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We expect that holders of Hanover or Universal common stock will
not recognize gain or loss for U.S. federal income tax
purposes in the mergers (except with respect to any cash
received in lieu of |
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fractional shares of Holdings common stock). You are strongly
urged to consult with a tax advisor to determine the particular
U.S. federal, state or local or foreign tax consequences of
the mergers to you. |
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Additional information regarding tax matters is set forth in
Material U.S. Federal Income Tax Consequences of the
Mergers beginning on page 79. |
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What vote is required to approve the mergers? |
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A: |
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For both Hanover and Universal, the affirmative vote of a
majority of their respective shares of common stock outstanding
and entitled to vote as of the respective record dates is
required to adopt the merger agreement and thereby approve the
mergers. At the close of business on June 28, 2007, the
record date for the Hanover annual meeting, directors and
executive officers of Hanover and their respective affiliates
had the right to vote 24.9% of the then outstanding shares of
Hanover common stock. At the close of business on June 28,
2007, the record date for the Universal annual meeting,
directors and executive officers of Universal and their
respective affiliates had the right to vote 1.0% of the then
outstanding shares of Universal common stock. Each of
Hanovers and Universals directors and executive
officers has indicated his or her present intention to vote, or
cause to be voted, the shares of Hanover or Universal common
stock owned by him or her for the adoption of the merger
agreement. |
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Additional information on the votes required to approve the
mergers is located on page 108 for Hanover and on
page 157 for Universal. |
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How do the boards of directors of Hanover and Universal
recommend that I vote with respect to the proposed mergers? |
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Hanovers board of directors unanimously recommends that
the stockholders of Hanover vote FOR the proposal to
adopt the merger agreement and consummate the mergers. |
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Universals board of directors unanimously recommends that
the stockholders of Universal vote FOR the proposal
to adopt the merger agreement and consummate the mergers. |
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Additional information on the recommendation of Hanovers
board of directors and the recommendation of Universals
board of directors is set forth in The Mergers
Hanovers Reasons for the Mergers and Recommendation of
Hanovers Board of Directors beginning on
page 44 and The Mergers Universals
Reasons for the Mergers and Recommendation of Universals
Board of Directors beginning on page 48, respectively. |
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You should note that some Hanover directors and executive
officers and some Universal directors and executive officers
have interests in the mergers as directors or officers that are
different from, or in addition to, the interests of other
Hanover stockholders or Universal stockholders, respectively.
Information relating to the interests of Hanovers and
Universals directors and executive officers in the mergers
is set forth in The Mergers Interests of
Hanover and Universal Directors and Executive Officers in the
Mergers beginning on page 66. |
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Who else must approve the mergers? |
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Under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, which we
refer to as the HSR Act, Hanover and Universal may not complete
the mergers until they have furnished certain information and
materials to the Antitrust Division of the U.S. Department
of Justice and the U.S. Federal Trade Commission and the
applicable waiting period has expired or been early terminated.
Completion of the mergers is also subject to approval of certain
non-U.S. antitrust
regulatory authorities if the failure to obtain those approvals
would have a material adverse effect on Holdings after
completion of the mergers. On July 3, 2007, Hanover and
Universal each received notice that the waiting period required
by the HSR Act with respect to the Mergers had been early
terminated. In addition, Hanover and Universal have determined
the jurisdictions in which foreign competition filings are
required and have made the necessary filings. |
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Additional information regarding regulatory approvals required
for completion of the mergers is set forth in The
Mergers Regulatory Matters beginning on
page 75. |
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Will Holdings shares be traded on an exchange? |
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It is a condition to the completion of the mergers that the
shares of common stock of Holdings that will be issuable
pursuant to the mergers be approved for listing on the New York
Stock Exchange. We intend to apply to list the shares of
Holdings common stock to be issued or reserved for issuance in
connection with the mergers on the New York Stock Exchange prior
to the consummation of the mergers. We expect that the shares of
Holdings common stock will trade under the symbol
EXH. |
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When do you expect to complete the mergers? |
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We are working to complete the mergers in the third quarter of
2007, although we cannot assure completion by any particular
date. If Hanover and Universal stockholders adopt the merger
agreement at their respective companies annual meetings,
we expect that the other conditions to completion of the mergers
will be satisfied and the mergers will be consummated within
three business days following the annual meetings. |
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Who will serve as the directors and executive officers of
Holdings after the consummation of the mergers? |
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Upon the consummation of the mergers, the Holdings board of
directors will consist of 10 members, half of whom will be
current members of Universals board of directors
designated by Universal and half of whom will be current members
of Hanovers board of directors designated by Hanover.
Gordon T. Hall, the current Chairman of the board of directors
of Hanover, will serve as Chairman of Holdings board of
directors. Stephen A. Snider, the current President and Chief
Executive Officer and Chairman of Universal, will serve as
President and Chief Executive Officer and a director of
Holdings. Additional information about the directors and
executive officers of Holdings after consummation of the mergers
is set forth in The Mergers Continuing Board
and Management Positions beginning on page 74. |
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Are there risks associated with the mergers? |
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Yes, there are important risks associated with the mergers. We
encourage you to read carefully and in their entirety the
sections of this joint proxy statement/prospectus entitled
Risk Factors and Cautionary Information
Regarding Forward-Looking Statements beginning on
pages 22 and 33, respectively. |
CONCERNING
THE HANOVER AND UNIVERSAL ANNUAL MEETINGS
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In addition to the proposed mergers, what other proposals are
to be considered and voted upon at the Hanover annual meeting
and the Universal annual meeting? |
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Hanover stockholders are being asked to consider and vote on the
following four proposals, which we refer to collectively as the
Hanover annual business matter proposals, in
addition to the proposed mergers: |
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the Holdings incentive plan proposal,
which is a proposal to approve a new long-term equity incentive
plan to be used by Holdings following the consummation of the
mergers to make awards of equity incentive compensation to
directors, officers and employees of Holdings;
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the Holdings stock purchase plan
proposal, which is a proposal to approve a new employee
stock purchase plan to be used by Holdings following the
consummation of the mergers;
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the Hanover election of directors
proposal, which is a proposal to elect eleven directors to
serve as members of Hanovers board of directors until the
2008 annual meeting of Hanover stockholders or until their
successors are duly elected and qualified; and
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the Hanover auditors ratification
proposal, which is a proposal to ratify the reappointment
of PricewaterhouseCoopers LLP as Hanovers independent
registered public accounting firm for fiscal year 2007.
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Universal stockholders are being asked to consider and vote on
the following four proposals, which we refer to collectively as
the Universal annual business matter proposals, in
addition to the proposed mergers: |
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the Holdings incentive plan proposal;
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the Holdings stock purchase plan proposal;
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the Universal election of directors
proposal, which is a proposal to re-elect Thomas C.
Case, Janet F. Clark and Uriel E. Dutton to serve as
Class A members of Universals board of directors
until the 2010 annual meeting of Universal stockholders or until
their successors are duly elected and qualified; and
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the Universal auditors ratification
proposal, which is a proposal to ratify the reappointment
of Deloitte & Touche LLP as Universals
independent registered public accounting firm for fiscal year
2007.
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Additional information relating to the Hanover annual business
matter proposals and the Universal annual business matter
proposals is set forth beginning on pages 108 and 156,
respectively. |
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What stockholder approvals are required to approve the
Hanover election of directors proposal and the Hanover auditors
ratification proposal and the Universal election of directors
proposal and the Universal auditors ratification proposal? |
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For Hanover, the affirmative vote of a plurality of the votes of
the shares present in person or represented by proxy and
entitled to vote at the Hanover meeting is required to elect
each director nominee in connection with the Hanover election of
directors proposal. However, Hanovers Governance
Principles require that any nominee who receives a greater
number of withheld votes than for votes
must submit his or her resignation for consideration by the
Hanover board of directors. The affirmative vote of a majority
of the shares of voting stock represented at the Hanover meeting
is required to approve the Hanover auditors ratification
proposal. |
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Additional information on Hanovers policy with regard to
nominees who receive more votes withheld than
for such nominee is set forth in the excerpt from
the Hanovers Governance Principles Concerning Shareholder
Election of Directors included in this joint proxy
statement/prospectus as Annex F. |
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For Universal, the affirmative vote of a plurality of the votes
cast at the Universal meeting is required to approve the
Universal election of directors proposal, which means that the
number of nominees recommended for election by the board of
directors, currently three, receiving the greatest number of
votes will be elected. The affirmative vote of a majority of the
votes cast at the Universal meeting is required to approve the
Universal auditors ratification proposal. |
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How will the vote on the proposed mergers impact the Hanover
directors elected pursuant to the Hanover election of directors
proposal and the Universal directors elected pursuant to the
Universal election of directors proposal? |
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If the proposed mergers receive the requisite stockholder
approvals at the respective annual stockholders meetings of
Hanover and Universal, the Hanover directors elected pursuant to
the Hanover election of directors proposal and the Universal
directors elected pursuant to the Universal election of
directors proposal will serve until all of the other conditions
to closing of the mergers are satisfied or waived and the
mergers are consummated, at which time they will resign. Upon
consummation of the mergers, each of Hanover and Universal will
become subsidiaries of Holdings and the board of directors of
Holdings will consist of 10 members, half of whom will consist
of members of Hanovers board of directors designated by
the Hanover board of directors and half of whom will consist of
members of Universals board of directors designated by the
Universal board of directors, as provided in the merger
agreement. More information regarding the Hanover and Universal
directors who are expected to serve on the board of directors of
Holdings is set forth in The Mergers
Continuing Board and Management Positions beginning on
page 74. |
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If the proposed mergers do not receive the requisite stockholder
approvals, or if for any other reason the merger agreement is
terminated, then the persons elected as directors at the Hanover
annual meeting or as Class A directors at the Universal
annual meeting will serve until the 2008 annual meeting of
Hanover stockholders or until the 2010 annual meeting of
Universal stockholders, as applicable, or until their successors
are elected. |
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What stockholder approvals are required to approve the
Holdings incentive plan proposal and the Holdings stock purchase
plan proposal? |
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For each of Hanover and Universal, approval of the Holdings
incentive plan proposal and the Holdings stock purchase plan
proposal requires the affirmative vote of a majority of the
votes cast and the votes cast must represent over 50% of their
respective shares of common stock outstanding and entitled to
vote as of the respective record dates. Abstentions and
broker non-votes will not be treated as votes cast. |
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Why are Hanover and Universal stockholders being asked to
vote on the Holdings incentive plan proposal and the Holdings
stock purchase plan proposal? |
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Under the terms of the equity incentive plans of Hanover and
Universal currently in effect, the vesting of all equity
incentive awards made prior to the date of the merger agreement
will accelerate as a result of the consummation of the mergers.
Holdings intends to implement a new equity incentive plan so it
can have the ability to make equity compensation awards to
directors, officers and employees of Holdings following the
consummation of the mergers. If the stockholders of Hanover and
Universal approve the Holdings incentive plan proposal, Holdings
will not issue any further equity incentive awards under the
existing Hanover and Universal plans following the consummation
of the mergers. If the stockholders of Hanover and Universal do
not approve the Holdings incentive plan proposal, Holdings
intends to use the remaining availability under Hanovers
and Universals existing equity plans for additional equity
incentive awards following the consummation of the mergers. |
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Under the terms of Universals employee stock purchase
plan, employees of Universal and its subsidiaries have the
opportunity to purchase shares of Universal common stock,
thereby encouraging employees to share in the economic growth
and success of Universal and its subsidiaries. Universals
employee stock purchase plan allows eligible employees an
opportunity to acquire a proprietary interest in
Universals long-term performance and success through the
purchase of shares of Universals common stock at a
discount from its fair market value with funds accumulated
through payroll deductions and without having to pay any
brokerage commissions with respect to the purchases. The
Universal employee stock purchase plan will be terminated in
connection with the consummation of the mergers. If the
stockholders of Hanover and Universal approve the Holdings stock
purchase plan proposal, then, following the consummation of the
mergers, Holdings will implement the employee stock purchase
plan, which is substantially similar to Universals current
employee stock purchase plan. If the stockholders of Hanover and
Universal do not approve the Holdings stock purchase plan
proposal, then Holdings will not have an employee stock purchase
plan. |
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How will the vote on the proposed mergers impact the Holdings
incentive plan proposal and the Holdings stock purchase plan
proposal? |
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The completion of the mergers is not conditioned upon the
approval of the Holdings incentive plan proposal or the Holdings
stock purchase plan proposal. However, the approval of each of
these plans by Holdings is subject to the consummation of the
mergers. |
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If the proposed mergers do not receive the requisite stockholder
approvals, or if for any other reason the merger agreement is
terminated, then the Holdings stock incentive plan and the
Holdings employee stock purchase plan will not be implemented. |
6
PROCEDURES
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What do I need to do now? |
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After carefully reading and considering the information
contained in this joint proxy statement/prospectus, please
complete and sign your proxy card and return it in the enclosed
postage-paid envelope as soon as possible so that your shares
may be represented at your annual meeting. Alternatively, you
may cast your vote by telephone or Internet by following the
instructions on your proxy card. In order to ensure that your
vote is recorded, please vote your proxy as instructed on your
proxy card, or on the voting instruction form provided by the
record holder if your shares are held in the name of your broker
or other nominee, even if you currently plan to attend your
annual meeting in person. |
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Additional information on voting procedures is located beginning
on page 108 for Hanover and on page 156 for Universal. |
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What should I do if I receive more than one set of voting
materials? |
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You may receive more than one set of voting materials, including
multiple copies of this joint proxy statement/prospectus and
multiple proxy cards or voting instruction cards. For example,
if you hold your shares in more than one brokerage account, you
will receive a separate voting instruction card for each
brokerage account in which you hold shares. If you are a holder
of record and your shares are registered in more than one name,
you will receive more than one proxy card. In addition, if you
are a stockholder of both Hanover and Universal, you will
receive one or more separate proxy cards or voting instruction
cards for each company. Please follow the instructions and vote
in accordance with each proxy card and voting instruction card
you receive. |
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Should I send in my share certificates now? |
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No. If the mergers are completed, we will send the former
stockholders of both Hanover and Universal written instructions
for exchanging their share certificates. Holdings shares will be
in uncertificated, book-entry form unless a physical certificate
is requested by the holder. Additional information on the
procedures for exchanging certificates representing shares of
Hanover or Universal common stock is set forth in The
Merger Agreement Procedures for Exchange of Share
Certificates beginning on page 83. |
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If my shares are held in street name by a broker
or other nominee, will my broker or nominee vote my shares for
me? |
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If you do not provide your broker with instructions on how to
vote your street name shares, your broker will not
be permitted to vote them on the proposals related to the
adoption of the merger agreement, the Holdings incentive plan
proposal or the Holdings stock purchase plan proposal at your
annual meeting. You should therefore be sure to provide your
broker with instructions on how to vote your shares. You should
check the voting form used by your broker to see if your broker
offers telephone or Internet voting. If you do not give voting
instructions to your broker, your shares will be counted towards
a quorum at your respective annual meeting, but effectively will
be treated as voting against the adoption of the merger
agreement unless you appear and vote in person at your annual
meeting. If your broker holds your shares and you plan to attend
and vote at your annual meeting, please bring a letter from your
broker identifying you as the beneficial owner of the shares and
authorizing you to vote. |
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Additional information on how to vote if your shares are held in
street name is located beginning on page 109 for Hanover
and on page 156 for Universal. |
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As a participant in Hanovers or Universals 401(k)
Plan, how do I vote shares held in my plan account? |
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If you are a participant in Hanovers 401(k) Plan, you have
the right to vote the shares of Hanover common stock allocated
to your plan account on the proposals to be considered at the
Hanover annual meeting as though you were the registered holder
with respect to such shares. If you are a participant in the
Universal 401(k) Plan, you have the right to provide voting
directions to the plan trustee by submitting your voting
directions for those shares of Universal common stock that are
held by the Universal 401(k) |
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Plan and allocated to your plan account on the proposals to be
considered at the Universal annual meeting. Plan participant
voting directions will be treated confidentially. The plan
trustee will follow participants voting directions unless
it determines that to do so would be contrary to the Employee
Retirement Income Security Act of 1974. If you elect not to
provide voting directions, the Universal plan trustee will vote
all of the Universal shares allocated to your account in the
same proportion as the actual voting instructions submitted by
plan participants at least two days prior to the Universal
annual meeting. Because the plan trustee must process voting
instructions from participants before the date of the Universal
annual meeting, you are urged to deliver your instructions well
in advance of the Universal annual meeting so that the
instructions are received no later than August 13, 2007. |
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What if I do not vote on the matters relating to the
mergers? |
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Because adoption of the merger agreement requires the
affirmative vote of a majority of the shares of common stock
outstanding and entitled to vote of each of Hanover and
Universal as of the respective record dates, if you abstain or
fail to vote your shares in favor of adoption of the merger
agreement, this will have the same effect as voting your shares
against adoption of the merger agreement. If you fail to respond
with a vote or fail to instruct your broker or other nominee how
to vote on the proposed mergers, it will have the same effect as
a vote against the proposed mergers. If you respond but do not
indicate how you want to vote on the proposed mergers, your
proxy will be counted as a vote in favor of adoption of the
merger agreement. |
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What if I want to change my vote? |
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If you are a stockholder of record of Hanover or Universal, you
may send a later-dated, signed proxy card so that it is received
prior to your annual meeting, or you may attend your annual
meeting in person and vote. You may also revoke your proxy card
by sending a notice of revocation that is received prior to your
annual meeting to your companys Corporate Secretary at the
address set forth under The Companies beginning on
page 97. You may also change your vote by telephone or
Internet. You may change your vote by using any one of these
methods regardless of the procedure used to cast your previous
vote. |
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If your shares are held in street name by a broker
or other nominee, you should follow the instructions provided by
your broker or other nominee to change your vote. |
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Do I have appraisal rights? |
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No. Neither the Hanover stockholders nor the Universal
stockholders will have appraisal rights under Delaware law as a
result of the mergers. |
8
The
Companies
Hanover Compressor Company
12001 N. Houston Rosslyn
Houston, Texas 77086
(281) 447-8787
Hanover is a global market leader in the full service natural
gas compression business and is also a leading provider of
service, fabrication and equipment for oil and natural gas
production, processing and transportation applications. Hanover
sells and rents this equipment and provides complete operation
and maintenance services, including run-time guarantees, for
both customer-owned equipment and its fleet of rental equipment.
For the twelve months ended December 31, 2006, Hanover had
revenues and other income of $1,670.7 million and net
income of $86.5 million. Hanover had revenues and other
income of $473.2 million and net income of
$25.4 million for the three months ended March 31,
2007.
Universal Compression Holdings, Inc.
4444 Brittmoore Road
Houston, Texas 77041
(713) 335-7000
Universal is one of the largest natural gas compression services
companies in the world in terms of compressor fleet horsepower,
with a fleet as of March 31, 2007 of approximately 7,100
compressor units comprising approximately 2.7 million
horsepower. Universal provides a full range of natural gas
compression services and products, including sales, operations,
maintenance and fabrication to the natural gas industry, both
domestically and internationally. For the twelve months ended
December 31, 2006, Universal had revenues of
$947.7 million and net income of $87.7 million.
Universal had revenues of $239.4 million and net income of
$14.3 million for the three months ended March 31,
2007.
Exterran Holdings, Inc.
4444 Brittmoore Road
Houston, Texas 77041
(713) 335-7000
Exterran Holdings, Inc., or Holdings, which changed its name
from Iliad Holdings, Inc. on June 18, 2007, is a Delaware
corporation formed for the purpose of holding both Hanover and
Universal as wholly owned subsidiaries following completion of
the mergers.
Hector Sub, Inc.
4444 Brittmoore Road
Houston, Texas 77041
(713) 335-7000
Hector Sub is a wholly owned subsidiary of Holdings, formed
solely for the purpose of engaging in the Hanover merger and the
other transactions contemplated by the merger agreement. In the
Hanover merger, Hector Sub will merge with and into Hanover and
thereafter cease to exist.
Ulysses Sub, Inc.
4444 Brittmoore Road
Houston, Texas 77041
(713) 335-7000
Ulysses Sub is a wholly owned subsidiary of Holdings, formed
solely for the purpose of engaging in the Universal merger and
the other transactions contemplated by the merger agreement. In
the Universal merger, Ulysses Sub will merge with and into
Universal and thereafter cease to exist.
9
The
Mergers
Recommendations
of the Hanover and Universal Boards of Directors (Pages 44
and 48)
At its meeting on February 3, 2007, after due
consideration, the Hanover board of directors unanimously:
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determined that the merger agreement and the transactions
contemplated thereby are advisable and in the best interests of
the stockholders of Hanover;
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approved, authorized and adopted the merger agreement; and
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recommended that the stockholders of Hanover vote for adoption
of the merger agreement at the annual meeting of stockholders of
Hanover.
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At its meeting on February 3, 2007, after due
consideration, the Universal board of directors unanimously:
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determined that the merger agreement and the transactions it
contemplates are advisable, fair to and in the best interests of
Universal and its stockholders;
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approved the merger agreement; and
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recommended that the Universal stockholders vote for the
adoption of the merger agreement.
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To review the risks related to the mergers and the combined
company following consummation of the mergers, please see
Risk Factors beginning on page 22. To review
the background, strategic and financial rationale and reasons
for the mergers, please see the sections beginning on
pages 35, 43 and 44 and 48, respectively.
Opinion
of Hanovers Financial Advisor (Page 54)
On February 3, 2007, Credit Suisse Securities (USA) LLC, or
Credit Suisse, rendered its oral opinion to Hanovers board
of directors (which was subsequently confirmed in writing by
delivery of Credit Suisses written opinion dated the same
date) to the effect that, as of February 3, 2007, the
Hanover exchange ratio was fair, from a financial point of view,
to the holders of Hanover common stock. Credit Suisse has not
been requested to and is not expected to update or reaffirm its
opinion.
Credit Suisses opinion was directed to Hanovers
board of directors and only addressed the fairness from a
financial point of view of the Hanover exchange ratio and does
not address any other aspect or implication of the mergers. The
summary of Credit Suisses opinion in this joint proxy
statement/prospectus is qualified in its entirety by reference
to the full text of its written opinion, which is included as
Annex B to this joint proxy statement/prospectus and
sets forth the procedures followed, assumptions made,
qualifications and limitations on the review undertaken and
other matters considered by Credit Suisse in preparing its
opinion. Hanover encourages Hanovers stockholders to
carefully read the full text of Credit Suisses written
opinion. However, neither Credit Suisses written opinion
nor the summary of its opinion and the related analyses set
forth in this joint proxy statement/prospectus are intended to
be, and do not constitute advice or a recommendation to any
stockholder as to how such stockholder should vote or act with
respect to any matter relating to the mergers.
Pursuant to an engagement letter between Hanover and Credit
Suisse, dated December 20, 2006, Hanover has agreed to pay
Credit Suisse a transaction fee of $8 million. Payment of
Credit Suisses fee is fully contingent upon the
consummation of the mergers.
Opinion
of Universals Financial Advisor (Page 59)
Goldman, Sachs & Co., or Goldman Sachs, rendered its
opinion to the board of directors of Universal that, as of
February 5, 2007 and based upon and subject to the factors
and assumptions set forth therein, the Universal exchange ratio
pursuant to the merger agreement was fair from a financial point
of view to the
10
holders of Universal common stock. Universal does not intend to
request that Goldman Sachs render an opinion as of any date
subsequent to February 5, 2007.
The full text of the written opinion of Goldman Sachs, dated
February 5, 2007, which sets forth assumptions made,
procedures followed, matters considered and limitations on the
review undertaken in connection with the opinion, is attached as
Annex C. Goldman Sachs provided its opinion for
the information and assistance of the board of directors of
Universal in connection with its consideration of the mergers.
The Goldman Sachs opinion is not a recommendation as to how any
holder of Universal common stock should vote with respect to the
mergers.
Pursuant to an engagement letter between Universal and Goldman
Sachs, dated December 22, 2006, Universal has agreed to pay
Goldman Sachs a transaction fee of $10 million, payable
upon consummation of the mergers. Universal has also agreed to
consider, in good faith, taking into account the level of
service that Goldman Sachs has provided in connection with the
merger, paying Goldman Sachs an additional transaction fee of
$3 million. Payment of Goldman Sachs fees is fully
contingent upon the consummation of the mergers.
Interests
of Directors and Executive Officers in the Mergers
(Page 65)
You should be aware that some Hanover and Universal directors
and executive officers have interests in the mergers as
directors or executive officers that are different from, or in
addition to, the interests of other Hanover and Universal
stockholders.
Continuing
Board and Management Positions (Page 74)
The Holdings board of directors will consist of 10 members, five
of whom will be current members of, and designated by,
Hanovers board of directors and five of whom will be
current members of, and designated by, Universals board of
directors.
Hanover intends to designate the following current members of
its board of directors to serve on the Holdings board of
directors:
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Gordon T. Hall;
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John E. Jackson;
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Peter H. Kamin;
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William C. Pate; and
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Stephen M. Pazuk.
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Universal intends to designate the following current members of
its board of directors to serve on the Holdings board of
directors:
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Stephen A. Snider;
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Ernie L. Danner;
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Uriel E. Dutton;
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Janet F. Clark; and
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J.W.G. Will Honeybourne.
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Stephen A. Snider, Universals current President and Chief
Executive Officer and Chairman of Universals board of
directors, will be the President and Chief Executive Officer of
Holdings and a member of the Holdings board of directors. Gordon
T. Hall, the current chairman of Hanovers board of
directors, will be the chairman of the Holdings board of
directors.
11
Regulatory
Matters (Page 75)
HSR
Act
Under the HSR Act, the mergers may not be consummated until
premerger notifications and required information have been
furnished to the Antitrust Division of the Department of Justice
and the Federal Trade Commission, or FTC, and the relevant
waiting periods have been early terminated or have expired. On
July 3, 2007, Hanover and Universal each received notice
that the waiting period required by the HSR Act with respect to
the mergers had been early terminated.
At any time before or after consummation of the mergers, the
Antitrust Division, the FTC or any state attorney general could
take any action under the antitrust laws deemed necessary or
desirable in the public interest, including seeking to enjoin
consummation of the mergers or seeking divestiture of particular
assets or businesses of Hanover or Universal. The merger
agreement requires Hanover and Universal to satisfy any
conditions or divestiture requirements imposed upon them unless
the conditions or divestitures would be reasonably likely to
have a material adverse effect on the combined company after the
completion of the mergers.
Foreign
Clearances
Completion of the mergers also may be subject to the antitrust
laws, rules and regulations of foreign governmental authorities.
The mergers may not be completed before receiving foreign
antitrust clearances unless the failure to obtain those
clearances would not have a material adverse effect on the
combined company after completion of the mergers. Hanover and
Universal have determined the jurisdictions in which foreign
competition filings are required and have made the necessary
filings.
Accounting
Treatment (Page 77)
The mergers will be accounted for using the purchase method of
accounting. Although the business combination of Hanover and
Universal is a merger of equals, Hanover has been determined to
be the acquirer for purposes of generally accepted accounting
principles. The purchase price will be allocated to
Universals identifiable assets and liabilities based on
their estimated fair values at the date of the consummation of
the mergers, and any excess of the purchase price over those
fair values will be accounted for as goodwill.
No
Appraisal Rights (Page 77)
Hanover and Universal stockholders will not have appraisal
rights under Delaware law as a result of the mergers.
Material
U.S. Federal Income Tax Consequences of the Mergers
(Page 79)
Hanover and Universal have structured the mergers so that a
holder of Hanover common stock or Universal common stock will
not recognize gain or loss upon the receipt of Holdings common
stock in exchange for Hanover or Universal common stock in the
mergers except to the extent of cash, if any, received in lieu
of a fractional share of Holdings common stock. It is a
condition to the closing of the mergers that Vinson &
Elkins L.L.P. deliver its opinion to Hanover and Baker Botts
L.L.P. deliver its opinion to Universal that for
U.S. federal income tax purposes no gain or loss shall be
recognized by a holder of that companys common stock upon
the transfer of that companys common stock to Holdings in
exchange for Holdings common stock pursuant to the applicable
merger.
This summary does not address tax consequences that may vary
with, or depend upon, individual circumstances. Accordingly, you
should consult a tax advisor to determine the U.S. federal,
state, local and foreign tax consequences to you of the mergers
taking into account your particular circumstances.
12
Summary
of Merger Agreement (Page 81)
The merger agreement is attached as Annex A to this
joint proxy statement/prospectus and governs the terms of the
mergers.
Conditions
to Mergers (Page 93)
Hanovers and Universals obligations to consummate
the mergers are subject to the satisfaction or waiver of a
number of conditions, including:
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adoption of the merger agreement by the stockholders of each of
Hanover and Universal;
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the expiration or early termination of any waiting period
applicable to the consummation of the mergers under the HSR Act
and, except in certain circumstances, the receipt of approval or
expiration of any mandatory waiting periods under applicable
non-U.S. antitrust
laws, which condition has been satisfied;
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the absence of any decree, order or injunction of a
U.S. court of competent jurisdiction that prohibits the
consummation of the mergers;
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|
the receipt by each of Hanover and Universal of a legal opinion
with respect to certain U.S. federal income tax
consequences of the mergers;
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the receipt of required consents and relief from Hanovers
and Universals credit agreements, which have been obtained;
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the parties satisfaction that financing arrangements have
been obtained to allow for the repayment or repurchase of any
indebtedness that may be required to be repaid or repurchased as
a result of the consummation of the mergers; and
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other customary conditions, including the truth and correctness
of the representations and warranties and performance of
covenants by each party, subject to a materiality standard, and
the absence of any occurrence, state of facts or development
that has had or is reasonably likely to have a material adverse
effect.
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No
Solicitation Provisions (Page 90)
The merger agreement contains no solicitation
provisions that prohibit either party from taking any action to
solicit a takeover proposal. The agreement does not, however,
prohibit either party from furnishing information to or
participating in negotiations with a person making a takeover
proposal that such partys board of directors determines is
or is reasonably likely to lead to a superior proposal, if the
failure to do so would be inconsistent with that boards
fiduciary duties to its stockholders.
Termination
of Merger Agreement (Page 95)
The parties may terminate the merger agreement by mutual written
consent. Either party may terminate the merger agreement if:
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the mergers have not been consummated by February 5, 2008,
through no fault of the terminating party;
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the stockholders of Hanover or Universal have held a meeting to
consider the merger agreement but have not voted to adopt the
merger agreement;
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there is a final and nonappealable legal restraint, injunction
or prohibition of the mergers, as long as the terminating party
has complied with certain covenants in the merger agreement and
has used its reasonable best efforts to remove the legal
restraint;
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the other party has breached its representations and warranties
or failed to perform its covenants or agreements in a manner
that would cause the failure of the related closing condition,
unless the breach is cured within 90 days after notice of
the breach; or
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13
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the board of directors of the other party has withdrawn or
adversely modified its recommendation of the merger agreement or
the proposed transactions or proposes to do the same,
recommended a takeover proposal or failed to timely reaffirm its
recommendation to stockholders upon request.
|
Expenses
and Termination Fees (Page 95)
Hanover or Universal will be obligated to pay the other party a
termination fee of $70 million if the merger agreement is
terminated because the board of directors of the non-terminating
party has changed its recommendation of the merger agreement.
Hanover or Universal also will be obligated to pay the other
party a fee of $5 million if there has been a takeover
proposal with respect to the party that becomes obligated to pay
the fee and the merger agreement is then terminated, either
because the mergers have not been completed by February 5,
2008 or because the stockholders of the party that is the
subject of the takeover proposal do not vote in favor of
adoption of the merger agreement. Under those circumstances, the
party that is the subject of the takeover proposal will be
required to pay to the other party an additional
$65 million termination fee if it enters into any
definitive agreement with respect to, or consummates, any
takeover proposal within 365 days after the termination of
the merger agreement.
Comparison
of Stockholder Rights (Page 210)
Hanover, Universal and Holdings are incorporated under the laws
of the State of Delaware. In accordance with the merger
agreement, upon the consummation of the mergers, the holders of
Hanover common stock and Universal common stock will exchange
their respective shares of common stock for Holdings common
stock in accordance with their respective exchange ratios. Your
rights as a stockholder of Holdings will be governed by Delaware
law, Holdings restated certificate of incorporation and
the amended and restated bylaws of Holdings. For a comparison of
the material rights of Hanover stockholders, Universal
stockholders and Holdings stockholders under each companys
organizational documents and the Delaware statutory framework,
please see Comparison of Stockholder Rights
beginning on page 210.
Matters
to be Considered at the Annual Meetings
Hanover
Hanover stockholders will be asked to vote on the following
proposals:
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to adopt the merger agreement;
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to approve the Holdings 2007 Stock Incentive Plan, a copy of
which is attached as Annex D to this joint proxy
statement/prospectus, to be used by Holdings following the
consummation of the mergers;
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to approve the Holdings Employee Stock Purchase Plan, a copy of
which is attached as Annex E to this joint proxy
statement/prospectus, to be used by Holdings following the
consummation of the mergers;
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to elect eleven directors to serve as members of Hanovers
board of directors until the 2008 annual meeting of Hanover
stockholders or until their successors are duly elected and
qualified;
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to ratify the reappointment of PricewaterhouseCoopers LLP as
Hanovers independent registered public accounting firm for
fiscal year 2007; and
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|
to transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
|
If the merger agreement is adopted and the mergers are
consummated, the Hanover directors elected pursuant to the
proposal in the fourth bullet above will serve only until the
mergers are consummated. Also, the proposals described in the
second and third bullets will be implemented only if the merger
agreement is adopted.
14
Universal
Universal stockholders will be asked to vote on the following
proposals:
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to adopt the merger agreement;
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to approve the Holdings 2007 Stock Incentive Plan, a copy of
which is attached as Annex D to this joint proxy
statement/prospectus, to be used by Holdings following the
consummation of the mergers;
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to approve the Holdings Employee Stock Purchase Plan, a copy of
which is attached as Annex E to this joint proxy
statement/prospectus, to be used by Holdings following the
consummation of the mergers;
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to re-elect Thomas C. Case, Janet F. Clark and Uriel E. Dutton
to service as Class A members of Universals board of
directors until the 2010 annual meeting of Universal
stockholders or until their successors are duly elected and
qualified;
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to ratify the reappointment of Deloitte & Touche LLP
as Universals independent registered public accounting
firm for fiscal year 2007; and
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to transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
|
If the merger agreement is adopted and the mergers are
consummated, the Universal directors elected pursuant to the
proposal in the fourth bullet above will serve only until the
mergers are consummated. Also, the proposals described in the
second and third bullets will be implemented only if the merger
agreement is adopted.
15
Comparative
Stock Prices and Dividends
Shares of Hanover common stock and Universal common stock are
listed for trading on the New York Stock Exchange. The following
table sets forth the closing sales prices per share of Hanover
common stock, on an actual and adjusted basis, and Universal
common stock on the New York Stock Exchange on the following
dates:
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February 2, 2007, the last full trading day prior to the
public announcement of the mergers, and
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July 5, 2007, the last trading day for which this
information could be calculated prior to the filing of this
joint proxy statement/prospectus.
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Universal
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Hanover
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Hanover
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Universal
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Equivalent
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Common Stock
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Adjusted(1)
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Common Stock
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per Share(2)
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February 2, 2007
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$
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19.40
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$
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59.69
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$
|
61.10
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$
|
61.10
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July 5, 2007
|
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$
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26.50
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$
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81.54
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$
|
81.73
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$
|
81.73
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(1) |
|
The adjusted per share data for Hanover common stock has been
determined by dividing the market price of a share of Hanover
common stock on each of the dates by 0.325 and is presented for
comparative purposes. As a result of the Hanover merger, each
holder of shares of Hanover common stock will have the right to
receive 0.325 shares of Holdings common stock in exchange
for each share of Hanover common stock the holder owns. The
Hanover Adjusted value does not represent the value
of the consideration that Hanover stockholders will receive per
share as a result of the Hanover merger. |
|
(2) |
|
The Universal equivalent per share price is the same as the
Universal common stock price because, as a result of the
Universal merger, each holder of shares of Universal common
stock will have the right to receive one share of Holdings
common stock in exchange for each share of Universal common
stock the holder owns. |
Neither Hanover nor Universal has ever declared or paid any cash
dividends on its common stock. The board of directors of
Holdings will determine the dividend policy of Holdings after
consummation of the mergers.
16
Selected
Historical Financial Data
Hanover and Universal are providing you with the following
financial information to assist you in your analysis of the
financial aspects of the mergers. This information is only a
summary that you should read together with the historical
audited consolidated financial statements of Hanover and
Universal and the related notes, as well as the sections titled
Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in the
annual reports on
Form 10-K
and quarterly reports on Form 10-Q for the three months
ended March 31, 2007 that Hanover and Universal previously
have filed with the SEC and that are incorporated by reference
into this joint proxy statement/prospectus. Historical results
are not necessarily indicative of any results to be expected in
the future. See Where You Can Find More Information
beginning on page 219.
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Hanover Compressor Company
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Three Months Ended March 31,
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Twelve Months Ended December 31,
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2007
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2006
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2006
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2005
|
|
|
2004
|
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2003
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|
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2002
|
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(In thousands, except per share data)
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Statement of Operations
Data:
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Revenue
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$
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460,213
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$
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336,730
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$
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1,605,232
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$
|
1,349,572
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|
|
$
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1,165,402
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|
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$
|
1,047,978
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|
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$
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991,287
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Equity in income of
non-consolidated affiliates
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|
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5,683
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|
|
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5,848
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|
|
|
19,430
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|
|
|
21,466
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|
|
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19,780
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|
|
|
23,014
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|
|
|
18,554
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Gain on sale of business and other
income
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|
|
7,332
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|
|
|
30,219
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|
|
|
46,001
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|
|
|
4,551
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|
|
|
3,413
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|
|
|
4,088
|
|
|
|
3,600
|
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Cost of sales (excluding
depreciation and amortization)
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|
|
303,810
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|
|
|
216,141
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|
|
|
1,049,701
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|
|
|
867,483
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|
|
|
731,545
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|
|
|
643,680
|
|
|
|
581,899
|
|
Depreciation and amortization
|
|
|
50,896
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|
|
|
41,968
|
|
|
|
181,416
|
|
|
|
182,681
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|
|
|
175,308
|
|
|
|
169,164
|
|
|
|
148,141
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Selling, general and administrative
expenses
|
|
|
51,794
|
|
|
|
48,055
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|
|
|
204,247
|
|
|
|
182,198
|
|
|
|
173,066
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|
|
|
159,870
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|
|
|
150,863
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Interest expense(1)
|
|
|
26,865
|
|
|
|
31,640
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|
|
|
118,006
|
|
|
|
136,927
|
|
|
|
146,978
|
|
|
|
89,175
|
|
|
|
43,352
|
|
Operating lease expense(1)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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43,139
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|
|
|
90,074
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Debt extinguishment costs
|
|
|
|
|
|
|
5,902
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|
|
|
5,902
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|
|
|
7,318
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|
|
|
|
|
|
|
|
|
|
|
|
|
Securities litigation settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,613
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)
|
|
|
42,991
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|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,466
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|
|
|
52,103
|
|
Provision for (benefit from) income
tax
|
|
|
14,445
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|
|
|
8,447
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|
|
|
28,782
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|
|
|
27,714
|
|
|
|
24,767
|
|
|
|
3,629
|
|
|
|
(17,114
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)
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Income (loss) from continuing
operations
|
|
|
25,402
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|
|
|
22,141
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|
|
|
85,722
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|
|
|
(37,148
|
)
|
|
|
(54,091
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)
|
|
|
(117,488
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)
|
|
|
(80,211
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)
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Income (loss) from discontinued
operations, net of tax
|
|
|
|
|
|
|
(92
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)
|
|
|
431
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|
|
|
(869
|
)
|
|
|
10,085
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|
|
|
(3,861
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)
|
|
|
(35,857
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)
|
Cumulative effect of accounting
change, net of tax
|
|
|
|
|
|
|
370
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|
|
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370
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|
|
|
|
|
|
|
|
|
|
|
(86,910
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)
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|
|
|
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Net income (loss)
|
|
|
25,402
|
|
|
|
22,419
|
|
|
|
86,523
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|
|
|
(38,017
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)
|
|
|
(44,006
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)
|
|
|
(208,259
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)
|
|
|
(116,068
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)
|
Earnings (loss) per common share
from continuing operations:
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|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|
|
$
|
0.85
|
|
|
$
|
(0.41
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(1.45
|
)
|
|
$
|
(1.01
|
)
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.22
|
|
|
$
|
0.80
|
|
|
$
|
(0.41
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(1.45
|
)
|
|
$
|
(1.01
|
)
|
Weighted average common stock
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
103,405
|
|
|
|
100,759
|
|
|
|
101,178
|
|
|
|
91,556
|
|
|
|
84,792
|
|
|
|
81,123
|
|
|
|
79,500
|
|
Diluted
|
|
|
117,619
|
|
|
|
111,428
|
|
|
|
112,035
|
|
|
|
91,556
|
|
|
|
84,792
|
|
|
|
81,123
|
|
|
|
79,500
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
5,234
|
|
|
$
|
(77,508
|
)
|
|
$
|
209,089
|
|
|
$
|
122,487
|
|
|
$
|
131,837
|
|
|
$
|
164,735
|
|
|
$
|
195,717
|
|
Investing activities
|
|
|
(64,043
|
)
|
|
|
(1,315
|
)
|
|
|
(168,168
|
)
|
|
|
(104,027
|
)
|
|
|
11,129
|
|
|
|
(43,470
|
)
|
|
|
(193,703
|
)
|
Financing activities
|
|
|
42,325
|
|
|
|
79,767
|
|
|
|
(18,134
|
)
|
|
|
(6,890
|
)
|
|
|
(162,350
|
)
|
|
|
(84,457
|
)
|
|
|
(4,232
|
)
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
56,935
|
|
|
$
|
49,157
|
|
|
$
|
73,286
|
|
|
$
|
48,233
|
|
|
$
|
38,076
|
|
|
$
|
56,619
|
|
|
$
|
19,011
|
|
Working capital(2)
|
|
|
202,092
|
|
|
|
386,803
|
|
|
|
326,565
|
|
|
|
351,694
|
|
|
|
301,893
|
|
|
|
279,050
|
|
|
|
218,398
|
|
Total assets
|
|
|
3,089,252
|
|
|
|
2,930,496
|
|
|
|
3,070,889
|
|
|
|
2,862,996
|
|
|
|
2,771,229
|
|
|
|
2,942,274
|
|
|
|
2,176,983
|
|
Total debt and convertible
preferred securities
|
|
|
1,365,669
|
|
|
|
1,478,442
|
|
|
|
1,369,931
|
|
|
|
1,478,948
|
|
|
|
1,643,616
|
|
|
|
1,782,823
|
|
|
|
641,194
|
|
Stockholders equity
|
|
|
1,088,695
|
|
|
|
935,990
|
|
|
|
1,014,282
|
|
|
|
909,782
|
|
|
|
760,055
|
|
|
|
753,488
|
|
|
|
927,626
|
|
|
|
|
(1) |
|
Operating lease expense related to the operating lease
facilities has been recognized as interest expense subsequent to
consolidation of the operating lease facilities on July 1,
2003. |
|
(2) |
|
Working capital is defined as current assets minus current
liabilities. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal Compression Holdings, Inc.
|
|
|
|
Three Months Ended
|
|
|
Twelve Months Ended
|
|
|
Nine Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005(1)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
239,363
|
|
|
$
|
229,068
|
|
|
$
|
947,707
|
|
|
$
|
613,647
|
|
|
$
|
763,070
|
|
|
$
|
688,786
|
|
|
$
|
625,218
|
|
Cost of sales (excluding
depreciation and amortization)
|
|
|
133,044
|
|
|
|
127,223
|
|
|
|
519,056
|
|
|
|
342,312
|
|
|
|
452,816
|
|
|
|
399,305
|
|
|
|
357,250
|
|
Depreciation and amortization
|
|
|
34,863
|
|
|
|
29,799
|
|
|
|
122,701
|
|
|
|
79,899
|
|
|
|
93,797
|
|
|
|
85,650
|
|
|
|
63,706
|
|
Selling, general and administrative
expenses
|
|
|
35,741
|
|
|
|
26,581
|
|
|
|
118,762
|
|
|
|
65,269
|
|
|
|
75,756
|
|
|
|
67,516
|
|
|
|
67,944
|
|
Interest expense, net(2)
|
|
|
14,039
|
|
|
|
14,057
|
|
|
|
57,349
|
|
|
|
40,221
|
|
|
|
64,188
|
|
|
|
73,475
|
|
|
|
36,421
|
|
Operating lease expense(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,071
|
|
Debt extinguishment costs
|
|
|
|
|
|
|
|
|
|
|
1,125
|
|
|
|
|
|
|
|
26,543
|
|
|
|
14,903
|
|
|
|
|
|
Provision for income tax
|
|
|
7,079
|
|
|
|
11,875
|
|
|
|
42,277
|
|
|
|
31,053
|
|
|
|
17,213
|
|
|
|
17,741
|
|
|
|
20,975
|
|
Income from continuing operations
and net income
|
|
|
14,324
|
|
|
|
20,875
|
|
|
|
87,656
|
|
|
|
55,369
|
|
|
|
33,610
|
|
|
|
30,787
|
|
|
|
33,518
|
|
Earnings per common share from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.70
|
|
|
$
|
2.93
|
|
|
$
|
1.74
|
|
|
$
|
1.07
|
|
|
$
|
1.00
|
|
|
$
|
1.09
|
|
Diluted
|
|
$
|
0.46
|
|
|
$
|
0.68
|
|
|
$
|
2.82
|
|
|
$
|
1.69
|
|
|
$
|
1.04
|
|
|
$
|
0.98
|
|
|
$
|
1.08
|
|
Weighted average common stock
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,820
|
|
|
|
29,629
|
|
|
|
29,911
|
|
|
|
31,773
|
|
|
|
31,392
|
|
|
|
30,848
|
|
|
|
30,665
|
|
Diluted
|
|
|
30,881
|
|
|
|
30,700
|
|
|
|
31,032
|
|
|
|
32,758
|
|
|
|
32,224
|
|
|
|
31,283
|
|
|
|
30,928
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
42,547
|
|
|
$
|
64,594
|
|
|
$
|
212,211
|
|
|
$
|
144,873
|
|
|
$
|
134,056
|
|
|
$
|
165,248
|
|
|
$
|
188,591
|
|
Investing activities
|
|
|
(72,862
|
)
|
|
|
(39,960
|
)
|
|
|
(213,187
|
)
|
|
|
(110,464
|
)
|
|
|
(181,476
|
)
|
|
|
(46,850
|
)
|
|
|
(107,704
|
)
|
Financing activities
|
|
|
25,839
|
|
|
|
(21,927
|
)
|
|
|
8,380
|
|
|
|
(34,734
|
)
|
|
|
(35,589
|
)
|
|
|
(69,732
|
)
|
|
|
(13,849
|
)
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
42,895
|
|
|
$
|
42,232
|
|
|
$
|
46,997
|
|
|
$
|
39,262
|
|
|
$
|
38,723
|
|
|
$
|
121,189
|
|
|
$
|
71,693
|
|
Working capital(3)
|
|
|
184,367
|
|
|
|
131,217
|
|
|
|
184,979
|
|
|
|
144,714
|
|
|
|
115,836
|
|
|
|
174,599
|
|
|
|
158,405
|
|
Total assets
|
|
|
2,434,499
|
|
|
|
2,137,856
|
|
|
|
2,342,031
|
|
|
|
2,095,295
|
|
|
|
2,022,758
|
|
|
|
1,972,451
|
|
|
|
1,953,887
|
|
Total debt(4)
|
|
|
856,582
|
|
|
|
898,050
|
|
|
|
830,554
|
|
|
|
923,341
|
|
|
|
858,096
|
|
|
|
884,442
|
|
|
|
945,155
|
|
Stockholders equity
|
|
|
935,856
|
|
|
|
861,278
|
|
|
|
916,430
|
|
|
|
831,312
|
|
|
|
861,672
|
|
|
|
799,235
|
|
|
|
744,451
|
|
|
|
|
(1) |
|
Effective in 2005, Universals Board of Directors approved
a change to its fiscal year end from March 31, to
December 31. |
(2) |
|
Operating lease expense related to the operating lease
facilities has been recognized as interest expense subsequent to
consolidation of the operating lease facilities on
December 31, 2002. |
|
(3) |
|
Working capital is defined as current assets minus current
liabilities. |
|
(4) |
|
Includes capital lease obligations. |
19
Selected
Unaudited Pro Forma Condensed Combined Financial Data
The following selected unaudited pro forma condensed combined
financial data gives effect to the mergers. The unaudited pro
forma statement of operations data presented below is based on
the assumption that the mergers occurred as of January 1,
2006 and reflects only adjustments directly related to the
mergers. The unaudited pro forma balance sheet data is prepared
as if the mergers occurred on March 31, 2007. The pro forma
adjustments are based on available information and assumptions
that each companys management believes are reasonable and
in accordance with SEC requirements. The selected unaudited pro
forma condensed combined financial data are presented for
illustrative purposes only and should not be read for any other
purpose. You should not rely on this information as being
indicative of the historical results that would have been
achieved had the companies been combined for the period
presented or the future results that the combined company will
experience after the mergers. The selected unaudited pro forma
condensed combined financial data:
|
|
|
|
|
have been derived from and should be read in conjunction with
the Exterran Holdings, Inc. Unaudited Pro Forma Condensed
Combined Financial Information and the related notes
beginning on page 199 of this joint proxy
statement/prospectus; and
|
|
|
|
|
|
should be read in conjunction with the historical consolidated
financial statements of Hanover and Universal incorporated by
reference into this joint proxy statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
Revenue and other income
|
|
$
|
720,343
|
|
|
$
|
2,640,284
|
|
Cost of sales (excluding
depreciation and amortization)
|
|
|
445,186
|
|
|
|
1,599,700
|
|
Depreciation and amortization
|
|
|
100,261
|
|
|
|
351,105
|
|
Selling, general and
administrative expenses
|
|
|
84,736
|
|
|
|
312,658
|
|
Interest expense
|
|
|
41,632
|
|
|
|
178,268
|
|
Debt extinguishment costs
|
|
|
|
|
|
|
7,027
|
|
Provision for income tax
|
|
|
17,222
|
|
|
|
53,886
|
|
Income from continuing operations
|
|
|
31,737
|
|
|
|
141,486
|
|
Earnings per common share from
continuing operations
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
|
$
|
2.25
|
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
2.17
|
|
Weighted average common stock
outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
63,427
|
|
|
|
62,794
|
|
Diluted
|
|
|
69,108
|
|
|
|
67,443
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
March 31, 2007
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
Cash
|
|
$
|
99,830
|
|
Working capital
|
|
|
(4,277
|
)
|
Total assets
|
|
|
6,830,125
|
|
Debt
|
|
|
2,270,744
|
|
Stockholders equity
|
|
|
3,151,012
|
|
20
Unaudited
Comparative Per Share Data
The following selected comparative per share information of
Hanover and Universal as of and for the three months ended
March 31, 2007 was derived from the companies
unaudited financial statements and as of and for the twelve
months ended December 31, 2006 was derived from the
companies audited financial statements. You should read
this information along with Hanovers and Universals
historical consolidated financial statements and the
accompanying notes for that period included in the documents
described under Where You Can Find More Information
beginning on page 219. You should also read the unaudited
pro forma condensed combined financial information and
accompanying discussion and notes included in this joint proxy
statement/prospectus under Exterran Holdings, Inc.
Unaudited Pro Forma Condensed Combined Financial
Information beginning on page 199.
|
|
|
|
|
|
|
|
|
|
|
As of or for the
|
|
|
As of or for the
|
|
|
|
Three Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
Hanover
Historical:
|
|
|
|
|
|
|
|
|
Earnings per share (from
continuing operations):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
0.85
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.80
|
|
Dividends declared per share of
common stock
|
|
$
|
|
|
|
$
|
|
|
Book value per share of common
stock
|
|
$
|
10.25
|
|
|
$
|
9.81
|
|
Hanover
Adjusted(1):
|
|
|
|
|
|
|
|
|
Earnings per share (from
continuing operations):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.77
|
|
|
$
|
2.62
|
|
Diluted
|
|
$
|
0.71
|
|
|
$
|
2.46
|
|
Dividends declared per share of
common stock
|
|
$
|
|
|
|
$
|
|
|
Book value per share of common
stock
|
|
$
|
31.54
|
|
|
$
|
30.18
|
|
Universal
Historical:
|
|
|
|
|
|
|
|
|
Earnings per share (from
continuing operations):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
2.93
|
|
Diluted
|
|
$
|
0.46
|
|
|
$
|
2.82
|
|
Dividends declared per share of
common stock
|
|
$
|
|
|
|
$
|
|
|
Book value per share of common
stock
|
|
$
|
30.90
|
|
|
$
|
30.42
|
|
Holdings unaudited pro forma
combined amounts(2):
|
|
|
|
|
|
|
|
|
Earnings per share (from
continuing operations):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.50
|
|
|
$
|
2.25
|
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
2.17
|
|
Dividends declared per share of
common stock
|
|
$
|
|
|
|
$
|
|
|
Book value per share of common
stock
|
|
$
|
48.61
|
|
|
$
|
48.20
|
|
|
|
|
(1) |
|
The Hanover Adjusted amounts are equal to the
corresponding Hanover historical amounts divided by 0.325. As a
result of the Hanover merger, each holder of shares of Hanover
common stock will have the right to receive 0.325 shares of
Holdings common stock in exchange for each share of Hanover
common stock the holder owns. |
|
(2) |
|
The Universal per share equivalent amounts based on the
combination of Hanover and Universal are the same as the
Holdings unaudited pro forma combined amounts because, as a
result of the Universal merger, each holder of shares of
Universal common stock will have the right to receive one share
of Holdings common stock in exchange for each share of Universal
common stock the holder owns. |
21
RISK
FACTORS
In addition to the other information included and
incorporated by reference in this joint proxy
statement/prospectus, Hanover and Universal stockholders should
carefully consider the matters described below to determine
whether to adopt the merger agreement and thereby approve the
mergers.
Risks
Relating to the Mergers
The
value of the shares of Holdings common stock you receive upon
the consummation of the mergers may be less than the value of
your shares of Hanover common stock or Universal common stock as
of the date of the merger agreement, the date of this joint
proxy statement/prospectus or the date of the annual
meetings.
The exchange ratios in the Hanover merger and the Universal
merger are fixed and will not be adjusted in the event of any
change in the stock prices of Hanover or Universal prior to the
mergers. There may be a significant amount of time between the
dates when the stockholders of each of Hanover and Universal
vote on the merger agreement at the annual meeting of each
company and the date when the mergers are completed. The
absolute and relative prices of shares of Hanover common stock
and Universal common stock may vary significantly between the
date of this joint proxy statement/prospectus, the date of the
annual meetings and the date of the completion of the mergers.
These variations may be caused by, among other things, changes
in the businesses, operations, results or prospects of Hanover
or Universal, market expectations of the likelihood that the
mergers will be completed and the timing of completion, the
prospects of post-merger operations, general market and economic
conditions and other factors. In addition, it is impossible to
predict accurately the market price of the Holdings common stock
to be received by Hanover and Universal stockholders after the
completion of the mergers. Accordingly, the prices of Universal
common stock and Hanover common stock on the date of this joint
proxy statement/prospectus and on the date of the annual
meetings may not be indicative of their prices immediately prior
to completion of the mergers and the price of Holdings common
stock after the mergers are completed.
The
anticipated benefits of combining the companies may not be
realized.
Hanover and Universal entered into the merger agreement with the
expectation that the mergers would result in various benefits,
including, among other things, annual synergies and cost savings
of approximately $50 million and other operating
efficiencies that cannot be quantified at this time. We may not
achieve these benefits at the levels expected or at all. If we
fail to achieve these expected benefits, the results of
operations and the enterprise value of the combined company may
be adversely affected.
The
integration of Hanover and Universal following the mergers will
present significant challenges that may reduce the anticipated
potential benefits of the mergers.
Hanover and Universal will face significant challenges in
consolidating functions and integrating their organizations,
procedures and operations in a timely and efficient manner, as
well as retaining key personnel. The integration of Hanover and
Universal will be complex and time-consuming due to the size and
complexity of each organization. The principal challenges will
include the following:
|
|
|
|
|
integrating Hanovers and Universals existing
businesses;
|
|
|
|
combining diverse product and service offerings and sales and
marketing approaches;
|
|
|
|
preserving customer, supplier and other important relationships
and resolving potential conflicts that may arise as a result of
the mergers;
|
|
|
|
consolidating and integrating duplicative facilities and
operations, including back-office systems such as Hanovers
and Universals different enterprise resource planning
(ERP) systems; and
|
|
|
|
addressing differences in business cultures, preserving employee
morale and retaining key employees, while maintaining focus on
providing consistent, high quality customer service and meeting
the operational and financial goals of the combined company.
|
22
The respective managements of Hanover and Universal will have to
dedicate substantial effort to integrating the businesses. These
efforts could divert managements focus and resources from
other
day-to-day
tasks, corporate initiatives or strategic opportunities during
the integration process.
Hanover
and Universal will incur significant transaction and
merger-related integration costs in connection with the
mergers.
Hanover and Universal expect to pay transaction costs of
approximately $40 million to $45 million in the
aggregate, including payments of approximately $10 million
made to some of their employees pursuant to change of control
agreements. These transaction fees include investment banking,
legal and accounting fees and expenses, SEC filing fees,
printing expenses, mailing expenses and other related charges.
These amounts are preliminary estimates that are subject to
change. A portion of the transaction costs will be incurred
regardless of whether the mergers are consummated. Hanover and
Universal will each pay its own transaction costs, except that
they will share equally certain filing, printing and other costs
and expenses.
Hanover and Universal currently estimate integration costs
associated with the mergers to be approximately $35 million
to $40 million. Hanover and Universal are in the early
stages of assessing the magnitude of these costs, and,
therefore, these estimates may change substantially and
additional unanticipated costs may be incurred in the
integration of the businesses of Hanover and Universal.
As a
result of the mergers, the repurchase of a significant portion
of Hanovers and Universals outstanding debt may be
required and additional funds to finance the repurchase may not
be available on terms favorable to Holdings, if at
all.
Hanover has indebtedness related to its outstanding compression
equipment lease obligations, the aggregate principal amount of
which was approximately $383.0 million in notes payable
plus an additional amount of $11.9 million in related
minority interest obligations as of March 31, 2007. As a
result of the mergers, the equipment trusts that issued the
indebtedness will be required to make an offer (with funds
supplied by Hanover) to repurchase the equipment lease notes and
the related minority interest obligations at a price equal to
101% of the outstanding principal amount, plus accrued and
unpaid interest to the date of purchase, unless the obligations
of the equipment trusts have been earlier satisfied and
discharged. For more information regarding these repurchase
obligations, please read The Mergers Change in
Control Provision in Hanovers Equipment Leases
beginning on page 78.
Hanover and Universal expect that Holdings will refinance any
required repurchase of the equipment lease obligations. If
Holdings is unable to obtain necessary financing on favorable
terms, the earnings and cash flow of Holdings could be
materially adversely affected. If Holdings is unable to obtain
the necessary financing at all, the equipment trusts would be in
default under the indenture relating to the equipment lease
obligations, which would cause defaults under Hanovers
other financing arrangements.
While
the mergers are pending, Hanover and Universal will be subject
to business uncertainties and contractual restrictions that
could adversely affect their businesses.
Uncertainty about the effect of the mergers on employees,
customers and suppliers may have an adverse effect on Hanover
and Universal and, consequently, on the combined company. These
uncertainties may impair Hanovers and Universals
ability to attract, retain and motivate key personnel until the
mergers are consummated and for a period of time thereafter, and
could cause customers, suppliers and others who deal with
Hanover and Universal to seek to change existing business
relationships with Hanover and Universal. Employee retention may
be particularly challenging during the pendency of the mergers
because employees may experience uncertainty about their future
roles with the combined company. If, despite Hanovers and
Universals retention efforts, key employees depart because
of issues relating to the uncertainty and difficulty of
integration or a desire not to remain with the combined company,
the combined companys business could be seriously harmed.
In addition, the merger agreement restricts Hanover and
Universal, without the other partys consent and subject to
certain exceptions, from making certain acquisitions and taking
other specified actions until the mergers occur or the merger
agreement terminates. These restrictions may prevent Hanover
23
and Universal from pursuing otherwise attractive business
opportunities and making other changes to their businesses that
may arise prior to completion of the mergers or termination of
the merger agreement.
Failure
to complete the mergers could negatively impact the stock prices
and the future business and financial results of Hanover and
Universal because of, among other things, the disruption that
would occur as a result of uncertainties relating to a failure
to complete the mergers.
The stockholders of both Hanover and Universal may not approve
the mergers. If the mergers are not completed for any reason,
Hanover and Universal could be subject to several risks,
including the following:
|
|
|
|
|
being required to pay the other company a termination fee of up
to $70 million in certain circumstances, as described under
The Merger Agreement Expenses and Termination
Fees beginning on page 95;
|
|
|
|
having had the focus of management of each of the companies
directed toward the mergers and integration planning instead of
on each companys core business and other opportunities
that could have been beneficial to the companies; and
|
|
|
|
incurring substantial transaction costs related to the mergers.
|
In addition, Hanover and Universal would not realize any of the
expected benefits of having completed the mergers.
If the mergers are not completed, the price of Hanover or
Universal common stock may decline to the extent that the
current market price of that stock reflects a market assumption
that the mergers will be completed and that the related benefits
and synergies will be realized, or as a result of the
markets perceptions that the mergers were not consummated
due to an adverse change in Hanovers or Universals
business. In addition, Hanovers business and
Universals business may be harmed, and the prices of their
stock may decline as a result, to the extent that customers,
suppliers and others believe that the companies cannot compete
in the marketplace as effectively without the mergers or
otherwise remain uncertain about the companies future
prospects in the absence of the mergers. Similarly, current and
prospective employees of Hanover and Universal may experience
uncertainty about their future roles with the resulting company
and choose to pursue other opportunities, which could adversely
affect Hanover or Universal, as applicable, if the mergers are
not completed. The realization of any of these risks may
materially adversely affect the business, financial results,
financial condition and stock prices of Hanover and Universal.
The
merger agreement limits Hanovers and Universals
ability to pursue an alternative acquisition proposal and
requires Hanover or Universal to pay a termination fee of up to
$70 million if it does.
The merger agreement prohibits Hanover and Universal from
soliciting, initiating or encouraging alternative merger or
acquisition proposals with any third party. The merger agreement
also provides for the payment by Hanover or Universal of a
termination fee of up to $70 million if the merger
agreement is terminated in certain circumstances in connection
with a competing acquisition proposal or the withdrawal by the
board of directors of that company of its recommendation that
the stockholders of that company vote for the adoption of the
merger agreement, as the case may be. See The Merger
Agreement Covenants and Agreements No
Solicitation beginning on page 90.
These provisions limit Universals and Hanovers
ability to pursue offers from third parties that could result in
greater value to Hanovers or Universals
stockholders. The obligation to make the termination fee payment
also may discourage a third party from pursuing an alternative
acquisition proposal.
Some
of the directors and executive officers of Hanover and Universal
have interests in the mergers that are different from the
interests of Hanovers and Universals
stockholders.
When considering the recommendation of the Hanover board of
directors with respect to the mergers, Hanover stockholders
should be aware that some directors and executive officers of
Hanover have interests in the mergers that are different from,
or in addition to, the interests of the stockholders of Hanover.
These
24
interests include (1) their designation as Holdings
directors or executive officers, (2) the fact that the
completion of the transaction will result in the acceleration of
vesting of long-term incentive awards held by directors and
executive officers and (3) the fact that certain executive
officers of Hanover have entered into change of control
agreements with Hanover that will entitle them to cash payments
and other benefits if the mergers are completed and their
employment is terminated or if the executive resigns for good
reason, as defined in the agreements.
When considering the recommendation of the Universal board of
directors with respect to the mergers, Universal stockholders
should be aware that some directors and executive officers of
Universal have interests in the mergers that are different from,
or in addition to, the interests of the stockholders of
Universal. These interests include (1) their designation as
Holdings directors or executive officers, (2) the fact that
the completion of the transaction will result in the
acceleration of vesting of equity-based awards held by directors
and executive officers and (3) the fact that certain
executive officers of Universal have entered into change of
control agreements with Universal that will entitle them to cash
payments and other benefits if the mergers are completed and
their employment is terminated or if the executive terminates
his employment for good reason, as defined in the agreements.
Stockholders should consider these interests in conjunction with
the recommendation of the directors of Hanover and Universal of
approval of the mergers. These interests have been described
more fully in The Mergers Interests of Hanover
and Universal Directors and Executive Officers in the
Mergers beginning on page 65.
Risks
Relating to the Businesses of the Combined Company
A
substantial portion of Holdings future cash flows may be
used to service its indebtedness, and Holdings ability to
generate cash will depend on many factors beyond its
control.
As of March 31, 2007, Hanover and Universal had
approximately $2.2 billion in combined outstanding
indebtedness. After the consummation of the mergers, factors
beyond the control of Holdings will continue to affect its
ability to make payments on or refinancings of its outstanding
indebtedness. These factors include those discussed elsewhere in
these Risk Factors and those listed in the
Cautionary Information Regarding Forward-Looking
Statements section of this joint proxy
statement/prospectus beginning on pages 22 and 33,
respectively. Further, the ability of Holdings to fund working
capital and capital expenditures will also depend on its ability
to generate cash. If, in the future, sufficient cash is not
generated from Holdings operations to meet its debt
service obligations, Holdings may need to reduce or delay
funding for capital investment, operations or other purposes.
Holdings
may be vulnerable to interest rate increases due to its floating
rate debt obligations.
As of March 31, 2007, after taking into consideration
interest rate swaps, Hanover and Universal had approximately
$472 million of combined outstanding indebtedness subject
to interest at floating rates. Changes in economic conditions
outside of Holdings control could result in higher
interest rates, thereby increasing Holdings interest
expense and reducing its funds available for capital investment,
operations or other purposes.
Hanovers
and Universals indebtedness imposes restrictions on them
that will affect Holdings ability to successfully operate
its business.
Following the consummation of the mergers, the bank credit
facilities and other indebtedness of Hanover and Universal are
expected to remain outstanding. These bank credit facilities and
the agreements governing certain of this indebtedness include
covenants that, among other things, will restrict Holdings
ability to:
|
|
|
|
|
borrow money;
|
|
|
|
create liens;
|
|
|
|
make investments;
|
25
|
|
|
|
|
declare dividends or make certain distributions;
|
|
|
|
sell or dispose of property; or
|
|
|
|
merge into or consolidate with any third party or sell or
transfer all or substantially all of its property.
|
These bank credit facilities and certain other agreements also
will require Holdings to maintain various financial ratios. Such
covenants will restrict Holdings ability to expand or to
pursue its business strategies. Holdings ability to comply
with these and any other provisions of such agreements will be
affected by changes in its operating and financial performance,
changes in business conditions or results of operations, adverse
regulatory developments or other events beyond its control. The
breach of any of these covenants could result in a default,
which could cause Holdings indebtedness to become due and
payable. If any of Holdings indebtedness were to be
accelerated, it may not be able to repay or refinance it.
A
reduction in oil or natural gas prices, or instability in
U.S. or global energy markets, could adversely affect
Holdings business.
Following the consummation of the mergers, Holdings
results of operations will depend upon the level of activity in
the global energy market, including natural gas development,
production, processing and transportation. Oil and natural gas
prices and the level of drilling and exploration activity can be
volatile. For example, oil and natural gas exploration and
development activity and the number of well completions
typically decline when there is a significant reduction in oil
and natural gas prices or significant instability in energy
markets. As a result, the demand for Holdings gas
compression services and oil and gas production and processing
equipment would be adversely affected. Any future decline in oil
and natural gas prices could have a material adverse effect on
the business, consolidated financial condition, results of
operations and cash flows of Holdings.
Erosion of the financial condition of customers of Holdings
following the consummation of the mergers could also have an
adverse effect on its business. During times when the oil or
natural gas markets weaken, the likelihood of the erosion of the
financial condition of customers increases. If and to the extent
the financial condition of Holdings customers declines,
those customers could seek to preserve capital by canceling any
month-to-month
natural gas compression contracts, canceling or delaying
scheduled maintenance of their existing gas compression and oil
and gas production and processing equipment or determining not
to enter into any new natural gas compression service contracts
or purchase new gas compression and oil and gas production and
processing equipment, thereby reducing demand for Holdings
products and services. The reduced demand for Holdings
services following the consummation of the mergers as described
above could adversely affect the business, financial condition
and operations results of Holdings. In addition, in the event of
the financial failure of a customer, Holdings could experience a
loss associated with the unsecured portion of any of its
outstanding accounts receivable.
There
are many risks associated with conducting operations in
international markets.
Following the consummation of the mergers, Holdings will
continue to operate in many geographic markets outside the
United States. For the three months ended March 31, 2007,
Hanover and Universal derived 48.9% and 30.8%, respectively, of
their revenues from international operations. Changes in local
economic or political conditions, particularly in Latin America,
could have a material adverse effect on the business,
consolidated financial condition, results of operations and cash
flows of the combined company. Additional risks inherent in
Holdings international business activities following the
consummation of the mergers include the following:
|
|
|
|
|
difficulties in managing international operations, including the
ability of Holdings to timely and cost effectively execute
projects;
|
|
|
|
training and retaining qualified personnel in international
markets;
|
|
|
|
inconsistent product regulation or sudden policy changes by
foreign agencies or governments;
|
|
|
|
the burden of complying with multiple and potentially
conflicting laws;
|
26
|
|
|
|
|
tariffs and other trade barriers that may restrict the ability
of Holdings to enter new markets;
|
|
|
|
governmental actions that result in the deprivation of contract
rights and other difficulties in enforcing contractual
obligations;
|
|
|
|
foreign exchange rate risks;
|
|
|
|
difficulty in collecting international accounts receivable;
|
|
|
|
potentially longer payment cycles;
|
|
|
|
changes in political and economic conditions in the countries in
which Holdings will operate, including the nationalization of
energy related assets, civil uprisings, riots, kidnappings and
terrorist acts, particularly with respect to operations in
Nigeria and Venezuela;
|
|
|
|
potentially adverse tax consequences;
|
|
|
|
restrictions on repatriation of earnings or expropriation of
property without fair compensation;
|
|
|
|
the geographic, time zone, language and cultural differences
among personnel in different areas of the world; and
|
|
|
|
difficulties in establishing new international offices and risks
inherent in establishing new relationships in foreign countries.
|
Following the consummation of the mergers, the combined company
plans to expand its business into international markets where
Universal and Hanover currently do not conduct business. The
risks inherent in establishing new business ventures, especially
in international markets where local customs, laws and business
procedures present special challenges, may affect Holdings
ability to be successful in these ventures or avoid losses that
could have a material adverse effect on its business, financial
condition, results of operations and cash flows.
There
are risks associated with the companies operations in
Nigeria. Local unrest and violence in Nigeria has adversely
affected Hanovers historical financial results and could
result in possible impairment and write-downs by the combined
company of its assets in Nigeria if the political situation in
Nigeria does not improve.
The companies operations in Nigeria are subject to
numerous risks and uncertainties associated with operating in
Nigeria. Such risks include, among other things, political,
social and economic instability, civil uprisings, riots,
terrorism, kidnapping, the taking of property without fair
compensation and governmental actions that may restrict payments
or the movement of funds or result in the deprivation of
contract rights. Any of these risks, including risks arising
from the increase in violence and local unrest in Nigeria over
the past year, could adversely impact the combined
companys operations in Nigeria and could affect the timing
and decrease the amount of revenue the combined company may
realize from its assets in Nigeria.
For example, Hanover is involved in a project called the
Cawthorne Channel Project in Nigeria in which it rents and
operates barge-mounted gas compression and gas processing
facilities stationed in a Nigerian coastal waterway. Because of
unrest and violence in the region, natural gas flow to the
project was stopped in June 2006. As a result, Hanover did not
recognize revenue on the Cawthorne Channel Project for the last
six months of 2006, and Holdings may not be able to recognize
revenue from this project in the future. If the violence and
local unrest in Nigeria continues or worsens following the
consummation of the mergers, Holdings may experience further
decreases in revenue from its projects in Nigeria.
At March 31, 2007, Hanover and Universal had combined
tangible net assets of approximately $74.1 million related
to projects in Nigeria. If Holdings is unable to operate its
assets under current projects, it may be required to find
alternative uses for those assets, which could potentially
result in an impairment and write-down of its investment in
those assets in Nigeria, which could adversely impact
Holdings consolidated financial position or results of
operation.
27
There
are risks associated with the companies operations in
Venezuela. Further changes to the laws and regulations of
Venezuela could adversely impact the combined companys
results of operations and require it to write-down certain of
its assets in Venezuela.
Recently, laws and regulations in Venezuela have been subject to
frequent and significant changes. These changes have included
currency controls, restrictions on repatriation of capital,
expropriation and nationalization of certain firms and
industries and changes to the tax laws. While these changes have
not had a material impact on Hanover or Universal to date,
future changes could have a material impact on the combined
company. For example, if the government of Venezuela institutes
further changes to the laws and regulations of Venezuela, those
changes could increase the expenses incurred by the combined
companys Venezuelan operations, resulting in a reduction
in its net income or a write-down of its investments in
Venezuela. At March 31, 2007, Hanover and Universal had
combined tangible net assets in Venezuela, including investments
in non-consolidated affiliates, of approximately
$291.7 million.
Following
the consummation of the mergers, Holdings will be exposed to
exchange rate fluctuations in the international markets in which
it will operate. A decrease in the value of any of these
currencies relative to the U.S. dollar could reduce profits
from international operations and the value of international net
assets of the combined company.
Following the consummation of the mergers, the reporting
currency of the combined company will be the U.S. dollar.
Gains and losses from the remeasurement of balances that are
receivable or payable in currency other than functional currency
are included in the consolidated statements of operations. The
remeasurement has caused the U.S. dollar value of
Hanovers and Universals international results of
operations to vary with exchange rate fluctuations and, after
consummation of the mergers, the U.S. dollar value of
Holdings international results of operations will continue
to vary with exchange rate fluctuations. Hanover and Universal
have not hedged exchange rate exposures, which exposes them to
the risk of exchange rate losses.
A fluctuation in the value of any of these currencies relative
to the U.S. dollar following the consummation of the
mergers could reduce Holdings profits from international
operations and the value of the net assets of Holdings
international operations when reported in U.S. dollars in
its financial statements. This could have a negative impact on
Holdings business, financial condition or results of
operations as reported in U.S. dollars. For example, in
February 2004 and March 2005, the Venezuelan government devalued
their currency to 1,920 bolivars and 2,148 bolivars,
respectively, for each U.S. dollar.
In addition, fluctuations in currencies relative to currencies
in which the earnings are generated may make it more difficult
to perform
period-to-period
comparisons of Holdings reported results of operations
following the consummation of the mergers.
Although both Hanover and Universal attempt to match costs and
revenues in local currencies, they anticipate that there will be
instances in which costs and revenues will not be exactly
matched with respect to currency denomination. As a result, to
the extent Holdings expands geographically, we expect that
increasing portions of its revenues, costs, assets and
liabilities will be subject to fluctuations in foreign currency
valuations. Holdings may experience economic loss and a negative
impact on earnings or net assets solely as a result of foreign
currency exchange rate fluctuations. Further, the markets in
which Holdings will operate could restrict the removal or
conversion of the local or foreign currency, resulting in
Holdings inability to hedge against these risks.
Many
of Hanovers and Universals compressor contracts with
customers have short initial terms, and Holdings cannot be sure
that the contracts for these compressors will be renewed after
the end of the initial contractual term.
The length of Hanovers and Universals compressor
contracts with customers varies based on operating conditions
and customer needs. In most cases, under currently prevailing
contract compression rates, Hanovers and Universals
initial contract terms are not long enough to enable them to
fully recoup the average cost of acquiring or fabricating the
equipment. Following the consummation of the mergers, Holdings
cannot be sure that a substantial number of these customers will
continue to renew their contracts, that it will be able to enter
28
into new contracts for the equipment with new customers or that
any renewals will be at comparable rates. The inability to renew
contracts with respect to a substantial portion of
Holdings compressor fleet would have a material adverse
effect upon the business, consolidated financial condition,
results of operations and cash flows of the combined company.
Hanover
and Universal are dependent on particular suppliers and are
vulnerable to product shortages and price
increases.
Some of the components used in Hanovers and
Universals products are obtained from a single source or a
limited group of suppliers. Hanovers and Universals
reliance on these suppliers involves several risks, including
price increases, inferior component quality and a potential
inability to obtain an adequate supply of required components in
a timely manner. The partial or complete loss of certain of
these sources following the consummation of the mergers could
have a negative impact on Holdings results of operations
and could damage its customer relationships. Further, a
significant increase in the price of one or more of these
components could have a negative impact on Holdings
results of operations.
Hanovers
ability to substitute compression equipment under its
compression equipment leases is limited, and there are risks
associated with reaching that limit prior to the expiration of
the lease term.
As of March 31, 2007, Hanover was the lessee in two
transactions involving the sale of compression equipment by
Hanover to special purpose entities, which in turn lease the
equipment back to Hanover. Hanover is entitled under the
compression equipment operating lease agreements to substitute
equipment that it owns for equipment owned by the special
purpose entities, provided that the value of the equipment that
it is substituting is equal to or greater than the value of the
equipment that is being substituted. Hanover generally
substitutes equipment when one of its lease customers exercises
a contractual right or otherwise desires to buy the leased
equipment or when fleet equipment owned by the special purpose
entities becomes obsolete or is selected by Hanover for transfer
to international projects. Each lease agreement limits the
aggregate amount of replacement equipment that may be
substituted to, among other restrictions, a percentage of the
termination value under each lease. The termination value is
equal to (1) the aggregate amount of outstanding principal
of the corresponding notes issued by the special purpose entity,
plus accrued and unpaid interest, and (2) the aggregate
amount of equity investor contributions to the special purpose
entity, plus all accrued amounts due on account of the investor
yield and any other amounts owed to those investors in the
special purpose entity or to the holders of the notes issued by
the special purpose entity or their agents. In the following
table, termination value does not include amounts in excess of
the aggregate outstanding principal amount of notes and the
aggregate outstanding amount of the equity investor
contributions, as such amounts are periodically paid as
supplemental rent as required by Hanovers compression
equipment operating leases. The aggregate amount of replacement
equipment substituted (in dollars and percentage of termination
value), the termination value and the substitution percentage
limitation relating to each of Hanovers compression
equipment operating leases as of March 31, 2007 are as
follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substitution
|
|
|
|
|
|
|
Value of
|
|
|
Percentage of
|
|
|
|
|
|
Limitation as
|
|
|
|
|
|
|
Substituted
|
|
|
Termination
|
|
|
Termination
|
|
|
Percentage of
|
|
|
Lease
|
|
Lease
|
|
Equipment
|
|
|
Value(1)
|
|
|
Value(1)
|
|
|
Termination Value
|
|
|
Termination Date
|
|
|
|
(Dollars in millions)
|
|
|
2001A compression equipment lease
|
|
$
|
20.2
|
|
|
|
14.7
|
%
|
|
$
|
137.1
|
|
|
|
25
|
%
|
|
|
September 2008
|
|
2001B compression equipment lease
|
|
|
55.4
|
|
|
|
21.5
|
%
|
|
|
257.7
|
|
|
|
25
|
%
|
|
|
September 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
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$
|
75.6
|
|
|
|
|
|
|
$
|
394.8
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Termination value assumes all accrued rents paid before
termination. |
In the event Hanover reaches the substitution limitation prior
to a lease termination date, it will not be able to effect any
additional substitutions with respect to such lease. This
inability to substitute could have a
29
material adverse effect on Holdings business, consolidated
financial position, results of operations and cash flows.
The
tax treatment of the Universal Partnership depends on its status
as a partnership for federal income tax purposes, as well as its
not being subject to a material amount of entity-level taxation
by individual states. If the Internal Revenue Service treats the
Universal Partnership as a corporation or it becomes subject to
a material amount of entity-level taxation for state tax
purposes, it would substantially reduce the amount of cash
available for distribution to the Universal Partnerships
unitholders and undermine the Universal Partnerships cost
of capital advantage, which would diminish one of the
anticipated benefits of consummating the mergers.
The anticipated after-tax economic benefit of an investment in
the Universal Partnerships common units depends largely on
its being treated as a partnership for federal income tax
purposes. The Universal Partnership has not received a ruling
from the Internal Revenue Service, or IRS, on this or any other
tax matter affecting it.
If the Universal Partnership were treated as a corporation for
federal income tax purposes, it would pay federal income tax at
the corporate tax rate and would also likely pay state income
tax. Treatment of the Universal Partnership as a corporation for
federal income tax purposes would result in a material reduction
in the anticipated cash flow and after-tax return to its
unitholders, likely causing a substantial reduction in the value
of its common units.
Current law may change so as to cause the Universal Partnership
to be treated as a corporation for federal income tax purposes
or otherwise subject it to entity-level taxation. In addition,
because of widespread state budget deficits and other reasons,
several states are evaluating ways to subject partnerships to
entity-level taxation through the imposition of state income,
franchise and other forms of taxation. The Universal
Partnerships partnership agreement provides that if a law
is enacted or existing law is modified or interpreted in a
manner that subjects it to taxation as a corporation or
otherwise subjects it to entity-level taxation for federal,
state or local income tax purposes, the minimum quarterly
distribution amount and the target distribution levels of the
Universal Partnership may be adjusted to reflect the impact of
that law on it at the option of its general partner without the
consent of its unitholders. If the Universal Partnership were to
be taxed as at the entity level, it would lose its comparative
cost of capital advantage over a corporation structure, thereby
undermining one of the companies key strategic reasons for
consummating the mergers.
The
combined company will face significant competition that may
cause it to lose market share and harm its financial
performance.
The U.S. compression business is highly competitive and there
are low barriers to entry. Following the consummation of the
mergers, Holdings expects to experience competition from
companies that may be able to adapt more quickly to
technological changes within its industry and throughout the
economy as a whole, more readily take advantage of acquisitions
and other opportunities and adopt more aggressive pricing
policies. The ability of Holdings to renew or replace existing
contracts with its customers at rates sufficient to maintain
current revenue and cash flows could be adversely affected by
the activities of its competitors and its customers. If its
competitors substantially increase the resources they devote to
the development and marketing of competitive services or
substantially decrease the price at which they offer their
services, Holdings may not be able to compete effectively. Some
of these competitors may expand or construct newer or more
powerful compression systems that would create additional
competition for the services Hanover and Universal currently
provide to their customers. In addition, customers that are
significant producers of natural gas may purchase their own
compression systems in lieu of using our contract compression
services. In addition, Holdings other lines of business
will face significant competition.
Following the consummation of the mergers, Holdings also may not
be able to take advantage of certain opportunities or make
certain investments because of its significant leverage, the
agreements related to Hanovers compression equipment lease
obligations and Holdings other obligations. All of these
competitive
30
pressures could have a material adverse effect on the business,
results of operations and financial condition of the combined
company.
Natural
gas operations entail inherent risks that may result in
substantial liability to Holdings following the consummation of
the mergers. Hanover and Universal do not insure against all
potential losses and each could be seriously harmed by
unexpected liabilities.
Natural gas operations entail inherent risks, including
equipment defects, malfunctions and failures and natural
disasters, which could result in uncontrollable flows of natural
gas or well fluids, fires and explosions. These risks may expose
Hanover, Universal or, following the consummation of the
mergers, Holdings, as an equipment operator or fabricator, to
liability for personal injury, wrongful death, property damage,
pollution and other environmental damage. Although Hanover and
Universal have obtained insurance against many of these risks,
their insurance may be inadequate to cover their liabilities.
For example, Universal has elected to fully self-insure its
offshore assets. Further, insurance covering the risks Holdings
expects to face or in the amounts it desires may not be
available in the future or, if available, the premiums may not
be commercially justifiable. If Hanover, Universal or Holdings
were to incur substantial liability and such damages were not
covered by insurance or were in excess of policy limits, or if
Hanover, Universal or Holdings were to incur liability at a time
when it was not able to obtain liability insurance, the
business, results of operations and financial condition of the
combined company could be negatively impacted.
Following
the consummation of the mergers, Holdings will be subject to a
variety of governmental regulations.
Following the consummation of the mergers, Holdings will be
subject to a variety of federal, state, local and international
laws and regulations relating to the environment, health and
safety, export controls, currency exchange, labor and employment
and taxation. These laws and regulations are complex, change
frequently and have tended to become more stringent over time.
Failure to comply with these laws and regulations may result in
a variety of administrative, civil and criminal enforcement
measures, including assessment of monetary penalties, imposition
of remedial requirements and issuance of injunctions as to
future compliance. From
time-to-time
as part of the regular overall evaluation of the operations of
Holdings, including newly acquired operations, Holdings may be
subject to compliance audits by regulatory authorities in the
various countries in which it operates.
Environmental laws and regulations may, in certain
circumstances, impose strict liability for environmental
contamination, which may render Holdings liable for remediation
costs, natural resource damages and other damages as a result of
conduct that was lawful at the time it occurred or the conduct
of, or conditions caused by, prior owners or operators or other
third parties. In addition, where contamination may be present,
it is not uncommon for neighboring land owners and other third
parties to file claims for personal injury, property damage and
recovery of response costs. Remediation costs and other damages
arising as a result of environmental laws and regulations, and
costs associated with new information, changes in existing
environmental laws and regulations or the adoption of new
environmental laws and regulations could be substantial and
could negatively impact Holdings financial condition or
results of operations.
Following the consummation of the mergers, Holdings may need to
apply for or amend facility permits or licenses from
time-to-time
with respect to storm water or wastewater discharges, waste
handling, or air emissions relating to manufacturing activities
or equipment operations in order to comply with new or revised
permitting conditions. In addition, customer service
arrangements may require Holdings to operate, on behalf of a
specific customer, petroleum storage units such as underground
tanks or pipelines and other regulated units, all of which may
impose additional compliance and permitting obligations.
Following the consummation of the mergers, Holdings will conduct
operations at numerous facilities in a wide variety of locations
across the country. The operations at many of these facilities
will require federal, state or local environmental permits or
other authorizations. Additionally, following the consummation
of the mergers, natural gas compressors at many of
Holdings customer facilities will require individual air
permits or general authorizations to operate under various air
regulatory programs established by rule or regulation.
31
These permits and authorizations frequently contain numerous
compliance requirements, including monitoring and reporting
obligations and operational restrictions, such as emission
limits. Given the large number of facilities in which Holdings
will operate, and the numerous environmental permits and other
authorizations that will be applicable to its operations,
Holdings may occasionally identify or be notified of technical
violations of certain requirements existing in various permits
or other authorizations. Occasionally, both Hanover and
Universal have been assessed penalties for their non-compliance,
and the combined company could be subject to such penalties in
the future.
In addition, future events, such as compliance with more
stringent laws, regulations or permit conditions, a major
expansion of the combined companys operations into more
heavily regulated activities, more vigorous enforcement policies
by regulatory agencies, or stricter or different interpretations
of existing laws and regulations could require the combined
company to make material expenditures.
The
price of Holdings common stock may experience
volatility.
Following the consummation of the mergers, the price of
Holdings common stock may be volatile. Some of the factors
that could affect the price of Holdings common stock are
quarterly increases or decreases in revenue or earnings, changes
in revenue or earnings estimates by the investment community,
the ability of Holdings to implement its integration strategy
and to realize the expected synergies and other benefits from
the mergers and speculation in the press or investment community
about Holdings financial condition or results of
operations. General market conditions and U.S. or international
economic factors and political events unrelated to the
performance of Holdings may also affect its stock price. For
these reasons, investors should not rely on recent trends in the
price of Hanovers or Universals common stock to
predict the future price of Holdings common stock or its
financial results.
The
charter and bylaws of Holdings contain provisions that may make
it more difficult for a third party to acquire control of it,
even if a change in control would result in the purchase of your
shares of common stock of Holdings at a premium to the market
price or would otherwise be beneficial to you.
There are provisions in Holdings restated certificate of
incorporation and bylaws that may make it more difficult for a
third party to acquire control of it, even if a change in
control would result in the purchase of your shares of common
stock of Holdings at a premium to the market price or would
otherwise be beneficial to you. For example, Holdings
restated certificate of incorporation authorizes Holdings
board of directors to issue preferred stock without stockholder
approval. If the board of directors of Holdings elects to issue
preferred stock, it could be more difficult for a third party to
acquire it. In addition, provisions of Holdings restated
certificate of incorporation and bylaws, such limitations on
stockholder actions by written consent and on stockholder
proposals at meetings of stockholders, could make it more
difficult for a third party to acquire control of Holdings.
Delaware corporation law may also discourage takeover attempts
that have not been approved by the board of directors of
Holdings.
32
CAUTIONARY
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus and the documents that are
incorporated into this joint proxy statement/prospectus by
reference may contain or incorporate by reference
forward-looking statements that do not directly or exclusively
relate to historical facts. You can typically identify
forward-looking statements by the use of forward-looking words,
such as may, will, could,
project, believe,
anticipate, expect,
estimate, continue,
potential, plan, forecast
and other words of similar import. Forward-looking statements
include information concerning possible or assumed future
results of our operations, including statements about the
following subjects:
|
|
|
benefits, effects or results of the proposed mergers;
cost reductions, operating efficiencies or synergies resulting from the proposed mergers;
operations and results after the proposed mergers;
integration of operations;
business strategies;
growth opportunities;
competitive position;
market outlook;
expected financial position;
expected value of our compression equipment;
expected results of operations;
|
|
future cash flows;
financing plans;
budgets for capital and other expenditures;
plans and objectives of management;
timing of the consummation of the proposed mergers;
ability to convey assets to the Universal Partnership;
tax treatment of the proposed mergers;
accounting treatment of the proposed mergers;
costs in connection with the proposed mergers; and
any other statements regarding future growth, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.
|
These forward-looking statements represent our intentions,
plans, expectations, assumptions and beliefs about future events
and are subject to risks, uncertainties and other factors. Many
of those factors are outside of our control and could cause
actual results to differ materially from the results expressed
or implied by those forward-looking statements. In addition to
the risk factors described in this joint proxy
statement/prospectus under Risk Factors, as well as
the risk factors described in the other documents we file with
the SEC and incorporate by reference in this joint proxy
statement/prospectus, those factors include:
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|
our ability to renew our short-term equipment contracts with our
customers so as to fully recoup our cost of the equipment;
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|
|
|
conditions in the oil and gas industry, including any prolonged
substantial reduction in oil and natural gas prices, which could
cause a decline in the demand for our compression and oil and
natural gas production and processing equipment;
|
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|
|
competition among the various providers of natural gas
compression services, including any introduction of any
competing technologies by other companies;
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|
economic or political conditions in the countries in which we do
business, including civil uprisings, riots, terrorism,
kidnappings, the taking of property without fair compensation
and legislative changes;
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|
currency exchange rate fluctuations;
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|
employment workforce factors, including the loss of key
employees;
|
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|
changes in safety and environmental regulations pertaining to
the production and transportation of natural gas;
|
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|
our ability to implement certain business objectives, such as
international expansion and the ability to timely and
cost-effectively execute integrated projects;
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33
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|
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|
|
the inherent risks associated with our operations, such as
equipment defects, malfunctions and natural disasters;
|
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|
our ability to obtain components used to fabricate our products;
|
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|
|
changes in governmental safety, health, environmental and other
regulations, which could require us to make significant
expenditures;
|
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|
liability related to the use of our products and
services; and
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|
our ability to successfully complete merger, acquisition or
divestiture plans (including the proposed mergers), regulatory
or other limitations imposed as a result of a merger,
acquisition or divestiture, and the success of the business
following a merger, acquisition or divestiture.
|
In light of these risks, uncertainties and assumptions, the
events described in the forward-looking statements might not
occur or might occur to a different extent or at a different
time than we have described. You should consider the areas of
risk and uncertainty described above and discussed under
Risk Factors in this joint proxy
statement/prospectus and the other documents we file with the
SEC and incorporate by reference in connection with any written
or oral forward-looking statements that may be made after the
date of this joint proxy statement/prospectus by Hanover,
Universal or Holdings or anyone acting for any or all of them.
Except as may be required by law, we undertake no obligation to
publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.
THE
MERGERS
The discussion in this joint proxy statement/prospectus of
the mergers and the principal terms of the merger agreement are
subject to, and are qualified in their entirety by reference to,
the merger agreement, a composite copy of which is attached to
this joint proxy statement/prospectus as Annex A and
incorporated into this joint proxy statement/prospectus by
reference.
General
Description of the Mergers
The mergers are structured as all-stock transactions. Prior to
entering into the merger agreement, Universal formed a new
Delaware corporation, Iliad Holdings, Inc., which in turn formed
two wholly owned subsidiaries, Ulysses Sub, Inc. and Hector Sub,
Inc. Iliad Holdings, Inc. was renamed Exterran Holdings, Inc. on
June 18, 2007. The merger agreement contemplates that
Ulysses Sub will merge with and into Universal, with Universal
surviving the merger. In that merger, which we call the
Universal merger, the holders of Universal common
stock will receive the right to receive one share of Holdings
common stock for each share of Universal common stock they hold.
As a result, the current holders of Universal common stock will
become, temporarily, the holders of all of the outstanding
shares of Holdings common stock, and Universal will become a
wholly owned subsidiary of Holdings.
Immediately following the Universal merger, the merger agreement
contemplates that Hector Sub will merge with and into Hanover,
with Hanover surviving the merger. In that merger, which we call
the Hanover merger, the holders of Hanover common
stock will receive the right to receive 0.325 shares of
Holdings common stock for each share of Hanover common stock
they hold. As a result, the current holders of Hanover common
stock will become holders of Holdings common stock, and Hanover
will become a wholly owned subsidiary of Holdings.
We refer to the Universal merger and the Hanover merger together
throughout this document as the mergers. Immediately
following completion of the mergers, based on the number of
shares of common stock of each of Hanover and Universal
outstanding as of February 2, 2007, the last trading day
prior to the public announcement of the mergers, former Hanover
stockholders will own approximately 53% of Holdings common
stock and former Universal stockholders will own approximately
47% of Holdings common stock. We intend to apply to the
New York Stock Exchange prior to the consummation of the mergers
to list Holdings common stock under the symbol EXH.
34
Background
of the Mergers
From time to time, the board of directors and management of each
of Hanover and Universal have examined possible strategic
opportunities in an effort to ensure that their respective
company is well positioned for future growth in light of
industry developments. In the first quarter of 2004, an
investment banker met with the management of Universal to
discuss the possibility of a combination of Universal with
Hanover. This same investment banker also met with
Hanovers management to determine if Hanover was interested
in a combination with Universal. Hanover considered the
information presented by this investment banker but informed the
investment banker that it was not interested in pursuing such a
transaction, primarily because companies in the compression
industry generally, including Hanover and Universal, were then
experiencing a period of relatively weak results of operations
and Hanover was then in the process of completing the settlement
of an SEC investigation and class action securities litigation.
Hanover and Universal did not engage in any direct dialogue
regarding a business combination at this time.
At various times during 2004, members of management of the two
companies had discussions with one another considering various
strategic transactions. Specifically, the parties discussed
transactions that generally involved the leasing or sale of
certain of Hanovers and Universals idle U.S.
compression assets to each other to satisfy the needs of each
others respective customers as well as transactions
involving various joint ventures and cooperation arrangements on
international compression projects. Hanover and Universal were
also requested by a major customer to jointly bid on a large
international compression project, though the parties ultimately
did not engage in the project. Hanover and Universal entered
into preliminary discussions with respect to some of these
potential transactions but ultimately were not able to reach an
agreement on the terms of any such transaction. As a result of
these conversations, however, Hanover offered to sell its
Canadian compression assets to Universal. This sale was
ultimately completed in November 2004 for approximately
$57 million in cash.
In the first quarter of 2005, Hanovers board of directors
authorized the company to issue shares of common stock in a
registered public offering. Prior to engaging in the offering,
management of Hanover decided to contact Universal to discuss
the possibility of the parties merging. In March 2005,
John E. Jackson, President and Chief Executive Officer of
Hanover, Lee E. Beckelman, Senior Vice President and Chief
Financial Officer of Hanover, Stephen A. Snider, the President
and Chief Executive Officer of Universal, and J. Michael
Anderson, the Senior Vice President and Chief Financial Officer
of Universal, met to discuss the possibility of a merger between
the two companies. The parties determined that it was not an
opportune time to pursue a merger between the companies for a
number of reasons, including complications from a financial,
legal and operational perspective associated with such a merger,
issues related to Hanovers capital structure and overall
leverage at the time and the parties respective stock
market valuations relative to one another. At the time,
Hanovers
debt-to-capital
ratio was relatively high and the equity values of Hanover and
Universal were not substantially similar based on the market
price of their common stock, thus making it difficult to
negotiate a merger of equals. In addition, management of each of
Hanover and Universal was concerned that the pressures
associated with a pending merger transaction would be too
disruptive to the parties given their respective financial
conditions at the time. As a result of this determination,
management of Hanover and Universal decided not to further
pursue merger discussions, and Hanover proceeded with its
registered public offering of common stock, which was completed
in August 2005.
Occasionally in 2005 and the first half of 2006,
Mr. Jackson and Mr. Snider discussed the possibility
of a transaction involving the companies. The discussions
generally related to sales of various U.S. asset packages
between the companies or joint venture arrangements for various
international projects. None of these discussions, however,
resulted in meaningful preliminary negotiations between the
parties regarding a merger or any other strategic transaction.
In July and October 2006, the Hanover board of directors held
regular meetings at which Mr. Jackson made presentations
regarding various strategic alternatives that Hanover was in the
process of evaluating. Included among those strategic
alternatives under consideration was the possibility of Hanover
forming a master limited partnership and commencing an initial
public offering of units in that partnership as well as a
business combination with Universal.
35
In October 2006, the Universal Partnership completed its initial
public offering. Mr. Jackson telephoned Mr. Snider to
congratulate him on the transaction.
In early November 2006, Mr. Jackson telephoned
Mr. Snider to explore the possibility of Hanover and
Universal engaging in a strategic transaction. Among the several
strategic alternatives Mr. Snider and Mr. Jackson
discussed were sales of certain assets by each company to the
other and a possible merger of Hanover and Universal.
Mr. Snider and Mr. Jackson agreed to further discuss
the possibility of a business combination between Hanover and
Universal at an in-person meeting. Each of Mr. Snider and
Mr. Jackson believed that because of improvements in the
business and capital structure of Hanover and Universal, this
could potentially be an opportune time for the parties to
consider a business combination. Hanover had significantly
reduced its
debt-to-capital
ratio compared to early 2004, and the reduced debt at Hanover
had also improved its earnings outlook. Management of each of
Hanover and Universal also believed that because of the improved
financial condition of each company and the industry in general,
each company was then in a better position to withstand the
disruptive pressures associated with a pending merger
transaction. The equity values of Hanover and Universal were
also substantially similar based on the market price of their
common stock, thus making it more likely that the parties could
negotiate a definitive transaction because it would be a merger
of equals. In addition, Universal had completed the initial
public offering of the Universal Partnership. Because Hanover
was considering the formation of its own master limited
partnership, the Universal Partnership made Universal a more
attractive merger party to Hanover than before. Following this
telephone call, Mr. Jackson telephoned Gordon Hall, the
chairman of the Hanover board of directors, to inform him of
these developments.
On November 21, 2006, Messrs. Jackson, Beckelman,
Snider and Anderson, together with Brian Matusek, the Senior
Vice President Western Hemisphere of Hanover, Ernie
Danner, the Executive Vice President and Chief Operating Officer
of Universal, Daniel Schlanger, the Vice President of Business
Development of Universal Compression, Inc., and representatives
of Credit Suisse, which from time to time had served as
financial advisor to Hanover, met to discuss the possibility of
a business combination between the companies. After that
meeting, Universal contacted Goldman, Sachs & Co. to
serve as its financial advisor in considering a possible
business combination transaction with Hanover.
On December 6, 2006, Donald Wayne, the Vice President,
General Counsel and Secretary of Universal, and Gary Wilson, the
Senior Vice President, General Counsel and Secretary of Hanover,
together with their respective antitrust counsel, met to discuss
antitrust considerations relating to a possible business
combination and the regulatory filings that might be required in
connection with any such combination.
On December 7, 2006, Mr. Wayne and Mr. Wilson
executed, on behalf of their respective companies, a
confidentiality agreement pursuant to which the parties could
exchange confidential financial and other information regarding
their respective business. Following the execution of the
confidentiality agreement, Mr. Wilson telephoned
Mr. Hall to inform him that the parties had executed the
confidentiality agreement, and thereafter Mr. Hall
telephoned each of the Hanover directors to inform them of this
development.
Beginning on December 11, 2006, Universal management, with
the assistance of representatives of Goldman Sachs, began
analyzing Hanovers business and considering the potential
benefits, synergies and risks of a combination transaction.
On December 12, 2006, at a regular meeting of the Universal
board of directors, Mr. Snider informed the Universal board
of directors that a confidentiality agreement had been executed
with Hanover and discussed the possibility of a transaction
between Hanover and Universal, including the parties
potential strategic fit and synergies.
On December 15, 2006, Messrs. Jackson, Beckelman,
Snider and Anderson met to discuss a proposed schedule for
conducting due diligence, analyzing potential synergies,
negotiating a merger agreement and analyzing the required
regulatory filings and implications of a potential transaction
and the next steps in the process. After that meeting,
Mr. Jackson telephoned Mr. Hall, who then telephoned
each of the other Hanover directors to notify them of the
information discussed by the parties at the December 15,
2006 meeting.
36
On December 20, 2006, the finance committee of the Hanover
board of directors held a special telephonic meeting of the
committee at which Messrs. Jackson and Wilson, Peter H.
Kamin, William C. Pate and a representative of
Vinson & Elkins L.L.P. participated. The committee has
authority under its charter to, among other duties, review
potential business combinations and make recommendations to the
full board of directors. At that time, Messrs. Kamin and
Pate had been appointed to become directors of Hanover,
effective as of January 1, 2007. Mr. Kamin is a
co-founder and Managing Partner of ValueAct Capital, an
investment partnership that, together with its affiliates, then
held just under 11% of Hanovers common stock.
Mr. Pate is a Managing Director of Equity Group
Investments, LLC (EGI), a private investment firm
that then held approximately 9% of Hanovers common stock.
During that meeting, Mr. Jackson provided the finance
committee with an overview of the meetings that had taken place
over the past several weeks related to a potential strategic
transaction between Hanover and Universal. Mr. Jackson led
a discussion regarding the relative business characteristics of
Hanover and Universal as well as their similar business
segments. A representative of Vinson & Elkins
discussed with the committee the customary process associated
with negotiation of a business combination such as the one being
considered by Hanover and Universal. The committee discussed
matters related to the negotiation of a strategic business
combination such as the retention of financial advisors and the
allocation of
break-up
risks and associated fees. The committee also discussed issues
relating to the engagement of a financial advisor to Hanover,
including the structure of the fee payable to any such financial
advisor. The committee authorized Messrs. Jackson and Hall
to negotiate and retain a financial advisor for Hanover in
connection with the consideration of a potential business
combination with Universal. Following the meeting of the finance
committee, Messrs. Hall and Jackson negotiated the terms of
an engagement letter with Credit Suisse whereby Hanover engaged
Credit Suisse to serve as its financial advisor in considering a
potential transaction with Universal.
On December 27, 2006, Messrs. Beckelman, Matusek,
Anderson, Schlanger and Danner and Larry Lucas, the Vice
President Strategic Planning and Corporate
Development of Hanover, and Kirk Townsend, a Senior Vice
President of Universal, met to discuss the potential synergies
to be obtained from a business combination.
On December 28, 2006, Mr. Jackson and Mr. Snider
met to discuss governance and management issues relating to a
business combination. Mr. Snider expressed an interest in
being the chief executive officer of the combined company, and
Mr. Jackson expressed that he was amenable to that result
as long as Hanover would be appropriately represented in
management positions of the combined company. Also on
December 28, 2006, Hanover and Universal began to exchange
confidential financial and other information to conduct due
diligence.
On December 29, 2006, the Universal board of directors held
a special telephonic meeting at which members of management
provided an update regarding a potential transaction. The
management update addressed, among other things,
Universals strategic fit with Hanover, the potential risks
and challenges associated with a transaction and the potential
benefits and synergies that could be obtained following
completion of a transaction. The Universal directors expressed a
desire to continue engaging in discussions and negotiations with
Hanover regarding a transaction.
On January 2, 2007, Mr. Wayne and Mr. Wilson
conducted a telephone conference with representatives of Baker
Botts L.L.P., counsel to Universal, and Vinson &
Elkins L.L.P., counsel to Hanover, to discuss the structure and
timing of a potential transaction. That same day, members of
Hanover and Universal management, together with representatives
of Vinson & Elkins, Baker Botts, Goldman Sachs and
Credit Suisse, conducted a telephone conference to discuss
various considerations regarding the structure of a transaction.
On January 4, 2007, the Hanover board of directors held a
special telephonic meeting. Representatives of Credit Suisse,
along with several members of Hanovers management team,
also participated in the meeting. Mr. Jackson provided the
Hanover board of directors with an overview of the meetings that
had taken place since the December 20, 2006 meeting of the
finance committee related to a potential strategic transaction
between Hanover and Universal and of the engagement of Credit
Suisse to serve as financial advisor to Hanover in connection
with a possible business combination with Universal.
Mr. Jackson then led a discussion
37
with the board of directors regarding strategic alternatives to
a business combination with Universal, including maintaining
Hanovers current structure and business strategy, the
formation by Hanover of a master limited partnership, the
acquisition by Hanover of Universals international assets,
the sale by Hanover of certain of its assets or a leveraged
buyout. Mr. Jackson discussed the advantages of a business
combination with Universal over these alternative strategies,
including the expected financial synergies, the combination of
personnel, and the increased scale of a combined company.
Representatives of Credit Suisse then discussed various
preliminary financial analyses regarding a potential business
combination of Hanover and Universal. Representatives of Credit
Suisse responded to various questions from directors regarding
potential exchange ratios and other issues related to a
potential business combination. The board of directors also
discussed Hanovers preliminary results for the fourth
quarter of 2006 and the timing of a public announcement of a
potential business combination with Universal relative to the
public announcement of Hanovers and Universals
results for the fourth quarter of 2006. Hanovers board of
directors also instructed management to negotiate and execute an
employee non-solicitation agreement with Universal. The Hanover
board of directors then met in executive session to discuss
matters related to the negotiation of a potential business
combination with Universal and, following executive session,
instructed management to continue negotiations with Universal
and to continue its analysis of the potential business
combination. The board of directors also instructed management
to conduct a further analysis of the formation of a master
limited partnership sponsored by Hanover as a strategic
alternative to the proposed business combination with Universal.
On January 5, 2007, Mr. Jackson and Mr. Snider
met to discuss issues relating to the management of a combined
company. Later that day, members of Hanover and Universal
management, together with representatives of Credit Suisse and
Goldman Sachs, met to discuss financial and operational
information. The parties exchanged information regarding the
preliminary results of their respective performance in the
fourth quarter of 2006 and each companys financial and
operational outlook for 2007. Representatives of Hanovers
management also made a presentation to familiarize
Universals management with the business segments in which
Hanover is engaged but Universal is not.
Also on January 5, 2007, representatives of Baker Botts
distributed to Hanover and its counsel an initial draft of the
merger agreement that had been prepared by Baker Botts and
Richards, Layton & Finger, P.A., special Delaware
counsel to Universal.
On January 8, 2007, Mr. Wilson and Mr. Wayne
executed, on behalf of their respective companies, a
non-solicitation agreement with respect to certain categories of
employees.
Also on January 8, 2007, the Universal board of directors
held a special meeting at Universals offices in Houston at
which representatives of Goldman Sachs, Baker Botts and
Universals antitrust counsel, along with several members
of Universals management team, were present. During that
meeting, Mr. Snider updated the board of directors
regarding recent discussions with Hanover and its advisors,
including discussions regarding transaction structure.
Mr. Snider noted that counsel to Universal had distributed
a draft of a merger agreement to Hanover and its counsel on
January 5, 2007 and that a structuring meeting had been
scheduled for January 9, 2007. Mr. Snider stated that
he had also discussed with Mr. Jackson governance and
social issues surrounding a possible transaction and observed
that the parties would continue to discuss these matters.
Representatives of Goldman Sachs then reviewed with the
Universal board of directors Goldman Sachs preliminary
financial analysis of a potential transaction. Goldman Sachs
representatives, Mr. Snider and Mr. Danner discussed
Hanovers lines of business. A representative of Baker
Botts reviewed the directors fiduciary obligations in
considering a transaction of this type, the terms of the current
draft of the merger agreement that had been distributed to
Hanover and its counsel and various structuring issues
associated with a transaction. Universals antitrust
counsel then discussed with the Universal board of directors
antitrust considerations with respect to a transaction.
On January 9, 2007, members of management of each of
Hanover and Universal, along with representatives of
Vinson & Elkins and Baker Botts, met to discuss
structuring considerations. The parties discussed several
possible transaction structures and various considerations
regarding each alternative. After considering those issues, the
parties agreed that the preferred transaction structure would
involve Universals formation of a holding company with
subsidiaries that would merge into each of Hanover and
Universal. Each of
38
Universals and Hanovers management also provided the
other party with an update regarding its preliminary results for
the fourth quarter of 2006.
On January 10, 2007, the Universal board of directors held
a special telephonic meeting to discuss the potential
transaction. Mr. Snider began by providing an update
regarding recent meetings between representatives of Hanover and
Universal, noting that most of the structural issues relating to
the potential transaction had been resolved at the
January 9, 2007 meeting between the parties and their
counsel and that the parties were continuing to discuss the
related governance and social issues. Mr. Snider noted that
Hanover had scheduled a special board meeting and discussion
with its financial advisor for January 12, 2007.
Mr. Snider also discussed with the Universal board of
directors Universals preliminary results for the fourth
quarter of 2006 and the impact of finalizing and announcing
those results, as well as Hanovers fourth quarter results,
on the timing of the proposed transaction.
Also on January 10, 2007, representatives of Baker Botts
distributed to Hanover and its counsel a draft of the merger
agreement that had been revised to reflect changes to the
transaction structure agreed upon at the January 9, 2007
meeting.
On January 11, 2007, Mr. Hall and Mr. Snider met
to discuss management and governance issues relating to a
combined company. Mr. Jackson later joined the meeting and
participated in those discussions. Mr. Anderson then met
with Messrs. Hall and Jackson to discuss financial matters
and other strategies and goals relating to the proposed
transaction and a combined company.
That evening, Mr. Snider had dinner with Messrs. Hall
and Pate during which they discussed Mr. Sniders
strategies and goals for a combined company.
On January 12, 2007, the Hanover board of directors held a
special telephonic meeting. Representatives of Credit Suisse and
Vinson & Elkins, along with several members of
Hanovers management team, also participated in the
meeting. A representative of Vinson & Elkins reviewed
with the directors and answered questions regarding the
directors fiduciary obligations in considering a
transaction of this type. Mr. Jackson provided the board of
directors with an update regarding the parties
discussions, noting that a preliminary draft merger agreement
was under review and that Hanover and Universal had signed an
employee non-solicitation agreement. Mr. Jackson informed
the board of directors that the preliminary results for the
fourth quarter of 2006, which had been previously exchanged by
representatives of Hanover and Universal, indicated that Hanover
expected to be at or above the consensus expectation of
securities analysts regarding its earnings per share and that
Universal expected to be slightly below that consensus on its
earnings per share. The Hanover board of directors discussed the
impact these preliminary results would have on the negotiation
of an exchange ratio in connection with a potential business
combination with Universal. Hanovers management also
discussed with the board of directors their understanding and
evaluation of Universals preliminary results for the
fourth quarter of 2006 and the potential impact those results
may have on results for 2007, based upon discussions between
Hanovers and Universals management. Prior to that
time, representatives of Hanover and Universal had discussed an
exchange ratio based upon the then-current market prices of
Hanovers and Universals common stock. The board of
directors engaged in a discussion of the advantages and
disadvantages of other strategic alternatives to a business
combination with Universal. Specifically, it was noted that a
business combination with Universal would eliminate the resource
and management distraction that would be required for Hanover to
form its own master limited partnership while providing a larger
and more diverse asset base that could be contributed to a
master limited partnership. The Hanover board of directors also
discussed the cost synergies associated with a business
combination with Universal, the improvement in Hanovers
capital structure as a result of a business combination with
Universal and certain other benefits. Representatives of Credit
Suisse then reviewed and discussed with the Hanover board of
directors Credit Suisses preliminary financial analysis of
a potential business combination with Universal. The Hanover
board of directors also discussed with a representative of
Vinson & Elkins issues associated with releasing
Hanovers preliminary results for the fourth quarter of
2006 prior to the expected announcement of earnings on
February 15, 2007. The directors discussed a preference not
to enter into a merger agreement with Universal until Hanover
and Universal had released their respective results for the
fourth quarter of 2006 unless the
39
Hanover stockholders received some premium to the then-current
market price of Hanovers common stock in connection with
the merger.
Following the Hanover board meeting, Mr. Jackson conveyed
to Mr. Snider the concern expressed by members of the board
of directors with negotiating an exchange ratio prior to the
announcement by Hanover and Universal of their respective
results for the fourth quarter of 2006. Mr. Snider
thereafter distributed an email to the Universal directors to
inform them of the Hanover directors position.
Also on January 12, 2007, the board of directors of the
general partner of the Universal Partnership held a special
telephonic meeting at which Mr. Snider apprised that board
of the potential transaction. Messrs. Snider and Schlanger
then discussed with the board the potential impact of the
transaction on the Universal Partnership.
On January 16, 2007, Mr. Snider met with Samuel Zell
of EGI, a Hanover stockholder which had previously executed a
non-disclosure agreement with Hanover. Mr. Pate, a director of
Hanover, is a Managing Director of EGI. Mr. Snider and
Mr. Zell discussed issues relating to the senior management
of a combined company and timing of the release of the
parties fourth quarter 2006 results. Mr. Snider and
Mr. Zell also discussed the potential impact of the
Universal Partnership on Hanovers U.S. compression
business and the significance to the combined company of
Hanovers international business. Mr. Zell
subsequently discussed the potential transaction with Messrs.
Jackson, Hall and Pate, following which Mr. Jackson and
Mr. Hall contacted each of the other Hanover directors.
Hanovers directors and management determined that it would
be productive to continue negotiating toward a definitive merger
agreement with Universal rather than to wait until each of
Hanover and Universal had announced their respective results for
the fourth quarter of 2006 primarily due to the risk that the
existence of the discussions between the parties might leak to
the market during the period of delay and the potential impact
any such leak could have on the market price of each
companys stock. Based on these conversations with the
Hanover directors, Hanover decided to propose an exchange ratio
of 0.340 shares of common stock of Universal or the new
holding company to be issued in exchange for each outstanding
share of Hanover common stock.
On January 17, 2007, Mr. Jackson telephoned
Mr. Snider to propose that exchange ratio.
On January 18, 2007, members of Universal management met to
discuss and analyze the exchange ratio proposed by Hanover.
Mr. Snider also contacted several board members that day to
convey and discuss Hanovers proposal.
On January 18, 2007, Messrs. Jackson and Beckelman met with
representatives of Credit Suisse in New York to review and
discuss potential exchange ratios for the transaction and other
financial aspects of a potential business combination.
On January 19, 2007, Universals management team met
with representatives of Goldman Sachs to discuss and analyze
various exchange ratios for the transaction and other financial
matters related to the proposed business combination. Following
the meeting, Mr. Snider telephoned Mr. Jackson to
schedule a meeting regarding the unresolved transaction issues.
On January 20, 2007, Mr. Snider and Mr. Jackson
met to discuss the proposed exchange ratio. In response to
Mr. Jacksons proposal, Mr. Snider
counterproposed an exchange ratio of 0.320 shares of common
stock of Universal or the new holding company to be issued in
exchange for each outstanding share of Hanover common stock.
Mr. Snider and Mr. Jackson also continued their
discussions regarding the senior management of the combined
company and agreed to propose to their respective boards of
directors that Mr. Snider would become the Chief Executive
Officer of the combined company. Mr. Snider and
Mr. Jackson also agreed to propose that the Chairman of the
combined company would come from Hanovers current board of
directors and that Mr. Danner would be a non-executive
director of the combined company.
On January 20, 2007, following his meeting with
Mr. Snider, Mr. Jackson telephoned Messrs. Hall,
Pate and Kamin and Stephen Pazuk, the Chairman of the finance
committee of the Hanover board of directors, and representatives
of Credit Suisse to discuss his January 20, 2007 meeting
with Mr. Snider. Mr. Jackson and Mr. Hall
subsequently telephoned each of the other members of the Hanover
board of directors to discuss the same topic. Following these
discussions with the Hanover directors, Mr. Jackson,
together with representatives
40
of Credit Suisse, telephoned Mr. Snider on January 22,
2007 to propose an exchange ratio of 0.325 shares of common
stock of Universal or the new holding company to be issued in
exchange for each outstanding share of Hanover common stock,
which represented a premium to Hanover stockholders based on the
then-current market prices of Hanovers and
Universals common stock.
On January 23, 2007, Mr. Snider telephoned
Mr. Jackson to state that Universal management would
recommend the proposed exchange ratio to Universals board
of directors. Later that day, the Universal board of directors
held a special telephonic meeting to review the status of the
proposed transaction. At that meeting, Mr. Snider noted
that Hanover had proposed an exchange ratio of 0.325 shares
of common stock of Universal or the new holding company for
every share of Hanover common stock to be exchanged in the
merger and that Universal management recommended the proposed
exchange ratio. Members of Universal management and the
Universal board of directors then discussed the impact of the
proposed transaction and exchange ratio on Universal.
Mr. Snider noted that any tentative agreement between
Hanover and Universal regarding the exchange ratio would remain
subject to completion of due diligence, finalization of the
merger agreement and final board approval.
Also on January 23, 2007, representatives of
Vinson & Elkins distributed to Universal and its
counsel a revised draft of the merger agreement reflecting
comments from Vinson & Elkins and Morris Nichols
Arsht & Tunnell LLP, special Delaware counsel to
Hanover.
On January 25, 2007, Mr. Snider met with
Mr. Jackson, Norman Mckay, the Senior Vice
President Eastern Hemisphere of Hanover,
Mr. Danner and Mr. Matusek, to discuss potential
roles, responsibilities and positions and other management
issues relating to the combined company. Mr. Jackson and
Mr. Snider then met separately and agreed to propose to
their respective boards of directors that Mr. Hall serve as
Chairman, Mr. Jackson serve as a non-executive director,
Mr. Anderson serve as Chief Financial Officer and
Mr. Matusek serve as Chief Operating Officer of the
combined company.
On January 26, 2007, Mr. Snider met with the directors
of Hanover in advance of a meeting of the Hanover board to
exchange views regarding the proposed transaction. After
concluding their discussions with Mr. Snider, the Hanover
board of directors held a regular meeting in Houston at which
representatives of Credit Suisse and Vinson & Elkins,
along with several members of Hanovers management team,
were present. During that meeting, Mr. Jackson provided the
board of directors with an overview of the status of the
negotiations with Universal and the strategic benefits and
expected synergies associated with a business combination with
Universal. The board of directors then engaged in a discussion
of alternative strategic transactions and the advantages and
disadvantages of the proposed business combination with
Universal compared to those alternative strategic transactions.
The primary strategic alternatives considered by the board of
directors were (1) the creation of a master limited
partnership to which Hanover could contribute its U.S. rental
business (if it was successful in restructuring certain customer
contracts) and (2) continuing as an independent company and
focusing on its international growth strategy using available
capital. The board also discussed other general strategies that
might be available to Hanover, including acquisitions of other
assets in the U.S. and in international markets, the sale of
U.S. compression assets to other master limited partnerships and
leveraged buy-out transactions. Representatives of Credit Suisse
then reviewed their preliminary financial analyses regarding the
proposed business combination. Representatives of
Vinson & Elkins reviewed the directors fiduciary
obligations in considering a transaction of this type, the terms
of the current draft of the merger agreement that had been
distributed to Hanover and its counsel, various structuring
issues associated with the merger and the legal consequences of
the proposed transaction and remaining matters to be negotiated
by Hanover and Universal. Hanovers antitrust counsel then
discussed with the Hanover board of directors antitrust
considerations with respect to the proposed transaction. The
Hanover board of directors then met in executive session to
discuss various matters related to the proposed transaction.
On January 27, 2007, representatives of Baker Botts
distributed to Hanover and its counsel a draft of the merger
agreement that had been revised to reflect discussions among
outside counsel.
On January 29, 2007, members of management of each of
Hanover and Universal, along with representatives of
Vinson & Elkins, Baker Botts, Credit Suisse and
Goldman Sachs, met to further discuss various financial,
accounting, legal and tax matters. Mr. Anderson first
provided an update regarding Universals
41
preliminary results for the fourth quarter 2006.
Mr. Beckelman then provided an update regarding
Hanovers preliminary results for the fourth quarter 2006.
The parties then discussed a number of financial, tax,
accounting, operational, legal and corporate compliance due
diligence topics.
During the week of January 29, 2007, Mr. Jackson and
Mr. Snider spoke telephonically several times about
management issues and about the presentation of the proposed
merger to the parties respective employees, customers and
suppliers.
On January 31, 2007, representatives of Vinson &
Elkins distributed to Universal and its counsel a revised draft
of the merger agreement reflecting comments from
Vinson & Elkins and Morris Nichols.
On February 1, 2007, Mr. Snider and Universal director
Will Honeybourne met with Mr. Jackson and Hanover director
I. Jon Brumley to discuss management issues relating to the
combined company. Also on February 1, 2007, representatives
of Baker Botts distributed to Hanover and its counsel a draft of
the merger agreement that had been revised to reflect
discussions among outside counsel.
On February 2, 2007, Messrs. Snider, Jackson and Mckay
engaged in a telephonic discussion of management issues relating
to the combined company.
On February 2 and 3, 2007, counsel to Hanover and Universal
engaged in discussions regarding the draft merger agreement and
exchanged revised drafts of the merger agreement.
On February 3, 2007, Mr. Hall met with the directors
of Universal in advance of a meeting of the Universal board to
exchange views regarding the proposed transaction. After
concluding their discussions with Mr. Hall, the Universal
board of directors held a special meeting. At the meeting,
Universals management, together with representatives of
Goldman Sachs, Baker Botts and Universals antitrust
counsel, apprised the Universal board of the status of
discussions and reviewed the terms of the proposed transaction
as reflected in the form of the merger agreement.
Representatives of Goldman Sachs delivered its oral opinion to
the board that, as of that date, based upon and subject to the
factors and assumptions set forth in its opinion, the exchange
ratio pursuant to which Universals stockholders would
exchange their common stock for Holdings common stock in the
Universal merger was fair from a financial point of view to
Universals stockholders. Representatives of Baker Botts
advised the Universal board regarding the terms of the merger
agreement, certain legal matters and the boards
consideration of the potential transaction. Representatives of
Universals antitrust counsel then discussed with the
Universal board certain antitrust considerations with respect to
the proposed transaction. Following extensive discussion, the
Universal board unanimously determined that the merger agreement
and the transactions it contemplates are advisable, fair to and
in the best interests of Universal and its stockholders,
approved the merger agreement and recommended that the Universal
stockholders vote for the adoption of the merger agreement.
On February 3, 2007, the Hanover board of directors held a
special telephonic meeting. Representatives of Credit Suisse and
Vinson & Elkins, along with several members of
Hanovers management team also participated in the meeting.
Hanovers management apprised the board of directors of the
status of discussions and reviewed the terms of the proposed
mergers as reflected in the form of merger agreement that had
been provided to the directors. Representatives of Credit Suisse
rendered its oral opinion to the Hanover board to the effect
that, as of that date and based upon and subject to the
procedures followed, assumptions made, qualifications and
limitations on the review undertaken and other matters
considered by Credit Suisse in connection with its opinion, the
Hanover exchange ratio was fair from a financial point of view
to holders of Hanover common stock. That opinion was
subsequently confirmed in writing dated the same date.
Representatives of Vinson & Elkins advised the Hanover
board of directors regarding the terms of the merger agreement,
certain legal matters and the boards consideration of the
potential transaction. Following extensive discussion, the
Hanover board of directors unanimously determined that the
merger agreement and the transactions it contemplates are
advisable and in the best interests of the stockholders of
Hanover, approved the merger agreement and recommended that the
Hanover stockholders vote for the adoption of the merger
agreement.
After the meetings, the merger agreement was executed and
delivered by the parties thereto on February 5, 2007. On
February 5, 2007, Goldman Sachs delivered its written
opinion to the Universal board that, as of that
42
date, and based on and subject to the factors and assumptions
set forth in its opinion, the exchange ratio pursuant to which
Universals stockholders would exchange their common stock
for Holdings common stock in the Universal merger was fair from
a financial point of view to Universals stockholders. On
February 5, 2007, before the opening of trading on the New
York Stock Exchange, Hanover and Universal issued a joint press
release announcing the execution of the merger agreement and
their respective projected results for the fourth quarter of
2006.
Strategic
and Financial Rationale for the Mergers
In the course of their discussions, both Hanover and Universal
recognized that there were substantial potential strategic and
financial benefits to be obtained from the mergers. This section
summarizes the primary strategic and financial reasons why
Hanover and Universal entered into the merger agreement. For a
discussion of various factors that could prohibit or limit the
parties ability to realize some or all of these benefits
the parties expect to achieve in the merger, please read
Risk Factors beginning on page 22,
Hanovers Reasons for the Mergers and
Recommendation of Hanovers Board of Directors
beginning on page 44 and Universals
Reasons for the Mergers and Recommendation of Universals
Board of Directors beginning on page 48.
We believe the mergers will provide the stockholders of each of
Hanover and Universal an opportunity to realize increased
long-term returns on their investment by creating a combined
company that is a global leader in the natural gas compression
services and production and processing equipment fabrication
industry. We believe that the mergers will enhance stockholder
value by, among other things, enabling the parties to capitalize
on the following benefits:
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Complementary Strengths. The mergers will
combine Hanovers strength in international contract
compression and Hanovers expertise as a provider of
service, fabrication and equipment for oil and natural gas
production, processing and transportation applications with
Universals expectation that it can achieve a lower cost of
capital in U.S. contract compression through the Universal
Partnership. Hanovers and Universals international
businesses complement one another well, as they primarily
operate in different countries with minimal overlapping
locations.
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Shared Vision. We share a common vision of the
future of the natural gas compression and production and
processing equipment industry. We believe this shared vision
will better enable the combined company to effectively implement
its business plan following consummation of the mergers. This
vision includes transferring our U.S. contract compression
business to the Universal Partnership over time and investing
substantial capital in expanding our international business.
Both companies are focused on expanding the combined
companys natural gas compression services, compressor
fabrication business and production and processing equipment
fabrication businesses in international markets.
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Impact on Customers. We believe the mergers
will have a favorable impact on our customers. Specifically, the
mergers should benefit customers through improved operating
efficiencies and reliability as well as a broader and deeper
array of experienced and skilled technicians and service
specialists who can serve the needs of our customers. Further,
the mergers will strengthen each companys ability to offer
a full range of compression products and services to its
customers. The combined company will also benefit from each
companys commitment to customer service.
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Cost-of-Capital
Advantage of Universal Partnership. The mergers
will result in a larger pool of U.S. compression contracts
and assets available for transfer to the Universal Partnership
over time to take advantage of a lower cost of capital than
Hanover and Universals current corporate structures.
Over time, the combined company expects to transfer a
substantial portion of its U.S. compression contracts and assets
to the Universal Partnership.
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Financial Position. We believe the combined
company initially will have increased earnings and cash flow as
a result of its size and business line diversification, with
improved access to capital markets.
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Expanded International Platform. The mergers
will create a combined company with greater international reach
and a broader geographic diversification of its compression
business than either company
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would have by itself. We believe that international compression,
combined with production processing capabilities, will become
increasingly significant given the rapid expansion of natural
gas infrastructure in international locations, and that the
combined companys more geographically balanced business
will be better positioned to take advantage of future
opportunities in the worldwide energy services market.
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Significant Cost Savings and Synergies. We
believe that the synergies expected to be captured through the
integration of the operations of the two companies, combined
with the increased size, breadth and depth of the combined
company, will allow for greater future profitability than either
company could achieve on a stand-alone basis. Not including
implementation and transaction costs, the mergers are expected
to generate approximately $50 million in annual gross
synergies, when fully realized in 2009. These cost savings will
result from elimination of duplicate spending (including, but
not limited to, overhead costs and general and administrative
expense relating to executive officers) and overlapping
functions and modifications to our processes to become more
efficient, including potentially standardizing our equipment.
Following the completion of the mergers, the combined company
plans to undertake a comprehensive review of its operations,
particularly in the United States, to determine which facilities
and functions are duplicative and can be eliminated or converted
to a different use. These expected cost savings and synergies
are estimates that may change, and achieving the expected cost
savings and synergies is subject to a number of risks and
uncertainties.
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Hanovers
Reasons for the Mergers and Recommendation of Hanovers
Board of Directors
At its meeting on February 3, 2007, after due
consideration, the Hanover board of directors unanimously:
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determined that the merger agreement and the transactions
contemplated thereby are advisable and in the best interests of
the stockholders of Hanover;
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approved, authorized and adopted the merger agreement; and
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recommended that the stockholders of Hanover vote FOR
adoption of the merger agreement at the meeting of stockholders
of Hanover.
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In approving the merger agreement and making these
determinations, the Hanover board of directors consulted with
Hanovers management as well as Hanovers financial
advisor and legal counsel, and considered a number of factors,
which are discussed below. The following discussion of the
information and factors considered by the Hanover board of
directors is not intended to be exhaustive. In view of the wide
variety of factors considered in connection with the mergers,
the Hanover board of directors did not consider it practicable
to, nor did it attempt to, quantify or otherwise assign relative
weights to the specific material factors it considered in
reaching its decision. In addition, individual members of the
Hanover board of directors may have given different weight to
different factors. The Hanover board of directors considered
this information and these factors as a whole, and overall
considered the relevant information and factors to be favorable
to, and in support of, its determinations and recommendations.
The Hanover board of directors considered the following as
generally supporting its decision to enter into the merger
agreement:
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Mutual Benefits. The Hanover board considered
the expected benefits to both companies and their stockholders
described above under Strategic and Financial
Rationale for the Mergers.
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Interest in Master Limited Partnership. The
Hanover board considered that the mergers would combine Hanover
with Universal, which already has formed a master limited
partnership that provides a lower cost of capital than
Hanovers corporate structure. The Hanover board believes
that the mergers will allow Hanover to capture the benefits of
the master limited partnership structure more quickly and
cost-effectively than if Hanover itself attempted to sponsor and
complete an initial public offering by a master limited
partnership.
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Financial Flexibility. The Hanover board
considered the expected financial condition of the combined
company after the mergers, including its expected market
capitalization, balance sheet, revenues, profits and earnings
per share, and noted that the combined company should provide
Hanover stockholders
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with increased liquidity and provide the combined company with a
potentially lower cost of capital from future equity and debt
transactions than Hanover as a stand-alone entity. The Hanover
board also considered a projection that the mergers are expected
to be accretive to estimated earnings per share of Holdings in
2007 compared to estimated earnings per share of Hanover in
2007, after factoring in synergies and excluding the one-time
costs related to the mergers, by approximately $0.23.
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Ownership of Holdings. The Hanover board noted
that the stockholders of Hanover would own approximately 53% of
the combined company based on the application of the negotiated
exchange ratios used in the mergers and the number of shares of
Hanover and Universal common stock outstanding as of the date of
the merger agreement. Because of the various elements that were
considered in the relative negotiated valuations of the two
companies, including that Hanover was contributing slightly more
assets and revenue than Universal, it was important to the
Hanover board that the application of the exchange ratios result
in stockholders of Hanover owning a slight majority of the
combined company.
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Board Composition. The Hanover board
considered that, upon consummation of the mergers, one-half of
the board of Holdings will consist of members of Hanovers
board, and that the Chairman of the Board of Hanover will serve
as the Chairman of the Board of Holdings. The Hanover board
believed that because the transaction was structured as a merger
of equals, the board of Holdings initially should be balanced
between legacy Hanover directors and Universal directors. In
addition, because several members of the senior management team
of Universal will serve as members of the senior management team
of Holdings, the Hanover board believed it was important that
the initial Chairman of the Board of Holdings be a current
member of the Hanover board in order to maintain this balance.
The Hanover board believed that this balance would enable the
combined company to take advantage of the expertise and
leadership of both companies.
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Composition of Management. The Hanover board
considered that, upon consummation of the mergers, the senior
management team of Holdings will be balanced between former
executives of Hanover and Universal. For example, Stephen A.
Snider will serve as President and Chief Executive Officer while
Brian A. Matusek will serve as Chief Operating Officer. The
Hanover board believed that this balance was important for many
of the same reasons that it believed it was important to
maintain a balance on the board of directors of Holdings as
described above.
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Increased Operational Scale. The Hanover board
considered the potential benefits to the combined company and
Hanovers employees from the expanded opportunities
available as a result of being part of a larger organization
with increased operational scale. This increased operational
scale should allow the combined company to take advantage of the
benefits of increased size, an expanded customer base, a more
diversified product and service offering, increased geographic
presence and greater resources to service the needs of
Holdings customers. The additional scale may also provide
additional options for future potential strategic alternatives
and will enable the combined company to increase the diversity
of its risk portfolio. It should also allow the combined company
to provide its employees with improved benefits associated with
a larger organization as well as giving them greater
opportunities to advance their careers in different fields and
in more regions of the world.
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No Cash Outlay. The Hanover board noted that
the consideration in the mergers consists of common stock of
Holdings rather than cash (other than cash paid in lieu of
fractional shares of Holdings common stock), which does not
require the combined company to make any additional borrowings
or cash outlays (other than to pay expenses associated with the
mergers).
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Reciprocity of Merger Agreement. The Hanover
board considered the largely reciprocal nature of the terms of
the merger agreement, including the representations and
warranties, obligations and rights of the parties under the
merger agreement, such as the provisions that permit either
party to respond to an unsolicited superior proposal and change
its recommendation of the mergers, the conditions to each
partys obligation to complete the mergers, the instances
in which each party is permitted to terminate the merger
agreement and the related termination fees payable by each party
in the event of termination of the merger agreement under
specified circumstances.
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Fairness Opinion Presented to the Hanover
Board. The Hanover board considered the financial
analysis reviewed and discussed with the Hanover board by
representatives of Credit Suisse as well as the oral opinion as
of February 3, 2007 of Credit Suisse to the Hanover board
(which was subsequently confirmed in writing by delivery of
Credit Suisses written opinion dated the same date) as to
the fairness from a financial point of view to the holders of
Hanover common stock of the Hanover exchange ratio in the
mergers. The full text of Credit Suisses written opinion,
setting forth the procedures followed, assumptions made,
qualifications and limitations on the review undertaken and
other matters considered by Credit Suisse in preparing its
opinion is attached as Annex B to this joint proxy
statement/prospectus.
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Tax-Free Exchange. The Hanover board also took
into account that the mergers are intended to be tax-free to the
holders of Hanover common stock and that the closing of the
Hanover merger is conditioned upon the receipt of a favorable
opinion from tax counsel to Hanover.
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Stock Market Prices. The Hanover board
considered the historical and current market prices of
Hanovers common stock and Universals common stock.
The overall equity values of Hanover and Universal based on the
market prices of their common stock were relatively equal, which
provided the basis for the companies to negotiate a merger
agreement that is relatively balanced between the two companies.
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Corporate Governance Provisions. The Hanover
board considered the corporate governance provisions contained
in the proposed certificate of incorporation and bylaws of
Holdings and believed that such provisions reflect an
appropriate balance between good corporate governance and
necessary protections to conduct the business of Holdings in an
orderly fashion.
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Location of Headquarters. The Hanover board
considered that both Hanover and Universal are headquartered in
Houston, Texas and the headquarters of the combined company will
remain in Houston, Texas, thus reducing the disruption caused by
the mergers to Hanover employees who work at Hanovers
current headquarters.
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The Hanover board also considered the potential risks of the
mergers, including the following:
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Fixed Exchange Ratio. The Hanover board
considered the fact that the fixed exchange ratio would not
adjust downwards to compensate for changes in the price of
Hanovers or Universals common stock prior to the
consummation of the mergers, and that the terms of the merger
agreement did not include termination rights triggered expressly
by a decrease in the value of Universal relative to the value of
Hanover. The Hanover board determined this structure was
appropriate and the risk acceptable due to the directors
focus on the relative intrinsic values and performance of
Hanover and Universal and the inclusion in the merger agreement
of other structural protections, such as the boards
ability to change its recommendation in favor of the merger
agreement or to terminate the merger agreement in certain other
circumstances.
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Regulatory Approvals. The Hanover board
considered the extensive regulatory approvals required to
complete the mergers and the risk that governmental authorities
might seek to impose unfavorable terms or conditions on the
required approvals or that such approvals may not be obtained at
all. The Hanover board further considered the potential length
of the regulatory approval process and the period of time
Hanover may be subject to the merger agreement without assurance
that the mergers will be completed.
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Restrictions of Interim Operations. The
Hanover board considered the provisions in the merger agreement
placing restrictions on Hanovers operations until
completion of the mergers, and the extent of those restrictions
as negotiated between the parties. These restrictions could have
the effect of preventing Hanover from pursuing other strategic
transactions during the pendency of the merger agreement,
including certain material acquisitions and divestitures. In
addition, these restrictions limit the ability of Hanover to
raise capital through the issuance of equity securities or the
incurrence of certain indebtedness. In considering the potential
risks imposed by the merger agreement, the Hanover board
determined that the potential benefits of the mergers outweighed
these risks. See The Merger
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Agreement Covenants and Agreements
Interim Operations beginning on page 84 for further
information.
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Personnel. The Hanover board considered the
adverse impact that business uncertainty pending completion of
the mergers could have on the ability to attract, retain and
motivate key personnel until the consummation of mergers. The
Hanover board determined, however, to address this risk by
implementing a retention program designed to retain key
employees during the pendency of the merger agreement. See
Interests of Hanover and Universal Directors
and Executive Officers in the Mergers Interests of
Hanover Directors and Executive Officers in the
Mergers Retention Plan beginning on page 70.
The Hanover board also considered the level and impact of job
reductions as a result of transaction-related synergies and
whether the possibility of those further job reductions also
could make it more difficult for Holdings to attract, retain and
motivate key personnel. In considering the potential risks
associated with employee morale and retention issues, the
Hanover board determined that the potential benefits that the
mergers could afford to the employees of Hanover outweighed
these risks.
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Non-Solicitation and Related Provisions. The
Hanover board considered the provisions of the merger agreement
that, subject to certain exceptions, prohibit Hanover from
soliciting, entering into or participating in discussions
regarding any takeover proposal and the provisions of the
agreement that require Hanover to conduct a stockholder meeting
to consider adoption of the merger agreement whether or not the
board of that company continues to recommend in favor of the
mergers. See The Merger Agreement Covenants
and Agreements No Solicitation beginning on
page 90 for further information.
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Termination Fee. The Hanover board considered
the risk of the provisions in the merger agreement relating to
the potential payment of a termination fee of up to
$70 million under certain circumstances and determined that
those provisions were customary and appropriate. See The
Merger Agreement Expenses and Termination Fees
beginning on page 95 for further information.
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Universal Business Risks. The Hanover board
considered certain risks inherent in Universals business
and operations and other contingent liabilities. Many of these
risks are described under the heading Risk Factors
in Universals Annual Report on
Form 10-K,
which is incorporated by reference herein. Based on reports of
management and outside advisors regarding the due diligence
process and the representations and warranties made by Universal
in the merger agreement, the Hanover board determined that these
risks were manageable as part of the ongoing business of the
combined company.
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Integration and Synergies. The Hanover board
considered the challenges inherent in the combination of two
business enterprises of the size and scope of Hanover and
Universal, including the possibility the anticipated cost
savings and synergies and other benefits sought to be obtained
from the mergers might not be achieved in the time frame
contemplated or at all.
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As part of the overall mix of information it considered, the
Hanover board also considered the interests that certain Hanover
executive officers and directors may have with respect to the
mergers in addition to their interests as Hanover stockholders.
See Interests of Hanover and Universal
Directors and Executive Officers in the Mergers beginning
on page 65 for further information. This factor was not
determined to necessarily be in support of or against the
Hanover boards decision to recommend the mergers.
The Hanover board concluded that, overall, the potential
benefits of the mergers to Hanover and its stockholders
outweighed the risks, many of which are mentioned above.
The Hanover board realized that there can be no assurance about
future results, including results considered or expected as
described in the factors listed above. It should be noted that
this explanation of the reasoning of the Hanover board and all
other information presented in this section are forward-looking
in nature and, therefore, should be read in light of the factors
discussed under the heading Cautionary Information
Regarding Forward-Looking Statements beginning on
page 33.
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The Hanover board of directors has unanimously approved,
authorized and adopted the merger agreement, has unanimously
determined that the merger agreement and the transactions
contemplated thereby, including the mergers, are advisable and
in the best interests of the stockholders of Hanover, and
unanimously recommends that Hanover stockholders vote FOR the
proposal to adopt the merger agreement.
Universals
Reasons for the Mergers and Recommendation of Universals
Board of Directors
At its meeting on February 3, 2007, after due
consideration, the Universal board of directors unanimously:
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determined that the merger agreement and the transactions it
contemplates are advisable, fair to and in the best interests of
Universal and its stockholders;
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approved the merger agreement; and
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recommended that the Universal stockholders vote for the
adoption of the merger agreement.
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In reaching its determination to recommend the adoption of the
merger agreement, the Universal board of directors consulted
with management as well as Goldman Sachs, Universals
financial advisor, and Universals legal counsel.
Universals board of directors also considered various
material factors that are discussed below. The discussion in
this section is not intended to be an exhaustive list of the
information and factors considered by Universals board of
directors. In view of the wide variety of factors considered in
connection with the mergers, the Universal board of directors
did not consider it practicable to, nor did it attempt to,
quantify or otherwise assign relative weights to the specific
material factors it considered in reaching its decision. In
addition, individual members of the Universal board of directors
may have given different weight to different factors. The
Universal board of directors considered this information and
these factors, as a whole and, overall, considered the relevant
information and factors to be favorable to, and in support of,
its determinations and recommendation.
The Universal board of directors considered the following
factors as generally supporting its decision to enter into the
merger agreement:
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Mutual Benefits. The Universal board
considered the expected benefits to both companies and their
stockholders described above under Strategic
and Financial Rationale for the Mergers.
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Enhanced Universal Partnership Growth
Opportunities. Universal intends for the
Universal Partnership to be the primary vehicle for the growth
of Universals domestic contract compression business
because the Universal Partnerships structure provides a
lower cost of capital than Universals corporate structure.
The Universal board considered that the mergers will provide a
greater number of compressor units and customers that can be
transferred to the Universal Partnership over time, thereby
enhancing the value of the Universal Partnership, as well as the
value of Universals general partner interest in the
Universal Partnership.
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Regional and Operational Scale and
Diversification. The Universal board considered
that the combined company should benefit from increased
operational scale. The Universal board also considered that the
combined company will be engaged in production and processing
equipment fabrication, a complementary line of business in which
Universal is not currently engaged.
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Financial Flexibility. The Universal board
noted a projection that the mergers are expected to be accretive
to estimated earnings per share of Holdings in the second half
of 2007 as compared to estimated earnings per share of Universal
in the second half of 2007, after factoring in synergies and
excluding the one-time costs related to the mergers, by
approximately 12%. The Universal board noted that the
transaction is expected to provide greater liquidity to
Universals stockholders because of the increased size of
the combined companys market capitalization resulting from
the all-stock transaction. This increase in market
capitalization is also expected to provide the combined company
with better access to capital markets than either company could
achieve by itself.
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Impact on Credit Profile. The Universal board
considered certain selected credit metrics of the combined
company on a pro forma basis as compared to those of Universal
on a stand-alone basis. The Universal board noted that there was
not a material change in the consolidated metrics as compared to
the projected stand-alone metrics and therefore did not expect a
material change in the credit profile of the combined company.
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Debt Arrangements. The Universal board
considered their expectation that, to the extent required upon
the completion of the mergers, refinancing of the
companies existing debt can be obtained on suitable terms.
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Tax-Free Exchange. The Universal board also
took into account the fact that the mergers are intended to be
tax-free to the holders of Universal common stock and that the
closing of the transaction is conditioned upon the receipt of
favorable opinions from tax counsel to each of the companies.
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No Cash Outlay. The Universal board considered
the fact that Holdings common stock rather than cash will be the
form of consideration to be paid to both parties
stockholders, which does not require either company to make any
additional borrowings or cash outlays (other than to pay
transaction costs and in lieu of any fractional shares).
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Fairness Opinion Presented to the Universal
Board. The Universal board considered the
financial analysis of Goldman, Sachs & Co. presented
to the Universal board on February 3, 2007 and the oral
opinion of that firm on that date (subsequently confirmed in a
written opinion dated February 5, 2007) to the Universal
board as to the fairness, from a financial point of view, to
Universals stockholders of the Universal exchange ratio in
the mergers as of the date of the opinion, as more fully
described below under the caption Opinion of
Universals Financial Advisor beginning on
page 59. The full text of this opinion, setting forth the
assumptions made, procedures followed, matters considered and
limitations on the reviews undertaken in connection with such
opinion, is attached as Annex C to this joint proxy
statement/prospectus.
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Holdings Governance. The Universal board
considered the corporate governance provisions of the proposed
certificate of incorporation and by-laws of Holdings. The
Universal board believes that those provisions reflect an
appropriate balance between good corporate governance and
necessary protections to allow the business of Holdings to be
conducted in an orderly fashion.
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Board Composition. The Universal board
considered that the Holdings board will be composed of five
former Universal directors and five former Hanover directors
upon consummation of the mergers. The Universal board believed
that because the transaction is structured as a merger of
equals, it is appropriate that the board of Holdings initially
be balanced between legacy Universal directors and legacy
Hanover directors.
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Employment Matters. The Universal board
considered the management composition of Holdings after the
consummation of the mergers, which will include Mr. Snider
as the President and Chief Executive Officer.
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Recommendation of Management. The Universal
board considered managements recommendation in support of
the mergers.
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Stockholder Approval. The Universal board took
into account the requirement that stockholder approval be
obtained as a condition to the consummation of the mergers.
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The Universal board also considered various potential risks of
the mergers, including the following:
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Hanover Business Risks. The Universal board
considered certain risks inherent in Hanovers business and
operations. Many of these risks are described under the heading
Risk Factors in Hanovers annual report on
Form 10-K,
which is incorporated by reference herein. Based on reports of
management and outside advisors regarding the due diligence
process, the Universal board determined that these risks were
manageable as part of the ongoing business of the combined
company.
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Regulatory Approvals. The Universal board
considered the regulatory approvals required to complete the
mergers and the risk that governmental authorities and third
parties might seek to impose unfavorable terms or conditions on
the required approvals or that such approvals may not be
obtained at all. The Universal board further considered the
potential length of the regulatory approval process and the
period of time Universal may be subject to the merger agreement
without assurance that it will be completed.
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Integration. The Universal board evaluated the
possibility that the anticipated cost savings and synergies and
other benefits sought to be obtained from the mergers might not
be achieved in the time frame contemplated.
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Personnel. The Universal board considered the
adverse impact that uncertainty pending consummation of the
mergers could have on the ability to attract, retain and
motivate key personnel until the mergers are completed. The
Universal board also considered the level and impact of job
reductions as a result of transaction-related synergies and
whether the possibility of those further job reductions also
could make it more difficult for the combined company to
attract, retain and motivate key personnel.
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Debt Arrangements. The Universal board
considered the impact of the mergers on the existing debt
arrangements of both Hanover and Universal and the
companies potential need to refinance their existing debt.
The Universal board concluded that the impact of the mergers on
the existing debt arrangements was manageable as part of the
business of the combined company.
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The Universal board also considered the largely reciprocal
nature of the terms of the merger agreement, including the
representations and warranties, obligations and rights of the
parties under the merger agreement, the conditions to each
partys obligation to complete the mergers, the instances
in which each party is permitted to terminate the merger
agreement and the related termination fees payable by each party
in the event of termination of the merger agreement under
specified circumstances. In particular, the Universal board
considered the fact that the following provisions have
substantially mutual application to both Hanover and Universal
and that, therefore, the parties face relatively equal
opportunities and risks arising from these provisions:
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Fixed Exchange Ratio. The Universal board
considered the fact that the fixed exchange ratio will not
adjust upward or downward to compensate for changes in the price
of either Hanover or Universal common stock prior to the
consummation of the mergers, and that the terms of the merger
agreement do not include termination rights triggered expressly
by a decrease in value of either company due to a decline in the
market price of that companys common stock. The Universal
board determined that this structure was appropriate and the
risk acceptable in view of the reciprocal nature of the fixed
exchange ratio, the Universal boards focus on the relative
intrinsic values and financial performance of Hanover and
Universal and the percentage of the combined company to be owned
by former holders of Universal common stock, and the inclusion
in the merger agreement of other structural protections such as
the boards ability to change its recommendation in favor
of the merger agreement or to terminate the merger agreement in
the event of a material adverse change in the other
companys business.
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Restrictions on Interim Operations. The
Universal board considered the provisions of the merger
agreement placing restrictions on each companys operations
until completion of the mergers and the extent of those
restrictions as negotiated between the parties. See The
Merger Agreement Covenants and
Agreements Interim Operations beginning on
page 84 for further information.
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Non-Solicitation and Related Provisions. The
Universal board considered the provisions of the merger
agreement that, subject to certain exceptions, prohibit each
company from soliciting, entering into or participating in
discussions regarding any takeover proposal and the provisions
of the agreement that require each company to conduct a
stockholder meeting to consider adoption of the merger agreement
whether or not the board of that company continues to recommend
in favor of the mergers. See The Merger
Agreement Covenants and Agreements No
Solicitation beginning on page 90 for further
information.
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Termination Fee. The Universal board
considered the provisions of the merger agreement relating to
the potential payment or receipt of a termination fee of up to
$70 million under certain circumstances
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and determined that those provisions were customary and
appropriate. See The Merger Agreement Expenses
and Termination Fees beginning on page 95 for further
information.
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As part of the overall mix of information it considered, the
Universal board also considered the following factors, none of
which individually was determinative of the Universal
boards decision to recommend the mergers but all of which,
taken together, were viewed as generally supporting the mergers:
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the scope of the due diligence investigation conducted by
management and Universals outside advisors and the results
thereof;
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the provisions of Holdings organizational documents,
including those that are different from Universals, such
as Holdings lack of a classified board of directors;
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the earnings, cash flow and balance sheet impact of the mergers;
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the relative financial performance, businesses, risks and
prospects of Hanover and Universal;
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the historical and then-current stock price information of
Hanover and Universal; and
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the interests that certain Universal executive officers and
directors may have with respect to the mergers in addition to
their interests as Universal stockholders. See
Interests of Hanover and Universal Directors
and Executive Officers in the Mergers beginning on
page 65 for further information.
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The Universal board of directors concluded that, overall, the
potential benefits of the mergers to Universal and
Universals stockholders outweighed the risks.
The Universal board of directors realized that there can be no
assurance about future results, including results considered or
expected as described in the factors listed above. It should be
noted that this explanation of Universals board of
directors reasoning and all other information presented in
this section are forward-looking in nature and, therefore,
should be read in light of the factors discussed under the
heading Cautionary Information Regarding Forward-Looking
Statements beginning on page 33.
The Universal board of directors has unanimously approved the
merger agreement, has unanimously determined that the merger
agreement and the transactions contemplated thereby, including
the mergers, are advisable, fair to and in the best interests of
Universal and Universals stockholders, and unanimously
recommends that Universal stockholders vote FOR the
proposal to adopt the merger agreement.
Financial
Forecasts
During the course of discussions between Hanover and Universal,
the companies provided their respective financial advisors and
each other selected, non-public financial forecasts prepared by
the companies respective managements as part of their
internal, year-end 2006 planning process for fiscal year 2007.
The forecast amounts set forth below are included in this joint
proxy statement/prospectus only because this information was
exchanged between Hanover and Universal and provided to the
respective financial advisors of Hanover and Universal in
connection with the proposed mergers.
Hanover and Universal advised each other and their financial
advisors that their respective internal financial forecasts were
subjective in many respects. The forecasts reflect numerous
assumptions with respect to industry performance, general
business, economic, market and financial conditions and other
matters, all of which are difficult to predict and beyond
Hanovers and Universals control. The forecasts also
reflect numerous estimates and assumptions related to the
business of Hanover and Universal (including with respect to the
growth and viability of certain segments of their respective
businesses) that are inherently subject to significant economic,
political, and competitive uncertainties, all of which are
difficult to predict and many of which are beyond Hanovers
and Universals control. See Risk Factors
beginning on page 22. The assumptions made in preparing the
forecasts may not prove accurate, and actual results may be
materially greater or less than those set forth below. See
Cautionary Information Regarding Forward-Looking
Statements beginning on page 33.
The managements of Hanover and Universal have prepared from time
to time in the past, and will continue to prepare in the future,
internal financial forecasts that reflect various estimates and
assumptions that
51
change from time to time. Accordingly, the forecasts used in
conjunction with the proposed transaction may differ from these
other forecasts.
THE INCLUSION OF THE FORECASTS IN THIS JOINT PROXY
STATEMENT/PROSPECTUS SHOULD NOT BE REGARDED AS AN INDICATION
THAT HANOVER OR UNIVERSAL OR THEIR RESPECTIVE OFFICERS AND
DIRECTORS CONSIDER THE FORECASTS TO BE AN ACCURATE PREDICTION OF
FUTURE EVENTS OR NECESSARILY ACHIEVABLE. IN LIGHT OF THE
UNCERTAINTIES INHERENT IN FORWARD-LOOKING INFORMATION OF ANY
KIND. HANOVER AND UNIVERSAL CAUTION YOU AGAINST RELYING ON THIS
INFORMATION. NONE OF HANOVER, UNIVERSAL OR THEIR RESPECTIVE
OFFICERS OR DIRECTORS INTEND TO UPDATE OR REVISE THE FORECASTS
TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE THEY WERE
PREPARED OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EXCEPT
TO THE EXTENT REQUIRED BY LAW. SEE CAUTIONARY INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS BEGINNING ON PAGE 34.
Hanovers
Forecasts
In developing its 2007 financial forecast, Hanover assumed that
worldwide natural gas market fundamentals will remain positive
in 2007 and that customers in the United States, Latin America
and the emerging markets of the Eastern Hemisphere will continue
to be active in the development of natural gas resources,
resulting in continued demand for surface equipment
infrastructure to support this development activity.
For its 2007 financial forecast, Hanover anticipated the rental
of compression equipment and the sale of compression, production
and processing equipment and aftermarket services in the United
States to be generally consistent with levels experienced in
2006. During 2007, Hanover expects to continue to increase the
number of higher horsepower units in its fleet under contract
and to complete its program to refurbish idle equipment for
re-application in the market. Pricing levels in the United
States for contracted compression were anticipated to be
consistent with or slightly better than 2006 levels. Hanover has
initiated a program to improve the efficiency of its United
States rental operations and expects rental operating expenses,
as a percentage of revenues, to begin to decline by the end of
2007.
In developing its 2007 international budget, Hanover assumed
increased rental activity in Latin America, the commencement of
a new rental project in the Middle East, and improved sales of
oil and gas surface equipment as well as improved sales at
Hanovers subsidiary, Belleli Energy S.r.l. Belleli
provides engineering, procurement and construction services
primarily related to the manufacturing of critical process
equipment for refinery and petrochemical facilities and
construction of evaporators and brine heaters for desalination
plants and tank farms, primarily for use in Europe and the
Middle East. Hanovers 2007 financial forecast was prepared
using accounting principles consistent with its historical
financial statements.
THE FORECASTS SET FORTH BELOW WERE NOT PREPARED WITH A VIEW TO
PUBLIC DISCLOSURE OR COMPLIANCE WITH PUBLISHED GUIDELINES OF THE
SEC, ANY STATE SECURITIES COMMISSION OR THE AMERICAN INSTITUTE
OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING PREPARATION AND
PRESENTATION OF PROSPECTIVE FINANCIAL INFORMATION. THE HANOVER
PROSPECTIVE FINANCIAL INFORMATION INCLUDED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS HAS BEEN PREPARED BY, AND IS THE
RESPONSIBILITY OF, THE HANOVER MANAGEMENT.
PRICEWATERHOUSECOOPERS LLP HAS NEITHER EXAMINED NOR COMPILED THE
ACCOMPANYING PROSPECTIVE FINANCIAL INFORMATION AND, ACCORDINGLY,
PRICEWATERHOUSECOOPERS LLP DOES NOT EXPRESS AN OPINION OR ANY
OTHER FORM OF ASSURANCE WITH RESPECT THERETO. THE
PRICEWATERHOUSECOOPERS LLP REPORT INCORPORATED BY REFERENCE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS RELATES TO HANOVERS
HISTORICAL FINANCIAL INFORMATION. IT DOES NOT EXTEND TO THE
PROSPECTIVE FINANCIAL INFORMATION AND SHOULD NOT BE READ TO DO
SO.
52
Forecast
of Hanovers Results Provided to its Financial Advisor
(dollars in millions, except per share amounts)
|
|
|
|
|
|
|
2007
|
|
Revenue and Other Income
|
|
$
|
1,889
|
|
Gross Profit and Equity in Earnings
|
|
|
676
|
|
EBITDA(1)
|
|
|
457
|
|
Net Income
|
|
|
79
|
|
Earnings per Share (diluted)
|
|
$
|
0.72
|
|
|
|
|
(1) |
|
EBITDA consists of consolidated income (loss) from continuing
operations before interest expense, provision for (benefit from)
income taxes, and depreciation and amortization. EBITDA is a
commonly used measure of operating performance for valuing
companies in Hanovers industry. EBITDA should not be
considered as an alternative to measures prescribed by generally
accepted accounting principles and may not be comparably
calculated from one company to another. |
Universals
Forecasts
The major underlying assumptions for the Universal forecasts
were tied to Universals belief that the fundamentals of
the worldwide natural gas industry will remain positive through
2007.
In the United States, Universal believes that the drilling
activity experienced in 2006 will continue in 2007, while
natural gas production in the United States will grow slightly.
Universal also believes that the level of natural gas produced
from unconventional sources, such as coalbeds, tight sands and
shales, will continue to grow, as it has over the past several
years. Because unconventional natural gas production requires
more compression per million cubic feet of natural gas than
conventional production, the requirements for compression in the
United States are expected to grow faster than the overall
natural gas production growth rate. Universal believes that this
increase in demand for compression will allow it to grow its
contract compression business in the United States by adding
additional compression equipment and putting existing idle
equipment back to work. Additionally, Universal expects that the
increase in demand for compression will benefit both its
aftermarket service and fabrication businesses.
In international markets, Universal believes that the
development of infrastructure to support the production and
transportation of natural gas experienced in 2006 will continue
in 2007. This infrastructure development has been undertaken as
more stringent environmental standards against the flaring of
natural gas have been enacted in many regions throughout the
world and more natural gas is being utilized in the regions
where it is produced to allow for the exportation of crude oil.
With the expansion of this infrastructure, Universal forecasts
that its international contract compression will continue to
grow at rates commensurate with recent history. Additionally,
Universal believes this increasing focus on natural gas
development will benefit both its international aftermarket
service and fabrication businesses. Finally, the forecast
Universal provided to Hanover included the financial effects of
the acquisition of B.T.I. Holdings Pte Ltd, a Singapore-based
equipment fabricator, that Universal completed in January 2007.
THE PROSPECTIVE FINANCIAL INFORMATION OF UNIVERSAL INCLUDED IN
THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN PREPARED BY, AND
IS THE RESPONSIBILITY OF, UNIVERSALS MANAGEMENT. THE
ACCOMPANYING PROSPECTIVE FINANCIAL INFORMATION RELATED TO
UNIVERSAL WAS NOT PREPARED WITH A VIEW TOWARD PUBLIC DISCLOSURE
OR WITH A VIEW TOWARD COMPLYING WITH THE GUIDELINES ESTABLISHED
BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS WITH
RESPECT TO PROSPECTIVE FINANCIAL INFORMATION, BUT, IN THE VIEW
OF THE UNIVERSALS MANAGEMENT, WAS PREPARED ON A REASONABLE
BASIS, REFLECTS THE BEST ESTIMATES AND JUDGMENTS AVAILABLE AT
THE TIME THE INFORMATION WAS PREPARED, AND PRESENTS, TO THE BEST
OF UNIVERSAL MANAGEMENTS KNOWLEDGE AND BELIEF AT THE TIME
THE INFORMATION WAS PREPARED, THE EXPECTED COURSE OF ACTION AND
THE EXPECTED FUTURE FINANCIAL PERFORMANCE OF THE UNIVERSAL.
HOWEVER, THIS INFORMATION IS NOT FACT AND SHOULD NOT BE
53
RELIED UPON AS BEING NECESSARILY INDICATIVE OF FUTURE RESULTS,
AND READERS OF THIS JOINT PROXY STATEMENT/PROSPECTUS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE PROSPECTIVE
FINANCIAL INFORMATION. NEITHER DELOITTE & TOUCHE LLP
NOR ANY OTHER INDEPENDENT ACCOUNTANTS HAVE COMPILED, EXAMINED OR
PERFORMED ANY PROCEDURES WITH RESPECT TO THE PROSPECTIVE
FINANCIAL INFORMATION CONTAINED HEREIN, NOR HAVE THEY EXPRESSED
ANY OPINION OR ANY OTHER FORM OF ASSURANCE ON SUCH
INFORMATION OR ITS ACHIEVABILITY, AND ASSUME NO RESPONSIBILITY
FOR, AND DISCLAIM ANY ASSOCIATION WITH, THE PROSPECTIVE
FINANCIAL INFORMATION.
Forecast
of Universals Results Provided to its Financial Advisor
(dollars in millions, except per share amounts)
|
|
|
|
|
|
|
2007
|
|
|
Revenue
|
|
$
|
1,152
|
|
Gross Profit
|
|
|
498
|
|
EBITDA, as Adjusted(1)
|
|
|
357
|
|
Net Income
|
|
|
100
|
|
Earnings per Share (diluted)
|
|
$
|
3.19
|
|
|
|
|
(1) |
|
EBITDA, as adjusted, is defined as net income plus income taxes,
interest expense (including debt extinguishment costs and gain
on the termination of interest rate swap agreements), operating
lease expense, depreciation and amortization, foreign currency
gains or losses, minority interest, excluding non-recurring
items (including facility consolidation costs). EBITDA is a
commonly used measure of operating performance for valuing
companies in Universals industry. EBITDA should not be
considered as an alternative to measures prescribed by generally
accepted accounting principles and may not be comparably
calculated from one company to another. |
Opinion
of Hanovers Financial Advisor
On February 3, 2007, Credit Suisse Securities (USA) LLC
rendered its oral opinion to Hanovers board of directors
(which was subsequently confirmed in writing by delivery of
Credit Suisses written opinion dated the same date) to the
effect that, as of February 3, 2007, the Hanover exchange
ratio was fair, from a financial point of view, to the holders
of Hanover common stock. Credit Suisse has not been requested to
and is not expected to update or reaffirm its opinion.
Credit Suisses opinion was directed to Hanovers
board of directors and only addressed the fairness from a
financial point of view of the Hanover exchange ratio and does
not address any other aspect or implication of the mergers. The
summary of Credit Suisses opinion in this joint proxy
statement/prospectus is qualified in its entirety by reference
to the full text of its written opinion, which is included as
Annex B to this joint proxy statement/prospectus and
sets forth the procedures followed, assumptions made,
qualifications and limitations on the review undertaken and
other matters considered by Credit Suisse in preparing its
opinion. Hanover encourages Hanovers stockholders to
carefully read the full text of Credit Suisses written
opinion. However, neither Credit Suisses written opinion
nor the summary of its opinion and the related analyses set
forth in this joint proxy statement/prospectus are intended to
be, and do not constitute advice or a recommendation to any
stockholder as to how such stockholder should vote or act with
respect to any matter relating to the mergers.
In arriving at its opinion, Credit Suisse, among other things:
|
|
|
|
|
reviewed a draft dated February 3, 2007 of the merger
agreement;
|
|
|
|
reviewed certain publicly available business and financial
information relating to Hanover and Universal;
|
54
|
|
|
|
|
reviewed certain other information relating to Hanover and
Universal, including financial forecasts (and adjustments
thereto based on discussions with the management of Hanover)
relating to Hanover and Universal, provided to or discussed with
Credit Suisse by Hanover and Universal;
|
|
|
|
met with the managements of Hanover and Universal to discuss the
business and prospects of Hanover and Universal, respectively;
|
|
|
|
considered certain financial and stock market data of Hanover
and Universal and compared that data with similar data for other
publicly held companies in businesses Credit Suisse deemed
similar to those of Hanover and Universal;
|
|
|
|
considered, to the extent publicly available, the financial
terms of certain other business combinations and other
transactions which had recently been effected; and
|
|
|
|
considered such other information, financial studies, analyses
and investigations and financial, economic and market criteria
which Credit Suisse deemed relevant.
|
In connection with Credit Suisses review, Credit Suisse
did not assume any responsibility for independent verification
of any of the foregoing information and relied on its being
complete and accurate in all material respects. As Hanover was
aware, the management of Universal only provided Credit Suisse
with financial forecasts for Universal with respect to 2007 and,
at Hanovers direction, for purposes of Credit
Suisses analyses and its opinion, Credit Suisse used such
financial forecasts for Universal for 2007 and financial
forecasts for Universal beyond 2007 based on the financial
forecasts for 2007 provided by the management of Universal. With
respect to the financial forecasts for Hanover and Universal
that Credit Suisse reviewed, Credit Suisse was advised, and
Credit Suisse assumed, that such forecasts for Hanover had been
reasonably prepared on bases reflecting reasonable estimates and
judgments of the management of Hanover as to the future
financial performance of Hanover and that such forecasts and
estimates for Universal had been reasonably prepared on bases
reflecting the reasonable estimates and judgments of the
managements of Universal (as to the financial performance of
Universal in 2007) and Hanover (as to the financial
performance of Universal beyond 2007). Credit Suisse assumed,
with Hanovers consent, that the mergers would be treated
as a tax-free reorganization for federal income tax purposes.
Credit Suisse also assumed, with Hanovers consent, that in
the course of obtaining any regulatory or third party consents,
approvals or agreements in connection with the mergers, no
delay, limitation, restriction or condition would be imposed
that would have an adverse effect on Hanover, Universal or the
contemplated benefits of the mergers that was material to Credit
Suisses analysis, that the mergers would be consummated in
accordance with the terms of the merger agreement without
waiver, modification or amendment of any material term,
condition or agreement thereof, and that the merger agreement,
when executed, would conform to the draft reviewed by Credit
Suisse in all respects material to its analyses. In addition,
Credit Suisse was not requested to make, and did not make, an
independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of Hanover or Universal, nor was
Credit Suisse furnished with any such evaluations or appraisals.
Credit Suisses opinion only addressed the fairness, from a
financial point of view, to the holders of Hanover common stock
of the Hanover exchange ratio and did not address any other
aspect or implication of the mergers or any other agreement,
arrangement or understanding entered into in connection with the
mergers or otherwise. Credit Suisses opinion was
necessarily based upon information made available to it as of
the date of its opinion and financial, economic, market and
other conditions as they existed and could be evaluated on that
date. Credit Suisses opinion also was based on certain
assumptions regarding the oil and gas services industry which
are subject to significant volatility and which, if different
than assumed, could have a material impact on Credit
Suisses analyses. Credit Suisse did not express any
opinion as to what the value of shares of common stock of
Holdings actually will be when issued to the holders of Hanover
common stock pursuant to the mergers or the prices at which
shares of common stock of Holdings will trade at any time.
Credit Suisses opinion did not address the relative merits
of the mergers as compared to alternative transactions or
strategies that might be available to Hanover, nor did it
address the underlying business decision of Hanover to proceed
with the mergers. Credit Suisse was not requested to, and did
not, solicit third party indications of interest in acquiring
all or any part of Hanover.
55
In preparing its opinion to Hanovers board of directors,
Credit Suisse performed a variety of analyses, including those
described below. The summary of Credit Suisses valuation
analyses is not a complete description of the analyses
underlying Credit Suisses fairness opinion. The
preparation of a fairness opinion is a complex process involving
various quantitative and qualitative judgments and
determinations with respect to the financial, comparative and
other analytic methods employed and the adaptation and
application of these methods to the unique facts and
circumstances presented. As a consequence, neither a fairness
opinion nor its underlying analyses is readily susceptible to
partial analysis or summary description. Credit Suisse arrived
at its opinion based on the results of all analyses undertaken
by it and assessed as a whole and did not draw, in isolation,
conclusions from or with regard to any individual analysis,
analytic method or factor. Accordingly, Credit Suisse believes
that its analyses must be considered as a whole and that
selecting portions of its analyses, analytic methods and
factors, without considering all analyses and factors, could
create a misleading or incomplete view of the processes
underlying its analyses and opinion.
In performing its analyses, Credit Suisse considered business,
economic, industry and market conditions, financial and
otherwise as they existed on, and could be evaluated as of, the
date of the written opinion. No company, transaction or business
used in Credit Suisses analyses for comparative purposes
is identical to Hanover or the proposed mergers. The implied
reference range values indicated by Credit Suisses
analyses are illustrative and not necessarily indicative of
actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested
by the analyses. In addition, any analyses relating to the value
of assets, businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or
securities actually may be sold, which may depend on a variety
of factors, many of which are beyond Hanovers control and
the control of Credit Suisse. Much of the information used in,
and accordingly the results of, Credit Suisses analyses
are inherently subject to substantial uncertainty.
Credit Suisses opinion and analyses were provided to
Hanovers board of directors in connection with its
consideration of the proposed mergers and were among many
factors considered by Hanovers board of directors in
evaluating the proposed mergers. Neither Credit Suisses
opinion nor its analyses were determinative of the Hanover
exchange ratio or of the views of Hanovers board of
directors or management with respect to the mergers.
The following is a summary of the material valuation analyses
prepared in connection with Credit Suisses opinion
rendered on February 3, 2007. The analyses summarized below
include information presented in tabular format. The tables
alone do not constitute a complete description of the analyses.
Considering data in tables without considering the full
narrative description of the analyses, as well as the
methodologies underlying and the assumptions, qualifications and
limitations affecting each analysis, could create a misleading
or incomplete view of Credit Suisses analyses.
For purposes of its analyses, Credit Suisse reviewed a number of
financial metrics including:
|
|
|
|
|
Enterprise Value generally the value as of a
specified date of the relevant companys outstanding equity
securities (taking into account its outstanding options,
warrants and convertible securities) plus the value of its net
debt (the value of its outstanding indebtedness and capital
lease obligations less the amount of cash on its balance sheet),
preferred stock and minority interests as of a specified date.
|
|
|
|
EBITDA generally the amount of the relevant
companys earnings before interest, taxes, depreciation,
and amortization for a specified time period.
|
|
|
|
After-Tax Cash Flow generally the amount of
the relevant companys net income plus the amounts of
depreciation and amortization and deferred taxes for a specified
time period.
|
Unless the context indicates otherwise, enterprise and per share
equity values used in the selected companies analysis described
below were calculated using the closing price of Hanovers
and Universals common stock and the common stock of the
selected companies in the oil and gas services industry listed
below as of February 2, 2007, and the enterprise and per
share equity values for the target companies used in the
selected transactions analysis described below were calculated
as of the announcement date of the relevant transaction based on
the purchase prices paid in the selected transactions. Estimates
of 2007 EBITDA and After-Tax Cash Flow for Hanover and Universal
were based on estimates provided by their respective
managements. Estimates
56
of 2007 EBITDA and After-Tax Cash Flow for the selected
companies in the oil and gas services industry listed below were
based on publicly available research analyst estimates for those
companies. For purposes of the analysis below, estimated 2006
and 2007 EBITDA and After Tax Cash Flow for Hanover were
adjusted for among other things, the conversion of certain
outstanding convertible securities of Hanover.
Selected Companies Analysis. Credit Suisse
calculated multiples of enterprise value and equity value and
considered certain financial data for Hanover and Universal and
selected companies in the oil and gas services industry.
The calculated multiples included:
|
|
|
|
|
Enterprise value as a multiple of estimated 2007 EBITDA; and
|
|
|
|
Equity value as a multiple of estimated 2007 After-Tax Cash Flow.
|
The selected companies in the oil and gas services industry were
selected because they were deemed to be similar to Hanover in
one or more respects which included nature of business, size,
diversification, financial performance and geographic
concentration. The selected companies were:
Large
Cap
|
|
|
|
|
Weatherford International
|
|
|
|
National Oilwell Varco
|
|
|
|
Smith International
|
|
|
|
BJ Services
|
|
|
|
Cameron International
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|
|
|
Grant Prideco
|
Mid
Cap Diversified
|
|
|
|
|
Superior Energy
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|
|
Complete Production
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|
Tetra Technologies
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|
Oil States International
|
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|
W-H Energy Services
|
Mid
Cap Focused
|
|
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FMC Technologies
|
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|
Dresser Rand Group
|
|
|
|
Oceaneering International
|
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Core Laboratories
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|
Hydril
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|
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|
Dril-Quip
|
Credit Suisse applied multiple ranges based on the selected
companies analysis to corresponding financial data for Hanover
and Universal, including estimates provided by their
managements. The selected companies analysis indicated an
implied reference range Hanover exchange ratio of 0.281 to
0.385, as compared to the proposed Hanover exchange ratio in the
Hanover merger of 0.325 per share of Hanover common stock.
57
Selected Transactions Analysis. Credit Suisse
calculated multiples of enterprise value and per share equity
value to certain financial data based on the purchase prices
paid in selected publicly-announced transactions involving
companies in the oil and gas services industry.
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|
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|
The calculated multiples included enterprise value as a multiple
of latest 12 months, or LTM EBITDA.
|
The selected transactions were selected because the target
companies were deemed to be similar to Hanover in one or more
respects which included nature of business, size,
diversification, financial performance and geographic
concentration. The selected transactions were:
|
|
|
Acquirer
|
|
Target
|
|
Compagnie Générale de
Géophysique
|
|
Veritas DGC Inc.
|
Tenaris S.A.
|
|
Maverick Tube Corporation
|
Schlumberger Limited
|
|
Western Geco
|
Weatherford International
Ltd.
|
|
Precision Drilling
Corporations Drilling Business
|
First Reserve Corporation
|
|
Dresser Rand Unit of
Ingersoll-Rand Company
|
National-Oilwell, Inc.
|
|
Varco International Inc.
|
Enerflex Systems Ltd.
|
|
EnSource Energy Services Inc.
|
First Reserve Corporation,
Odyssey
Investment Partners, Dresser
Equipment Group management
|
|
Dresser Equipment Group
(Halliburton Company)
|
Tuboscope Inc.
|
|
Varco International Inc.
|
Precision Drilling Corporation
|
|
Computalog Ltd.
|
Schlumberger Limited
|
|
Camco International Inc.
|
Baker Hughes Inc.
|
|
Western Atlas Inc.
|
Halliburton Company
|
|
Dresser Industries, Inc.
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EVI, Inc.
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|
Weatherford Enterra, Inc.
|
Credit Suisse applied multiple ranges based on the selected
transactions analysis to corresponding financial data for
Hanover and Universal. The selected transactions analysis
indicated an implied reference range Hanover exchange ratio of
0.266 to 0.435, as compared to the Hanover exchange ratio in the
Hanover merger of 0.325 per share of Hanover common stock.
Discounted Cash Flow Analysis. Credit Suisse
also calculated the net present value of Hanovers and
Universals unlevered, after-tax free cash flows through
2011 based on estimates provided by Hanovers management
with respect to Hanover. The management of Universal only
provided Credit Suisse with financial forecasts for Universal
with respect to 2007 and, at Hanovers direction, for
purposes of its analyses and its opinion, Credit Suisse used
such financial forecasts for Universal for 2007 and financial
forecasts for Universal beyond 2007 based on the financial
forecasts for 2007 provided by the management of Universal. In
performing this analysis, Credit Suisse used discount rates
ranging from 11.0% to 12.0% for Hanover and 9.5% to 10.5% for
Universal based on Hanovers and Universals estimated
weighted average cost of capital and terminal value multiples
ranging from 7.5x to 8.5x for Hanover and Universal based on the
selected companies analyses. The discounted cash flow analyses
indicated an implied reference range Hanover exchange ratio of
0.264 to 0.400, as compared to the Hanover exchange ratio in the
Hanover merger of 0.325 per share of Hanover common stock.
Contribution Analysis. Credit Suisse also
reviewed the respective contributions of Hanover and Universal
to estimated 2006 and 2007 EBITDA, Net Income and After-Tax Cash
Flow for the pro forma combined entity resulting from the
mergers without giving effect to any cost savings or synergies.
This analysis indicated that the following relative
contributions of Hanover and Universal resulted in the indicated
implied Hanover
58
exchange ratios, as compared to the Hanover exchange ratio in
the Hanover merger of 0.325 per share of Hanover common
stock:
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Hanover Implied
|
|
|
|
Hanover
|
|
|
Universal
|
|
|
Exchange Ratio
|
|
|
2006E EBITDA
|
|
|
58
|
%
|
|
|
42
|
%
|
|
|
0.387
|
|
2007E EBITDA
|
|
|
57
|
%
|
|
|
43
|
%
|
|
|
0.359
|
|
2006E Net Income
|
|
|
48
|
%
|
|
|
52
|
%
|
|
|
0.246
|
|
2007E Net Income
|
|
|
46
|
%
|
|
|
54
|
%
|
|
|
0.227
|
|
2006E After Tax Cash Flow
|
|
|
55
|
%
|
|
|
45
|
%
|
|
|
0.326
|
|
2007E After Tax Cash Flow
|
|
|
55
|
%
|
|
|
45
|
%
|
|
|
0.326
|
|
For the purposes of the contribution analysis, estimated 2006
and 2007 EBITDA and After Tax Cash Flow for Universal were
adjusted for, among other things, certain conforming accounting
adjustments based on discussions with Hanovers management.
Other
Matters
Credit Suisse was engaged by Hanover pursuant to a letter
agreement dated as of December 20, 2006 to act as
Hanovers financial advisor with respect to, among other
things, the possible acquisition of all or substantially all of
the assets or the capital stock of Universal, including any
merger, joint venture or other business combination involving
Universal. Hanover engaged Credit Suisse based on Credit
Suisses qualifications, experience and reputation. Credit
Suisse is an internationally recognized investment banking and
financial advisory firm. Credit Suisse, as part of its
investment banking business, is regularly engaged in the
valuation of businesses and securities in connection with
mergers and acquisitions, leveraged buyouts, negotiated
underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and
valuations for corporate and other purposes. Pursuant to the
engagement letter, Hanover will pay Credit Suisse a fee of
$8 million for serving as Hanovers financial advisor.
Payment of such fee is fully contingent upon the consummation of
the merger between Hanover and Universal. As part of its
services as financial advisor to Hanover, Credit Suisse rendered
the opinion described above to Hanovers board of
directors. Credit Suisse did not receive a separate fee for
rendering this opinion. Hanover has also agreed to indemnify
Credit Suisse for certain liabilities and other items arising
out of its engagement. Credit Suisse and its affiliates have in
the past provided and are currently providing investment banking
services to Hanover for which Credit Suisse has received, and
would expect to receive, compensation. Since January 1,
2005, Credit Suisse has been paid an aggregate of approximately
$4.2 million by Hanover for such services. In the future
Credit Suisse and its affiliates may provide such services to
Holdings and its affiliates, for which Credit Suisse would
expect to receive compensation. Credit Suisse is a full service
securities firm engaged in securities trading and brokerage
activities as well as providing investment banking and other
financial services. In the ordinary course of business, Credit
Suisse and its affiliates may acquire, hold or sell, for its and
its affiliates own accounts and the accounts of customers,
equity, debt and other securities and financial instruments
(including bank loans and other obligations) of Hanover,
Universal and any other company that may be involved in the
mergers, as well as provide investment banking and other
financial services to such companies.
Opinion
of Universals Financial Advisor
Goldman, Sachs & Co. rendered its opinion to the board
of directors of Universal that, as of February 5, 2007 and
based upon and subject to the factors and assumptions set forth
therein, the Universal exchange ratio pursuant to the merger
agreement was fair from a financial point of view to the holders
of Universal common stock. Universal does not intend to request
that Goldman Sachs render an opinion as of any date subsequent
to February 5, 2007.
The full text of the written opinion of Goldman Sachs, dated
February 5, 2007, which sets forth assumptions made,
procedures followed, matters considered and limitations on the
review undertaken in connection with the opinion, is attached as
Annex C. Goldman Sachs provided its opinion for the
information and assistance of the board of directors of
Universal in connection with its consideration of
59
the mergers. The Goldman Sachs opinion is not a
recommendation as to how any holder of Universal common stock
should vote with respect to the Universal merger.
In connection with rendering the opinion described above and
performing its related financial analysis, Goldman Sachs
reviewed, among other things:
|
|
|
|
|
the merger agreement;
|
|
|
|
annual reports to stockholders and annual reports on Form
10-K of
Universal for the four fiscal years ended March 31, 2005
and the nine months ended December 31, 2005, and of Hanover
for the five years ended December 31, 2005;
|
|
|
|
certain interim reports to stockholders and Quarterly Reports on
Form 10-Q
of Universal and Hanover;
|
|
|
|
certain other communications from Universal and Hanover to their
respective stockholders;
|
|
|
|
certain internal financial analyses and forecasts for Universal
prepared by Universals management;
|
|
|
|
certain financial analyses and forecasts for Hanover prepared by
Universals management; and
|
|
|
|
certain cost savings and operating synergies projected by
Universals management to result from the mergers
(hereinafter the Synergies).
|
Goldman Sachs also held discussions with members of the senior
managements of Universal and Hanover regarding their assessment
of the strategic rationale for, and the potential benefits of,
the mergers and the past and current business operations,
financial condition, and future prospects of Hanover, and with
members of the senior management of Universal regarding their
assessment of the past and current business operations,
financial condition and future prospects of Universal. In
addition, Goldman Sachs reviewed the reported price and trading
activity for the Universal common stock and the Hanover common
stock, compared certain financial and stock market information
for Universal and Hanover with similar information for certain
other companies the securities of which are publicly traded,
reviewed the financial terms of certain recent business
combinations in the energy industry specifically and in other
industries generally and performed such other studies and
analyses, and considered such other factors, as it considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all
of the financial, legal, accounting, tax and other information
discussed with or reviewed by it and assumed such accuracy and
completeness for purposes of rendering the opinion described
above. In that regard, Goldman Sachs assumed, with the consent
of Universals board of directors, that the financial
analyses and forecasts for Universal and Hanover and the
Synergies estimates prepared by Universals management
described above were reasonably prepared on a basis reflecting
the best currently available estimates and judgments of
Universal. Goldman Sachs also assumed that all governmental,
regulatory or other consents and approvals necessary for the
consummation of the mergers will be obtained without any adverse
effect on Holdings or on the expected benefits of the mergers in
any way meaningful to its analysis. In addition, Goldman Sachs
did not make an independent evaluation or appraisal of the
assets and liabilities (including any contingent, derivative or
off-balance-sheet assets and liabilities) of Hanover or
Universal or any of their respective subsidiaries, nor has
Goldman Sachs been furnished with any such evaluation or
appraisal.
Goldman Sachs opinion does not address the underlying
business decision of Universal to engage in the mergers, nor
does it express any opinion as to the prices at which shares of
Holdings common stock will trade at any time.
The following is a summary of the material financial analyses
delivered by Goldman Sachs to the board of directors of
Universal in connection with rendering the opinion described
above. The following summary, however, does not purport to be a
complete description of the financial analyses performed by
Goldman Sachs, nor does the order of analyses described
represent relative importance or weight given to those analyses
by Goldman Sachs. Some of the summaries of the financial
analyses include information presented in tabular format. The
tables must be read together with the full text of each summary
and are alone not a complete description of Goldman Sachs
financial analyses. Except as otherwise noted, the following
quantitative
60
information, to the extent that it is based on market data, is
based on market data as it existed on or before February 2,
2007, and is not necessarily indicative of current market
conditions.
Historical Exchange Ratio Analysis. Goldman
Sachs calculated the average historical exchange ratios of
Hanover common stock to Universal common stock based on the
closing prices of Hanover common stock and Universal common
stock during the 45-trading day, 60-trading day, 90-trading day,
six-month, one-year, three-year, and five-year periods ended
February 2, 2007, and on the closing prices of Universal
common stock and Hanover common stock on February 2, 2007.
The following table illustrates each such historical exchange
ratio.
|
|
|
|
|
Time Period
|
|
Exchange Ratio
|
|
5 Year Average
|
|
|
0.4177x
|
|
3 Year Average
|
|
|
0.3487x
|
|
1 Year Average
|
|
|
0.3296x
|
|
6 Month Average
|
|
|
0.3240x
|
|
90 Trading Day Average
|
|
|
0.3181x
|
|
60 Trading Day Average
|
|
|
0.3111x
|
|
45 Trading Day Average
|
|
|
0.3113x
|
|
At February 2, 2007
|
|
|
0.3175x
|
|
Selected Transactions Analysis. Goldman Sachs
reviewed certain financial and governance information for each
merger of equals transaction in the energy industry
since 2000 that was identified by Goldman Sachs:
|
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|
|
|
National Oilwell / Varco International, Inc. (2004)
|
|
|
|
PanCanadian Energy Corp. / Alberta Energy Company Ltd. (2002)
|
|
|
|
Phillips Petroleum Company / Conoco Inc. (2001)
|
|
|
|
Santa Fe International Group / Global Marine Inc. (2001)
|
|
|
|
Pride International Inc. / Marine Drilling Co., Inc. (2001)
|
|
|
|
BHP Ltd. / Billiton PLC (2001)
|
|
|
|
Chevron Corp. / Texaco Inc. (2000)
|
For each of the foregoing transactions, Goldman Sachs calculated
the premium to the stock price for the last trading day prior to
the announcement of the transaction implied by the exchange
ratio for the transaction, compared the market value of each
company in the transaction and the pro forma ownership of the
combined company, and reviewed certain non-financial terms of
the transaction, including the composition of the board of
directors and management of the combined company. Goldman Sachs
reviewed the foregoing transactions primarily to analyze the
composition of the board and senior management of the combined
company in transactions similar to the mergers. Goldman Sachs
did not perform its selected transactions review for the
purposes of performing financial analyses. The results of these
analyses and reviews are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Board
|
|
|
|
|
|
|
|
|
Premium to Market
|
|
Representation
|
|
|
|
|
% Market
|
|
New %
|
|
(over
1-day
|
|
in New
|
|
Senior Management
|
Merger
|
|
Capitalization
|
|
Ownership
|
|
Pre-Announcement)
|
|
Company
|
|
in New Company
|
|
National Oilwell
|
|
|
53
|
%
|
|
|
51
|
%
|
|
|
|
|
|
|
50
|
%
|
|
President / CEO
|
Varco International
|
|
|
47
|
%
|
|
|
49
|
%
|
|
|
9
|
%
|
|
|
50
|
%
|
|
Chairman / COO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PanCanadian Energy
|
|
|
54
|
%
|
|
|
54
|
%
|
|
|
|
|
|
|
50
|
%
|
|
Chairman
|
Alberta Energy
|
|
|
46
|
%
|
|
|
46
|
%
|
|
|
0
|
%
|
|
|
50
|
%
|
|
President / CEO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillips Petroleum
|
|
|
57
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
50
|
%
|
|
President / CEO
|
Conoco
|
|
|
43
|
%
|
|
|
43
|
%
|
|
|
0
|
%
|
|
|
50
|
%
|
|
Chairman
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Board
|
|
|
|
|
|
|
|
|
Premium to Market
|
|
Representation
|
|
|
|
|
% Market
|
|
New %
|
|
(over
1-day
|
|
in New
|
|
Senior Management
|
Merger
|
|
Capitalization
|
|
Ownership
|
|
Pre-Announcement)
|
|
Company
|
|
in New Company
|
|
Santa Fe International
|
|
|
53
|
%
|
|
|
50
|
%
|
|
|
|
|
|
|
50
|
%
|
|
President / CEO
|
Global Marine
|
|
|
47
|
%
|
|
|
50
|
%
|
|
|
17
|
%
|
|
|
50
|
%
|
|
Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pride International
|
|
|
56
|
%
|
|
|
56
|
%
|
|
|
|
|
|
|
50
|
%
|
|
President / CEO
|
Marine Drilling
|
|
|
44
|
%
|
|
|
44
|
%
|
|
|
3
|
%
|
|
|
50
|
%
|
|
Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BHP
|
|
|
68
|
%
|
|
|
64
|
%
|
|
|
|
|
|
|
50
|
%
|
|
Interim CEO
|
Billiton
|
|
|
32
|
%
|
|
|
36
|
%
|
|
|
21
|
%
|
|
|
50
|
%
|
|
CEO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chevron
|
|
|
64
|
%
|
|
|
61
|
%
|
|
|
|
|
|
|
60
|
%
|
|
Chairman / CEO
|
Texaco
|
|
|
36
|
%
|
|
|
39
|
%
|
|
|
18
|
%
|
|
|
40
|
%
|
|
Vice Chairman
|
Contribution Analysis. Goldman Sachs performed
a contribution analysis in which Goldman Sachs analyzed the
relative estimated contributions to be made by Universal and
Hanover to the market capitalization, earnings before interest,
taxes, depreciation and amortization, or EBITDA, net income, and
cash flow, which is defined as net income plus depreciation and
amortization and other non-cash items, of the combined company
following consummation of the mergers, before taking into
account any of the possible benefits that may be realized
following the mergers. This analysis was based on the closing
price of Universal common stock of $61.10 and of Hanover common
stock of $19.40 on February 2, 2007, and on projections
prepared by Universals management. Additionally, Goldman
Sachs calculations assumed conversion of Hanovers
in-the-money
convertible debt securities (those securities for which the
conversion price is below Hanovers common stock price).
The following table presents the results of this analysis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relative Contribution to the Combined Company
|
|
|
Hanover
|
|
Universal
|
|
Implied Exchange Ratio
|
|
Market Capitalization
|
|
|
54
|
%
|
|
|
46
|
%
|
|
|
0.3175x
|
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
2006E
|
|
|
54
|
%
|
|
|
46
|
%
|
|
|
0.3032x
|
|
2007E
|
|
|
56
|
%
|
|
|
44
|
%
|
|
|
0.3301x
|
|
2008E
|
|
|
55
|
%
|
|
|
45
|
%
|
|
|
0.3218x
|
|
Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
2006E
|
|
|
56
|
%
|
|
|
44
|
%
|
|
|
0.3334x
|
|
2007E
|
|
|
56
|
%
|
|
|
44
|
%
|
|
|
0.3343x
|
|
2008E
|
|
|
55
|
%
|
|
|
45
|
%
|
|
|
0.3294x
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
2006E
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
0.2667x
|
|
2007E
|
|
|
51
|
%
|
|
|
49
|
%
|
|
|
0.2761x
|
|
2008E
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
0.2615x
|
|
Relative Discounted Cash Flow
Analysis. Goldman Sachs performed a relative
discounted cash flow analysis to determine the implied exchange
ratio of Hanover common stock to Universal common stock,
assuming each company continued to operate as a stand-alone
company, and using estimates for Universal and Hanover prepared
by Universals management. Goldman Sachs calculated implied
per share prices for Universal common stock and Hanover common
stock by calculating (a) the sum of (i) the present
values of estimated cash flows for Universal and Hanover,
respectively, through the year 2015, using discount rates
ranging from 8% to 11% and (ii) the present values of the
illustrative terminal values of Universal and Hanover,
respectively, in the year 2015, based on a range of multiples
from 5.5x to 9.5x estimated EBITDA in 2015 and using discount
rates ranging from 8% to 11%, divided by (b) the total
number of outstanding shares
62
of Universal and Hanover, respectively. Goldman Sachs
calculations were based on projections prepared by
Universals management. The following table presents the
results of this analysis:
Hanover /
Universal Implied Exchange Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal Value of 2015E
EBITDA
|
Discount Rate
|
|
5.5x
|
|
6.5x
|
|
7.5x
|
|
8.5x
|
|
9.5x
|
|
|
|
|
|
8.0
|
%
|
|
|
0.334x
|
|
|
|
0.335x
|
|
|
|
0.336x
|
|
|
|
0.337x
|
|
|
|
0.338x
|
|
|
9.0
|
%
|
|
|
0.332x
|
|
|
|
0.334x
|
|
|
|
0.335x
|
|
|
|
0.336x
|
|
|
|
0.337x
|
|
|
10.0
|
%
|
|
|
0.330x
|
|
|
|
0.332x
|
|
|
|
0.334x
|
|
|
|
0.335x
|
|
|
|
0.336x
|
|
|
11.0
|
%
|
|
|
0.328x
|
|
|
|
0.330x
|
|
|
|
0.332x
|
|
|
|
0.333x
|
|
|
|
0.334x
|
|
Discounted Cash Flow Accretion / Dilution
Analysis. Goldman Sachs performed an accretion /
dilution analysis to determine whether the mergers would be
accretive or dilutive to the holders of Universal common stock,
by comparing implied per share prices of Holdings common stock
to implied per share prices of Universal common stock on a
stand-alone basis.
Goldman Sachs performed a discounted cash flow analysis to
determine implied per share prices for Holdings common stock,
assuming that the combined companies will operate without any
Synergies, by calculating (a) the sum of (i) the
present values of estimated cash flows for Holdings through the
year 2015, using discount rates ranging from 8% to 11% and
(ii) the present value of the illustrative terminal value
of Holdings in the year 2015, based on a range of multiples from
5.5x to 9.5x estimated EBITDA in 2015, and using discount rates
ranging from 8% to 11%, divided by (b) the total number of
outstanding Holdings shares following completion of the mergers.
Goldman Sachs then performed a discounted cash flow analysis to
determine implied per share prices for Universal common stock,
on a stand-alone basis, by calculating (a) the sum of
(i) the present values of estimated cash flows for
Universal through the year 2015, using discount rates ranging
from 8% to 11% and (ii) the present value of the
illustrative terminal value of Universal in the year 2015, based
on a range of multiples from 5.5x to 9.5x estimated EBITDA in
2015, and using discount rates ranging from 8% to 11%, divided
by (b) the total number of outstanding shares of Universal.
Based on these calculations, Goldman Sachs then determined
whether the mergers would be accretive or dilutive to holders of
Universal common stock.
% Change
in Per Share Value of Universal from Status Quo (without
Synergies)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal Value of 2015E
EBITDA
|
Discount Rate
|
|
5.5x
|
|
6.5x
|
|
7.5x
|
|
8.5x
|
|
9.5x
|
|
|
|
|
|
8.0
|
%
|
|
|
0.6
|
%
|
|
|
0.9
|
%
|
|
|
1.1
|
%
|
|
|
1.3
|
%
|
|
|
1.5
|
%
|
|
9.0
|
%
|
|
|
(0.1
|
)%
|
|
|
0.3
|
%
|
|
|
0.6
|
%
|
|
|
0.9
|
%
|
|
|
1.1
|
%
|
|
10.0
|
%
|
|
|
(0.8
|
)%
|
|
|
(0.3
|
)%
|
|
|
0.1
|
%
|
|
|
0.4
|
%
|
|
|
0.7
|
%
|
|
11.0
|
%
|
|
|
(1.6
|
)%
|
|
|
(1.0
|
)%
|
|
|
(0.5
|
)%
|
|
|
(0.1
|
)%
|
|
|
0.2
|
%
|
Goldman Sachs also performed a discounted cash flow analysis to
determine implied per share prices for Holdings common stock,
assuming that the combined companies will operate with annual
Synergies of $50 million as estimated by Universals
management, by calculating (a) the sum of (i) the
present values of estimated cash flows for Holdings through the
year 2015, using discount rates ranging from 8% to 11% and
(ii) the present value of the illustrative terminal value
of Holdings in the year 2015, based on a range of multiples from
5.5x to 9.5x estimated EBITDA in 2015, and using discount rates
ranging from 8% to 11%, divided by (b) the total number of
outstanding Holdings shares following completion of the mergers.
Goldman Sachs then performed a discounted cash flow analysis to
determine implied per share prices for Universal common stock,
on a stand-alone basis, by performing the same calculations
described in the preceding paragraph. Based on these
calculations, Goldman Sachs then determined whether the mergers
would be accretive or dilutive to holders of Universal common
stock.
63
Goldman Sachs calculations were based on estimates for
Universal and Hanover and Synergies estimates prepared by
Universals management. The following table presents the
results of this analysis:
% Change
in Per Share Value of Universal from Status Quo (with
Synergies)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal Value of 2015E
EBITDA
|
Discount Rate
|
|
5.5x
|
|
6.5x
|
|
7.5x
|
|
8.5x
|
|
9.5x
|
|
|
|
|
|
8.0
|
%
|
|
|
8.7
|
%
|
|
|
8.5
|
%
|
|
|
8.3
|
%
|
|
|
8.2
|
%
|
|
|
8.1
|
%
|
|
9.0
|
%
|
|
|
8.3
|
%
|
|
|
8.2
|
%
|
|
|
8.0
|
%
|
|
|
8.0
|
%
|
|
|
7.9
|
%
|
|
10.0
|
%
|
|
|
7.9
|
%
|
|
|
7.8
|
%
|
|
|
7.7
|
%
|
|
|
7.7
|
%
|
|
|
7.6
|
%
|
|
11.0
|
%
|
|
|
7.5
|
%
|
|
|
7.4
|
%
|
|
|
7.4
|
%
|
|
|
7.4
|
%
|
|
|
7.3
|
%
|
Pro Forma Merger Analysis. Goldman Sachs
prepared illustrative pro forma analyses of the potential
financial impact of the mergers using estimates for Universal
and Hanover prepared by Universals management. For the
second half of 2007 and each of the years 2008 and 2009, Goldman
Sachs compared the projected earnings per share, or EPS, and
cash flows per share, or CFPS, defined as net income plus
depreciation and amortization, divided by fully diluted shares
outstanding (and does not include deferred taxes), of Universal
common stock on a standalone basis to the projected EPS and CFPS
of the Holdings common stock. Goldman Sachs calculations
were based on the
agreed-upon
exchange rate of 0.325x, and assuming annual Synergies of
$50 million as estimated by Universals management.
Goldman Sachs also performed sensitivity calculations assuming
annual Synergies of $25 million and $75 million,
respectively. The following tables present the results of this
analysis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$25 Million
|
|
|
$50 Million
|
|
|
$75 Million
|
|
|
|
Synergies
|
|
|
Synergies
|
|
|
Synergies
|
|
|
EPS Accretion / (Dilution)
|
|
|
|
|
|
|
|
|
|
|
|
|
2H 2007E
|
|
|
4.8
|
%
|
|
|
12.3
|
%
|
|
|
19.7
|
%
|
2008E
|
|
|
(3.2
|
)%
|
|
|
3.5
|
%
|
|
|
10.2
|
%
|
2009E
|
|
|
(4.7
|
)%
|
|
|
1.6
|
%
|
|
|
7.8
|
%
|
CFPS Accretion / (Dilution)
|
|
|
|
|
|
|
|
|
|
|
|
|
2H 2007E
|
|
|
6.5
|
%
|
|
|
9.4
|
%
|
|
|
12.3
|
%
|
2008E
|
|
|
3.2
|
%
|
|
|
5.9
|
%
|
|
|
8.5
|
%
|
2009E
|
|
|
2.8
|
%
|
|
|
5.3
|
%
|
|
|
7.7
|
%
|
The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analysis or summary
description. Selecting portions of the analyses or of the
summary set forth above, without considering the analyses as a
whole, could create an incomplete view of the processes
underlying Goldman Sachs opinion. In arriving at its
fairness determination, Goldman Sachs considered the results of
all of its analyses and did not attribute any particular weight
to any factor or analysis considered by it. Rather, Goldman
Sachs made its determination as to fairness on the basis of its
experience and professional judgment after considering the
results of all of its analyses. No company or transaction used
in the above analyses as a comparison is directly comparable to
Hanover or Universal or the contemplated mergers.
Goldman Sachs prepared these analyses for purposes of Goldman
Sachs providing its opinion to Universals board of
directors, as to the fairness from a financial point of view to
the holders of Universal common stock, of the Universal exchange
ratio contemplated by the merger agreement. These analyses do
not purport to be appraisals nor do they necessarily reflect the
prices at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by these
analyses. Because these analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond
the control of the parties or their respective advisors, none of
Universal, Hanover, Goldman Sachs or any other person assumes
responsibility if future results are materially different from
those forecast.
The Universal exchange ratio and the Hanover exchange ratio were
determined through arms-length negotiations between
Universal and Hanover and were approved by Universals
board of directors. Goldman
64
Sachs provided advice to Universal during these negotiations.
Goldman Sachs did not, however, recommend any specific exchange
ratio to Universal or its board of directors or that any
specific exchange ratio constituted the only appropriate
exchange ratio for either merger.
As described above, Goldman Sachs opinion was one of many
factors taken into consideration by Universals board of
directors in making its determination to approve the merger
agreement. The foregoing summary does not purport to be a
complete description of the analyses performed by Goldman Sachs
in connection with the fairness opinion and is qualified in its
entirety by reference to the written opinion of Goldman Sachs
attached as Annex C.
Goldman Sachs and its affiliates, as part of their investment
banking business, are continually engaged in performing
financial analyses with respect to businesses and their
securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private
placements and other transactions as well as for estate,
corporate and other purposes. Goldman Sachs has acted as
financial advisor to Universal in connection with, and has
participated in certain of the negotiations leading to, the
mergers contemplated by the merger agreement. Goldman Sachs also
may provide investment banking services to Universal and Hanover
in the future. In connection with the above-described investment
banking services, Goldman Sachs may in the future receive
compensation.
Goldman Sachs is a full service securities firm engaged, either
directly or through its affiliates, in securities trading,
investment management, financial planning and benefits
counseling, risk management, hedging, financing and brokerage
activities for both companies and individuals. In the ordinary
course of these activities, Goldman Sachs and its affiliates may
provide such services to Universal, Hanover and their respective
affiliates, may actively trade the debt and equity securities of
Universal and Hanover for their own account and for the accounts
of their customers and may at any time hold long and short
positions of such securities.
Pursuant to a letter agreement, dated December 22, 2006,
Universal engaged Goldman Sachs to act as its financial advisor
in connection with the contemplated mergers. Universals
board of directors selected Goldman Sachs as its financial
advisor because it is an internationally recognized investment
banking firm that has substantial experience in transactions
similar to the mergers. Pursuant to the terms of this engagement
letter, Universal has agreed to pay Goldman Sachs a transaction
fee of $10 million, payable upon consummation of the
mergers. Universal has also agreed to consider, in good faith,
taking into account the level of service that Goldman Sachs has
provided in connection with the mergers, paying Goldman Sachs an
additional transaction fee of $3 million, payable upon
consummation of the mergers. Payment of Goldman Sachs fees
is fully contingent upon the consummation of the mergers. In
addition, Universal has agreed to reimburse Goldman Sachs for
its expenses, including attorneys fees and disbursements,
and to indemnify Goldman Sachs and related persons against
various liabilities, including certain liabilities under the
federal securities laws. At the request of, and without any
limitations or instructions from, Universals board of
directors, Goldman Sachs rendered its opinion described above
pursuant to the engagement letter dated December 22, 2006.
Interests
of Hanover and Universal Directors and Executive Officers in the
Mergers
You should be aware that some Hanover and Universal directors
and executive officers have interests in the mergers as
directors or officers that are different from, or in addition
to, the interests of other Hanover and Universal stockholders.
Governance
Structure and Management Positions
As provided in the merger agreement, upon the consummation of
the mergers, the Holdings board of directors will consist of 10
members, five of whom will be current members of, and designated
by, Hanovers board of directors and five of whom will be
current members of, and designated by, Universals board of
directors. In addition, certain executive officers of Hanover
and Universal have been selected to serve as executive officers
of Holdings. More information regarding the directors and
executive officers that have been designated or selected is set
forth in Continuing Board and Management
Positions beginning on page 74.
65
Interests
of Hanover Directors and Executive Officers in the
Mergers
Equity
Compensation Awards
The merger agreement provides that upon completion of the
Hanover merger, each share of restricted stock issued by Hanover
and each Hanover stock option, including those held by executive
officers and directors of Hanover, will be converted into
Holdings restricted stock and stock options, respectively, based
on the Hanover exchange ratio. Upon the consummation of the
Hanover merger, under the terms of Hanovers equity
incentive plans, each Hanover stock option and each share of
restricted stock or restricted stock unit of Hanover granted
prior to the date of the merger agreement and outstanding as of
the effective time of the Hanover merger, including those held
by executive officers and directors of Hanover, will vest in
full. Equity compensation awards, including stock options and
restricted stock or restricted stock units, granted after the
date of the merger agreement will not vest upon the consummation
of the Hanover merger, but will vest in accordance with their
normal vesting schedule or, depending on the terms of the
applicable award agreement, upon any future corporate change (as
such term is defined in the applicable equity incentive plan
other than the Hanover merger). For additional information
regarding the treatment of equity awards in the mergers, see
The Merger Agreement Consideration to be
Received in the Mergers Assumption by Holdings of
Certain Outstanding Equity Awards beginning on
page 83. Based on the Hanover equity compensation awards
held by executive officers and directors of Hanover as of
June 28, 2007 and assuming a merger closing date of
August 20, 2007, the vesting of the following shares of
restricted stock and stock options held by the directors and
executive officers of Hanover would accelerate as a result of
the Hanover merger:
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted
|
|
|
Unvested Stock
|
|
|
|
Stock(1)
|
|
|
Options
|
|
|
Non-Employee
Directors
|
|
|
|
|
|
|
|
|
I. Jon Brumley
|
|
|
6,000
|
|
|
|
2,000
|
|
Ted Collins, Jr.
|
|
|
6,000
|
|
|
|
2,000
|
|
Margaret K. Dorman
|
|
|
7,000
|
|
|
|
3,000
|
|
Robert R. Furgason
|
|
|
6,000
|
|
|
|
2,000
|
|
Victor E. Grijalva
|
|
|
6,000
|
|
|
|
2,000
|
|
Gordon T. Hall
|
|
|
6,000
|
|
|
|
2,000
|
|
Peter H. Kamin(2)
|
|
|
|
|
|
|
|
|
William C. Pate(2)
|
|
|
|
|
|
|
|
|
Stephen M. Pazuk
|
|
|
7,000
|
|
|
|
3,000
|
|
L. Ali Sheikh
|
|
|
4,333
|
|
|
|
|
|
Executive
Officers
|
|
|
|
|
|
|
|
|
John E. Jackson
|
|
|
247,792
|
|
|
|
10,000
|
|
Lee E. Beckelman
|
|
|
55,838
|
|
|
|
5,667
|
|
Brian A. Matusek
|
|
|
54,120
|
|
|
|
7,073
|
|
Norman A. Mckay
|
|
|
47,400
|
|
|
|
4,333
|
|
Steven W. Muck
|
|
|
55,800
|
|
|
|
4,333
|
|
Gary M. Wilson
|
|
|
55,122
|
|
|
|
7,144
|
|
Anita H. Colglazier
|
|
|
15,905
|
|
|
|
1,667
|
|
Peter G. Schreck
|
|
|
18,192
|
|
|
|
1,667
|
|
Stephen P. York
|
|
|
21,217
|
|
|
|
1,667
|
|
|
|
|
(1) |
|
Includes 149,125, 36,738, 38,925, 30,800, 34,600, 41,200,
12,038, 14,925 and 17,350 shares of unvested restricted
stock held by Messrs. Jackson, Beckelman, Matusek, Mckay,
Muck and Wilson, Ms. Colglazier, Mr. Schreck and
Mr. York, respectively, that are subject to Long-Term
Incentive Plan performance awards described below under
Long-Term Incentive Plan Performance
Awards the vesting of which will accelerate at the maximum
award level as a result of the Hanover merger. |
|
(2) |
|
Elected to the Hanover board of directors effective as of
January 1, 2007. |
66
In May 2007, the non-employee directors (other than the Chairman
of the Board) were each granted 4,700 shares of restricted
stock as part of their ordinary annual compensation. Such
restricted stock vests at the rate of one-third per year over a
three year period of service, beginning on the first anniversary
of the grant date (subject to accelerated vesting upon a change
of control of Hanover except with respect to the proposed
mergers). Because the shares of restricted stock awarded to
those Hanover directors who have not been nominated to serve on
the board of directors of Holdings will not accelerate upon
completion of the mergers, Hanover approved a cash grant of
$105,000 to such directors (consisting of Messrs. Brumley,
Collins, Furgason, Grijalva and Sheikh and Ms. Dorman).
This amount is equal to the grant date value of the restricted
stock award made in May 2007 and described above. The cash grant
is contingent and payable to such directors only upon the
completion of the mergers and the forfeiture of their 2007
awards of restricted stock.
On May 8, 2007, Gordon T. Hall, Chairman of the Board, was
granted 6,700 shares of restricted stock. The Hanover board
of directors also awarded Mr. Hall a special grant of
21,000 shares of restricted stock. The grant was provided
to acknowledge Mr. Halls significant role in
negotiating the mergers. The restricted stock awarded to
Mr. Hall vests at the rate of one-third per year over a
three year period of service beginning on the first anniversary
of the grant date (subject to accelerated vesting upon a change
of control of Hanover except with respect to the mergers).
Long-Term
Incentive Plan Performance Awards
Upon completion of the Hanover merger, each Long-Term Incentive
Plan, or LTIP, performance-based restricted stock award granted
under Hanovers Long-Term Incentive Plans prior to the date
of the merger agreement will be paid based on the
maximum performance levels without proration. Each
LTIP performance-based cash award will be paid based on the
target performance levels without proration. In the
absence of the Hanover merger, both types of the LTIP
performance awards would have been paid out, if at all, at a
threshold level, at a target level or at a maximum level based
on Hanovers actual level of achievement of the applicable
performance measures, but without any assurance that the maximum
performance level would be achieved. Each LTIP performance award
was subject to determination over a performance period of three
years and fully vested at the end of the applicable three-year
period based upon the level of achievement of the applicable
performance measures. The LTIP performance awards granted to
Hanovers executive officers in 2004 and 2006 would have
been settled solely in common stock by the vesting of shares of
restricted stock, while the LTIP performance awards granted to
Hanovers executive officers in 2005 would have been
settled solely in cash. Compensation expense for the 2004 and
2005 LTIP performance-based awards have been accruing at the
maximum level based on Hanovers performance. The 2006 LTIP
performance-based awards are accruing between target and maximum
levels. Based on the LTIP performance awards granted to each of
Hanovers executive officers as of June 28, 2007 and
assuming a merger closing date of August 20, 2007, the
executive officers of Hanover would receive the following
payments upon the consummation of the Hanover merger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 LTIP
|
|
|
2005 LTIP
|
|
|
2006 LTIP
|
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
|
Award
|
|
|
Award
|
|
|
Award
|
|
Executive Officer
|
|
(# of Shares)
|
|
|
($)
|
|
|
(# of Shares)
|
|
|
John E. Jackson
|
|
|
26,125
|
|
|
|
780,000
|
|
|
|
123,000
|
|
Lee E. Beckelman
|
|
|
5,938
|
|
|
|
180,000
|
|
|
|
30,800
|
|
Brian A. Matusek
|
|
|
8,125
|
|
|
|
180,000
|
|
|
|
30,800
|
|
Norman A. Mckay
|
|
|
|
|
|
|
140,000
|
|
|
|
30,800
|
|
Steven W. Muck
|
|
|
10,000
|
|
|
|
140,000
|
|
|
|
24,600
|
|
Gary M. Wilson
|
|
|
15,000
|
|
|
|
140,000
|
|
|
|
26,200
|
|
Anita H. Colglazier
|
|
|
3,438
|
|
|
|
50,000
|
|
|
|
8,600
|
|
Peter G. Schreck
|
|
|
8,125
|
|
|
|
50,000
|
|
|
|
6,800
|
|
Stephen P. York
|
|
|
8,750
|
|
|
|
50,000
|
|
|
|
8,600
|
|
67
Retention
Plan
The merger agreement provides that, prior to the consummation of
the Hanover merger, Hanover may provide for cash retention
bonuses to employees, including executive officers, not in
excess of $10 million in the aggregate. Hanovers
board of directors adopted a Retention Bonus Plan of up to
$10 million effective March 19, 2007. The Retention
Bonus Plan provides for awards to certain key employees if such
individuals remain employed by Hanover or its successor through
March 31, 2008, or are terminated without cause
prior to such date. Participants are also entitled to a
retention bonus award upon death or disability. Subject to the
terms of the plan, as of the date of this joint proxy
statement/prospectus, the following executive officers are
entitled to receive a retention bonus award in the amounts shown:
|
|
|
|
|
Norman A. Mckay
|
|
$
|
310,000
|
|
Gary M. Wilson
|
|
$
|
310,000
|
|
Steven W. Muck
|
|
$
|
250,000
|
|
Stephen P. York
|
|
$
|
200,000
|
|
Anita H. Colglazier
|
|
$
|
150,000
|
|
Supplemental
Performance Bonus Plan
Hanover has approved a supplemental performance bonus plan that
is contingent upon the consummation of the mergers. If the
mergers are consummated, cash performance awards granted under
Hanovers 2005 Long-Term Incentive Program (2005 LTI
program) will vest at only 100% of target payout even
though the maximum performance criteria are currently expected
to be met. Absent the proposed mergers, if the maximum
performance criteria were met, the payout would be up to 200% of
what would have been payable at target performance. As a result
of this inequity, Hanover approved approximately
$2.9 million in supplemental performance bonuses payable to
officers and other employees in cash upon consummation of the
mergers. Employees who received cash awards under the 2005 LTI
program and were salary grades 38 and above at the time of grant
(generally director-level managers and above) will receive a
supplemental performance bonus that, when taken together with
the 100% target payout that will vest upon consummation of the
mergers, will be the equivalent of Hanover obtaining a 150%
performance level under the 2005 LTI program (which is the
maximum payout level). Employees who received cash awards under
the 2005 LTI program and were salary grades 37 and below at the
time of grant will receive a supplemental performance bonus
that, when taken together with the 100% target payout that will
vest upon consummation of the mergers, will be the equivalent of
Hanover obtaining a 200% performance level under the 2005 LTI
program.
The estimated supplemental performance bonus for each of
Hanovers executive officers, payable only upon
consummation of the mergers, will be as follows:
|
|
|
|
|
|
|
Estimated
|
|
|
|
Supplemental
|
|
|
|
Performance
|
|
Officer
|
|
Bonus
|
|
|
John E. Jackson
|
|
$
|
390,000
|
|
Lee E. Beckelman
|
|
$
|
90,000
|
|
Brian A. Matusek
|
|
$
|
90,000
|
|
Norman A. Mckay
|
|
$
|
70,000
|
|
Steven W. Muck
|
|
$
|
70,000
|
|
Gary M. Wilson
|
|
$
|
70,000
|
|
Stephen P. York
|
|
$
|
25,000
|
|
Peter G. Schreck
|
|
$
|
25,000
|
|
Anita H. Colglazier
|
|
$
|
25,000
|
|
Change of
Control Agreements
Hanover has entered into a change of control agreement with each
of its executive officers. The change of control agreements
generally provide that following a qualifying
termination of employment (which is generally defined as
either the termination of the executive officer by Hanover
without cause or the termination by the executive
officer for good reason, in each case within
12 months of a change of control,
68
such as the Hanover merger), Hanover will pay to the executive
officer, within five business days after the date of termination
(or, if Section 409A of the Code is applicable to the
payment, as soon as such payment can be made without being
subject to the additional tax under Section 409A), an
amount equal to the sum of:
|
|
|
|
|
the executive officers earned but unpaid base salary
through the date of termination plus the executive
officers target bonus for the current year (prorated to
the date of termination);
|
|
|
|
any earned but unpaid actual bonus for the prior year;
|
|
|
|
that portion of the executive officers vacation pay
accrued, but not used, for the current year to the date of
termination;
|
|
|
|
the product of a designated multiple times the sum of the
executive officers respective base salary and target
bonus; and
|
|
|
|
amounts previously deferred by the executive officer, if any, or
earned but not paid, if any, under any Hanover incentive and
nonqualified deferred compensation plans or programs as of the
date of termination.
|
In addition, each change of control agreement provides that
Hanover will pay the executive officer for health insurance
premiums for a period of up to eighteen months. If the executive
officer is terminated for cause, or such executive
officer terminates his or her employment without good
reason, Hanover is not obligated to make any payments
under the change of control agreement.
The multiple used to determine the amount owed to Hanovers
executive officers pursuant to the fourth bullet point above is:
|
|
|
|
|
Executive Officer
|
|
Multiple
|
|
|
John E. Jackson
|
|
|
3.0x
|
|
Lee E. Beckelman
|
|
|
2.0x
|
|
Brian A. Matusek
|
|
|
2.0x
|
|
Norman A. Mckay
|
|
|
2.0x
|
|
Steven W. Muck
|
|
|
2.0x
|
|
Gary M. Wilson
|
|
|
2.0x
|
|
Anita H. Colglazier
|
|
|
1.5x
|
|
Peter G. Schreck
|
|
|
1.5x
|
|
Stephen P. York
|
|
|
1.5x
|
|
For purposes of these change of control agreements, good
reason includes, in relevant part, the following events:
|
|
|
|
|
a permanent change in the executive officers duties or
responsibilities which are materially inconsistent with either
the type of duties and responsibilities of the executive officer
then in effect or with the executive officers title, but
excluding any such change that is in conjunction with and
consistent with a promotion of the executive officer;
|
|
|
|
a reduction in the executive officers base salary;
|
|
|
|
a reduction in the executive officers annual target bonus
percentage of base salary as in effect immediately prior to the
change of control;
|
|
|
|
a material reduction in the executive officers employee
benefits (without regard to bonus compensation, if any) if such
reduction results in the executive officer receiving benefits
that are, in the aggregate, materially less than the benefits
received by other comparable employees of Hanover or its
successor generally; or
|
|
|
|
the willful failure by Hanover or its successor to pay any
compensation to the executive officer when due.
|
69
For purposes of these change in control agreements
cause includes but is not limited to:
|
|
|
|
|
the commission by the executive of an act of fraud, embezzlement
or willful breach of a fiduciary duty to Hanover or an affiliate;
|
|
|
|
a conviction or a no contest plea in connection with a felony or
a crime involving fraud, dishonesty or moral turpitude;
|
|
|
|
willful misconduct; or
|
|
|
|
failure of the executive to follow the written directions of the
board of directors or to render services in accordance with an
employment arrangement.
|
As a result of the Change of Control Agreements, any executive
officers of Hanover who are terminated without cause
or who terminate their own employment for good
reason within 12 months of the consummation of the
Hanover merger will be entitled to the severance benefits set
forth in their Change of Control Agreement. For additional
information regarding Hanovers change of control
agreements and amounts that may be owed to Hanovers
executive officers, please see Hanover Annual
Meeting Proposal 4 Election of
Directors Information Regarding Executive
Compensation beginning on page 139.
Hanover
401(k) Match
Hanovers matching cash contributions, which are
discretionary and subject to change at the election of Hanover
at any time, are determined based on each participants
eligible compensation (as defined in the plan document) and
contributed to Hanovers 401(k) plan in cash and invested
in each individual participants account in accordance with
their investment allocation elections on a quarterly basis. For
the twelve months ended December 31, 2006, Hanovers
matching contributions were made to each participants
account at a rate of 50% of each participants
contributions up to 6% of eligible compensation.
Hanovers 401(k) plan provides for participant vesting in
its matching contributions, including reallocated forfeitures,
and actual earnings thereon at the rate of 20% each year of
employment with Hanover and are 100% vested after five years of
credited service subject to certain limitations defined in the
plan document. Participants become 100% vested in Hanover
matching contributions upon death, disability or attainment of
normal retirement age. Effective January 1, 2005, if there
is a corporate change, as defined in the Hanover Compressor
Company 2003 Stock Incentive Plan, all unvested balances under
the Hanover 401(k) would become fully vested. As a result of the
Hanover merger, all matching contributions by Hanover to its
401(k) plan, including matching contributions to accounts for
the benefit of Hanovers executive officers, will
immediately vest.
Interests
of Universal Directors and Executive Officers in the
Mergers
Retention
Plan
The merger agreement provides that prior to the consummation of
the Universal merger, Universal may, implement a cash retention
plan of up to $10 million for some or all of its employees
or employees of its subsidiaries including executive officers.
On April 13, 2007, the Universal board of directors adopted
a retention bonus plan for selected employees, including
executive officers, that provides participants with a retention
bonus in a lump sum cash payment upon continuing employment with
Universal until a specified date or dates (each a key
date). If a participants employment with Universal
is terminated prior to any key date by reason of death,
disability or termination without cause (as defined in the
retention bonus plan), that participant is entitled to be paid
his or her entire retention bonus. If a participants
employment is terminated prior to any key date for any other
reason, that participant will not be entitled to any unpaid
portion of his or her retention bonus. As of the date of this
joint proxy statement/prospectus, the following executive
officers are entitled to receive a retention bonus award in the
amounts set forth below upon the later of (1) six months
after the consummation of the mergers and
(2) April 30, 2008 (except that Mr. Bickett will
receive one half of his retention bonus award on
70
that date and the other half of his award upon the later of
(1) 12 months after the consummation of the mergers
and (2) October 31, 2008):
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|
|
|
|
Named Executive Officer
|
|
Amount of Retention Bonus Award
|
|
J. Michael Anderson
|
|
$
|
160,000
|
|
D. Bradley Childers
|
|
$
|
160,000
|
|
Kirk E. Townsend
|
|
$
|
125,000
|
|
Richard Leong
|
|
$
|
125,000
|
|
Donald C. Wayne
|
|
$
|
125,000
|
|
Kenneth Bickett
|
|
$
|
100,000
|
|
Directors
Stock Plan
Under the terms of Universals directors stock plan,
pursuant to which outside directors of Universal who elect to
participate in the plan are granted shares of Universals
common stock, all deferrals of shares granted to directors will
accelerate upon the consummation of the mergers and must be paid
by Universal within 30 days of the consummation of the
mergers. Currently, directors Janet F. Clark and Lisa Rodriguez
have deferred receipt of 2,177 and 214 shares,
respectively, of Universal common stock pursuant to the
directors stock plan. Receipt of these shares will
accelerate upon the consummation of the mergers.
Restricted
Stock Plan and Incentive Stock Option Plan
Pursuant to the terms of the merger agreement, upon the
consummation of the mergers, all outstanding restricted stock
awards and options to purchase shares of Universals common
stock granted under Universals restricted stock plan and
incentive stock option plan, respectively, will be converted
into an equivalent number of Holdings restricted stock awards or
options to purchase shares of Holdings common stock, as
the case may be, at the same exercise price. For additional
information regarding the treatment of equity awards in the
mergers, see The Merger Agreement
Consideration to be Received in the Mergers
Assumption by Holdings of Certain Outstanding Equity
Awards beginning on page 83.
On June 12, 2007, the compensation committee of
Universals board of directors approved the grant of
(i) restricted stock under Universals restricted
stock plan and (ii) options to purchase Universal common
stock under Universals incentive stock option plan to the
executive officers and directors set forth below in the
respective amounts set forth below.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of Shares of
|
|
|
|
Shares of
|
|
|
Common Stock
|
|
|
|
Restricted Stock
|
|
|
Underlying
|
|
Executive Officer
|
|
Granted
|
|
|
Options Granted
|
|
|
Stephen A. Snider
|
|
|
21,333
|
|
|
|
38,651
|
|
D. Bradley Childers
|
|
|
6,000
|
|
|
|
10,871
|
|
J. Michael Anderson
|
|
|
6,000
|
|
|
|
10,871
|
|
Kirk E. Townsend
|
|
|
4,000
|
|
|
|
7,247
|
|
Donald C. Wayne
|
|
|
2,667
|
|
|
|
4,831
|
|
Janet F. Clark
|
|
|
|
|
|
|
3,000
|
|
Uriel E. Dutton
|
|
|
|
|
|
|
3,000
|
|
J.W.G. Will Honeybourne
|
|
|
|
|
|
|
3,000
|
|
The shares of restricted stock vest in one-third increments on
the first, second and third anniversary of the grant. Upon any
termination of the executive officers continuous
service (as that term is defined in Universals
restricted stock plan), Universal will have the right to cancel
any unvested shares of restricted stock. The options will become
exercisable in one-third increments on the first, second and
third anniversary of the grant. The purchase price per share
under each option granted is the average of the high and low
reported consolidated trading sales prices of Universals
common stock on the New York Stock Exchange on the date of grant.
71
The grants of restricted stock will vest upon a change in
control (as that term is defined in Universals
restricted stock plan) and the grants of options will become
immediately exercisable upon the acquisition by any person of
51% or more of Universals common stock, in each case,
other than any change in control resulting from the consummation
of the mergers.
Change of
Control Agreements
Universal has entered into change of control agreements with the
following executive officers:
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|
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Stephen A. Snider;
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|
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|
J. Michael Anderson;
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|
|
|
Ernie L. Danner;
|
|
|
|
Kirk E. Townsend;
|
|
|
|
D. Bradley Childers;
|
|
|
|
Richard Leong; and
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|
|
|
Donald C. Wayne.
|
The mergers will constitute a change of control of
Universal for purposes of these agreements. If the employment of
any of these executive officers is terminated by the executive
during the one-year period immediately following the
consummation of the mergers due to good reason or by
Universal for any reason other than death, disability or
cause, as defined below, the former officer will be
entitled to receive the following from Holdings:
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|
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an amount equal to the executives annual base salary
through the date of termination and a pro rated annual bonus
based upon the greater of the annual bonus that would be payable
to the executive for that year or the executives highest
annual bonus over the preceding three years;
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|
an amount equal to two times the executives current annual
base salary and two times the greater of the annual bonus that
would be payable to the executive for that year or the
executives highest annual bonus over the preceding three
years;
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for a period of two years following the executives date of
termination, Universal will provide company medical and welfare
benefits to the executive or the executives family equal
to those benefits which would have been provided to such
executive in accordance with the benefits if the
executives employment had not been terminated;
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|
Universal will pay the executive an amount equal to the amount
forfeited by the executive under the deferred compensation plan
or any similar plan;
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|
all stock options, restricted stock, restricted stock units or
other stock-based awards held by the executive that are not
vested, will vest; and
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|
in the event that any payment or distribution made by Universal
to or for the benefit of the executive would be subject to a
federal excise tax, then the executive is entitled to receive an
additional
gross-up
payment.
|
For purposes of these change of control agreements, good
reason includes, in relevant part, the following events:
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|
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the assignment to the executive officer of any duties
inconsistent with his or her position, authority, duties or
responsibilities during the
ninety-day
period prior to the change of control, or any material
diminution in his or her position, authority, duties or
responsibilities;
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72
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|
|
|
|
the requirement that the executive officer be based at any
location other than that required during the
ninety-day
period prior to the change of control, or any substantially
increased business travel relative to that required during the
ninety-day
period prior to the change of control; or
|
|
|
|
any purported termination of the executive officers
employment, other than as expressly permitted by the applicable
change of control agreement.
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For purposes of these change of control agreements, termination
for cause includes, in relevant part, termination
for any of the following reasons:
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|
|
|
|
the willful and continued failure of the executive officer to
perform substantially his or her duties (other than as a result
of incapacity due to physical or mental illness), after a
written demand for substantial performance has been delivered to
the executive officer by the board of directors or the Chief
Executive Officer of Universal or its successor; or
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|
|
|
the willful engaging by the executive officer in illegal conduct
or gross misconduct which is materially and demonstrably
injurious to Universal or its successor.
|
Based on the Universal equity awards held as of June 28,
2007 by executive officers of Universal who have entered into
change of control agreements and assuming a merger closing date
of August 20, 2007, the consummation of the Universal
merger would result in the acceleration of vesting of the
following stock options and shares of restricted stock or
restricted stock units:
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|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Equity-Based Awards
|
|
|
|
Upon Completion of Merger
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|
|
|
Options
|
|
|
Restricted
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
Shares
|
|
|
|
Granted
|
|
|
Exercise Price
|
|
|
or RSUs
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
Mr. Anderson
|
|
|
19,001
|
|
|
$
|
41.83
|
|
|
|
24,000
|
|
Mr. Childers
|
|
|
19,001
|
|
|
$
|
41.83
|
|
|
|
21,500
|
|
Mr. Danner
|
|
|
24,001
|
|
|
$
|
41.79
|
|
|
|
30,000
|
|
Mr. Leong
|
|
|
11,001
|
|
|
$
|
41.33
|
|
|
|
15,000
|
|
Mr. Snider
|
|
|
96,667
|
|
|
$
|
42.85
|
|
|
|
22,500
|
|
Mr. Townsend
|
|
|
19,001
|
|
|
$
|
41.83
|
|
|
|
20,000
|
|
Mr. Wayne
|
|
|
|
|
|
|
|
|
|
|
5,643
|
|
Indemnification
and Insurance
The merger agreement includes provisions relating to
indemnification and insurance for directors and officers of
Hanover and Universal.
Each of the parties to the merger agreement has agreed that, for
six years after the consummation of the mergers, Holdings will
indemnify and hold harmless and advance expenses to, to the
greatest extent permitted by law as of the date of the merger
agreement, the individuals who at or prior to the consummation
of the mergers were officers and directors of Hanover, Universal
or their respective subsidiaries with respect to all acts or
omissions by them in their capacities as such or taken at the
request of Hanover, Universal or any of their respective
subsidiaries at any time prior to the consummation of the
mergers. Holdings has also agreed to honor all indemnification
agreements, expense advancement and exculpation provisions with
the individuals identified in the preceding sentence (including
under Hanovers or Universals certificate of
incorporation or bylaws) in effect as of February 5, 2007,
the date of the execution of the merger agreement, in accordance
with the terms of those agreements or provisions.
The merger agreement also provides that for a period of six
years after the consummation of the mergers, Holdings will cause
to be maintained officers and directors liability
insurance covering all officers and directors of Hanover and
Universal who are, or at any time prior to the consummation of
the mergers were, covered by Hanovers or Universals
existing officers and directors liability insurance
policies on terms substantially no less advantageous than the
existing policies, provided that Holdings will not be required
to
73
pay annual premiums in excess of 200% of the last annual premium
paid by Hanover or Universal, as applicable, prior to
February 5, 2007, the date of the execution of the merger
agreement, but in such case will purchase as much coverage as
reasonably practicable for that amount.
The indemnification rights described above will be in addition
to any other rights available under the certificate of
incorporation or bylaws of Hanover or Universal or any of its
subsidiaries, under applicable law or otherwise.
Continuing
Board and Management Positions
The merger agreement provides that upon the consummation of the
mergers, the Holdings board of directors will consist of 10
members, five of whom will be current members of, and designated
by, Hanovers board of directors and five of whom will be
current members of, and designated by, Universals board of
directors. Hanover intends to designate the following current
members of its board of directors to serve on the Holdings board
of directors: Gordon T. Hall, John E. Jackson, Peter H. Kamin,
William C. Pate and Stephen M. Pazuk. Universal intends to
designate the following current members of its board of
directors to serve on the Holdings board of directors: Stephen
A. Snider, Ernie L. Danner, Uriel E. Dutton, Janet F. Clark and
J.W.G. Will Honeybourne. Committee members and
chairpersons will be chosen by the Holdings board of directors
from among its members. The amended and restated bylaws of
Holdings that will become effective upon the consummation of the
mergers provide that the size of the board of directors can be
increased or decreased, and any vacancies on the board can be
filled, only with the affirmative vote of a majority of the
whole board, which is defined to mean the total number of
authorized directors, regardless of whether there exists a
vacancy in any previously authorized director position.
The merger agreement provides that Stephen A. Snider,
Universals current President and Chief Executive Officer
and Chairman of Universals board of directors, will be the
President and Chief Executive Officer of Holdings and Gordon T.
Hall, the current chairman of Hanovers board of directors,
will be the chairman of the board of directors of Holdings.
Messrs. Snider and Hall will have all duties customary to
their respective positions, as well as any duties specifically
set forth in the amended and restated bylaws of Holdings, a copy
of which is included as Exhibit 2.3.2 of
Annex A to this joint proxy statement/prospectus.
Mr. Snider and Mr. Hall have jointly evaluated
candidates to fill the most senior officer positions at
Holdings. Pursuant to this process, the following people have
been selected to be officers of Holdings and will be appointed
to their respective positions by the Holdings board of directors
upon the consummation of the mergers:
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|
|
|
|
|
|
Position or Area of
|
|
|
Name
|
|
Responsibility with Holdings
|
|
Prior Office
|
|
J. Michael Anderson
|
|
Chief Financial Officer
|
|
Senior Vice President and Chief
Financial Officer (Universal)
|
Brian A. Matusek
|
|
Chief Operating Officer
|
|
Senior Vice President, Western
Hemisphere (Hanover)
|
Dan Newman
|
|
Manufacturing
|
|
Vice President, Manufacturing and
Global Services (Hanover)
|
D. Bradley Childers
|
|
Corporate Development
|
|
Senior Vice President and
President, International Operations (Universal)
|
Steven W. Muck
|
|
Human Resources
|
|
Vice President, Human Resources
& Health Safety and Environment (Hanover)
|
Donald C. Wayne
|
|
Legal
|
|
Vice President, General Counsel
and Secretary (Universal)
|
Kenneth R. Bickett
|
|
Corporate Controller
|
|
Vice President, Accounting and
Corporate Controller (Universal)
|
74
Regulatory
Matters
Before completing the mergers, Hanover and Universal must make
merger filings with, and in some cases obtain clearances or
consents from, United States federal and various foreign
antitrust authorities, as described below. Hanover and Universal
have received the required consents and clearances described
below to complete the mergers.
Hart-Scott-Rodino
Act
The mergers are subject to the requirements of the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder, which we call the
HSR Act. The HSR Act provides that certain transactions may not
be consummated until premerger notifications and required
information have been furnished to the Antitrust Division of the
Department of Justice and the Federal Trade Commission, or FTC,
and the relevant waiting periods have been early terminated or
have expired. Hanover and Universal filed premerger notification
forms pursuant to the HSR Act with the Antitrust Division and
the FTC on February 22, 2007. On March 26, 2007,
Hanover and Universal each received a request for additional
information from the Antitrust Division regarding the proposed
mergers. On July 3, 2007, Hanover and Universal each
received notice that the waiting period required by the HSR Act
with respect to the mergers had been early terminated.
At any time before or after consummation of the mergers, the
Antitrust Division, the FTC or any state attorney general could
take any action under the antitrust laws deemed necessary or
desirable in the public interest, including seeking to enjoin
consummation of the mergers or seeking divestiture of particular
assets or businesses of Hanover or Universal. The early
termination of the applicable HSR Act waiting period, and the
consummation of the mergers, does not preclude the Antitrust
Division or the FTC from challenging the mergers on antitrust
grounds and seeking divestiture of businesses or assets or
rescission of the transaction. Private parties also may take
legal action under the antitrust laws in certain circumstances.
It is possible that Hanover and Universal may not prevail in any
such challenge.
The merger agreement requires Hanover and Universal to satisfy
any conditions or divestiture requirements imposed upon them
unless the conditions or divestitures would be reasonably likely
to have a material adverse effect on the combined company after
the completion of the mergers.
Foreign
Clearances
Completion of the mergers also may be subject to the antitrust
laws, rules and regulations of foreign governmental authorities,
which may provide that certain transactions may not be completed
until required merger filings have been furnished to the
appropriate antitrust regulatory entity and certain waiting
periods have been early terminated or have expired or those
entities approve or clear the merger. Pursuant to the merger
agreement, completion of the mergers is subject to receipt of
these foreign antitrust clearances unless the failure to obtain
those clearances would not have a material adverse effect on the
combined company after completion of the mergers. Hanover and
Universal have determined the jurisdictions in which foreign
competition filings are required and have made the necessary
filings.
Workforce
and Employee Benefits Matters
Continuation
of Agreements
After the completion of the mergers, Holdings will assume and
agree to honor all obligations of the respective employer under
any change of control agreements and plans of Hanover and
Universal (other than the Universal Employee Stock Purchase
Plan, which Universal will terminate prior to the completion of
the mergers) existing as of the date of the merger agreement (or
as established or amended in accordance with the merger
agreement) that apply to any current or former employee or
current or former director of Universal or Hanover or any of
their subsidiaries, provided that neither Holdings nor its
subsidiaries will be prevented from enforcing those agreements
or plans in accordance with their terms, including any reserved
right to amend, modify, suspend, revoke or terminate any such
agreement or plan.
75
Workforce
Reductions
Subject to obligations under applicable law and applicable
collective bargaining agreements, Holdings current
intention is that:
|
|
|
|
|
any reductions in the employee workforce of Holdings and its
subsidiaries will be made in light of the circumstances and the
objectives to be achieved. Holdings and its subsidiaries will
give consideration to previous work history, job experience and
qualifications and such other factors as Holdings and its
subsidiaries consider appropriate, without regard to whether
employment prior to the completion of the mergers was with
Hanover and its subsidiaries or with Universal and its
subsidiaries, and any employees whose employment is terminated
or jobs are eliminated by Holdings or any of its subsidiaries
during that period will be entitled to participate (as
determined by Holdings and its subsidiaries) in the job
opportunity and employment placement programs offered by
Holdings or any of its subsidiaries for which they are eligible;
and
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|
|
|
employees of Holdings and its subsidiaries will be able to
participate in all job training, career development and
educational programs of Holdings and its subsidiaries for which
they are eligible, and employees also will be entitled to fair
and equitable consideration in connection with any job
opportunities with Holdings and its subsidiaries, in either case
without regard to whether the employment of those employees
prior to the completion of the mergers was with Hanover and its
subsidiaries or with Universal and its subsidiaries.
|
Employee
Severance Plans
In connection with the proposed mergers, Hanover and Universal
have each adopted a severance plan providing certain benefits to
their
U.S.-based
employees and employees of any other subsidiaries designated by
their respective boards of directors (but excluding any
employees with change of control agreements). The Hanover and
Universal severance plans provide that any eligible employee who
is terminated without cause during the six-month period
following the consummation of the mergers will be entitled to
payment of a minimum of 10 weeks salary or annualized
base rate of pay and a maximum amount to be determined on an
individual basis by the plan administrator based on the
employees years of service at Hanover or Universal. Each
of the plans provides that, generally, management-level
employees will be entitled to a minimum of 17 weeks
salary or annualized base rate of pay, and participants above
management level, including directors, vice presidents and
senior vice presidents, will be entitled to a minimum of
26 weeks salary or annualized base rate of pay. All
eligible terminated employees are also entitled to continued
medical, dental and vision coverage through the salary
continuation period. These severance plans will be effective
during the six-month period following the consummation of the
mergers and will supersede all prior severance plans, practices
and policies, except for each companys retention bonus
plan. Prior to or at the conclusion of six months following the
consummation of the mergers, Holdings board of directors
may consider either an extension of the severance plans or
adoption of a plan that is more typically used for reductions in
force or job eliminations.
Effect
on Awards Outstanding Under Stock Plans
Hanover
At the time of the Hanover merger, each outstanding stock option
granted under the Hanover equity incentive plans, whether vested
or unvested, will fully vest and be converted into an option to
acquire, on the same terms and conditions as were applicable
under that Hanover stock option (after taking into account the
transactions contemplated by the merger agreement), a number of
shares of Holdings common stock equal to the number of shares of
Hanover common stock subject to that stock option immediately
before the Hanover merger multiplied by 0.325 (rounded to the
nearest whole share) at a price per share of Holdings common
stock equal to the price per share under that Hanover option
divided by 0.325 (rounded to the nearest cent). Likewise, at the
time of the Hanover merger, each restricted share of Hanover
common stock and restricted share unit, whether vested or
unvested, will fully vest and will be converted into a number of
shares of Holdings common stock equal to the number of shares of
Hanover common stock subject to such restricted stock award or
restricted stock unit multiplied by 0.325.
76
Universal
and the Universal Partnership
At the time of the Universal merger, each outstanding stock
option granted under the Universal equity incentive plans (other
than options to purchase Universal common stock under the
Universal employee stock purchase plan), whether vested or
unvested, will fully vest and be converted into an option to
acquire, on the same terms and conditions as were applicable
under such Universal stock option, the same number of shares of
Holdings common stock at the same price per share. Universal
will take such actions as are necessary to terminate its
employee stock purchase plan and all outstanding options to
purchase shares of Universal common stock under the Universal
employee stock purchase plan effective immediately prior to the
effective time of the Universal merger. Likewise, at the time of
the Universal merger, each restricted share of Universal common
stock, whether vested or unvested, will fully vest and will be
converted into the same number of shares of Holdings common
stock. Vesting of the outstanding equity awards made under the
Universal Partnerships long-term incentive plan will not
accelerate upon the consummation of the mergers; that plan and
the outstanding awards made under that plan will remain in
effect.
Accounting
Treatment
The mergers will be accounted for using the purchase method of
accounting. Although the business combination of Hanover and
Universal is a merger of equals, generally accepted accounting
principles require that one of the two companies in the
transaction be designated as the acquirer for accounting
purposes. After a review of relevant factors, Hanover has been
determined to be the accounting acquirer based on the fact that
its stockholders are expected to hold more than 50% of the
Holdings common stock after the mergers. The purchase price will
be allocated to Universals identifiable assets and
liabilities based on their estimated fair values at the date of
the consummation of the mergers, and any excess of the purchase
price over those fair values will be accounted for as goodwill.
The results of final valuations of property, plant and
equipment, and intangible and other assets and the finalization
of any potential plans of restructuring have not yet been
completed. We will revise the allocation of the purchase price
based on Universals net assets at the time of the merger
and when additional information becomes available.
Appraisal
Rights
Section 262 of the Delaware General Corporation Law grants
appraisal rights to stockholders who are required, by the terms
of a merger, to accept any consideration other than shares of
stock in the surviving company, shares of stock listed on a
national securities exchange or cash received as payment for
fractional shares. Because Hanover and Universal stockholders
will receive shares of Holdings common stock that will be listed
on a national securities exchange and cash in lieu of fractional
shares, if any, as consideration in the mergers, Hanover and
Universal stockholders will not have appraisal rights as a
result of the mergers.
Resale of
Holdings Common Stock
The shares of Holdings common stock issued in the mergers will
not be subject to any restrictions on transfer arising under the
Securities Act except for shares issued to any Hanover or
Universal stockholder who is, or is expected to be, an
affiliate of Hanover or Universal for purposes of
Rule 145 under the Securities Act at the time of the
Hanover or Universal annual meeting, respectively. Persons who
may be deemed to be affiliates of Hanover or
Universal for these purposes generally include individuals or
entities that control, are controlled by or are under common
control with Hanover or Universal, respectively, and include the
directors of Hanover and Universal, respectively. The merger
agreement requires each of Hanover and Universal to use its
reasonable best efforts to cause each of its affiliates to enter
into a written agreement with Holdings agreeing, among other
things, not to transfer any Holdings common stock received in
the mergers except (1) pursuant to an effective
registration statement, (2) in compliance with
Rule 145 under the Securities Act or (3) pursuant to
an exemption from the registration requirements under the
Securities Act.
This joint proxy statement/prospectus does not cover resales of
Holdings common stock received by any person upon consummation
of the mergers, and no person is authorized to make any use of
this joint proxy statement/prospectus in connection with any
resale.
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Listing
of Holdings Common Stock
It is a condition to the consummation of the mergers that the
Holdings common stock issuable to Hanover and Universal
stockholders pursuant to the merger agreement be approved for
listing on the New York Stock Exchange, subject to official
notice of issuance.
Deregistration
and Delisting of Hanover and Universal Common Stock
If the mergers are consummated, Hanover and Universal will
delist their respective common stock from the New York Stock
Exchange and may deregister their respective common stock under
the Exchange Act. The stockholders of each of Hanover and
Universal will become stockholders of Holdings, and their rights
as stockholders will be governed by Delaware law and by
Holdings certificate of incorporation and bylaws.
Hanover and Universal may cease filing periodic reports pursuant
to the Exchange Act with the SEC following deregistration of
their common stock, subject to securities laws requirements and
the companies obligations under their respective debt
instruments.
Dividends
Neither Hanover nor Universal ever has declared a dividend on
its common stock. Both parties bank credit facilities and
the agreements governing Universals senior notes and
Hanovers senior notes and compression equipment lease
obligations restrict the parties respective ability to
declare or pay any dividend on, or make similar payments with
respect to, their capital stock. In addition, the merger
agreement prohibits the parties from declaring, setting aside or
paying any dividend with respect to their capital stock while
the mergers are pending.
We expect that, after the consummation of the mergers, Holdings
will adopt a policy not to pay dividends as well. The payment of
any dividend by Holdings would be subject to approval and
declaration by the Holdings board of directors and would depend
on a variety of factors, including business, financial and
regulatory considerations as well as any limitations in any
agreements governing indebtedness of Holdings that may then be
in existence.
Bank
Facility Amendments
It is a condition to the consummation of the mergers that each
of Hanover and Universal obtain relief from the provisions of
their respective bank credit agreements as may be necessary to
permit consummation of the mergers without breach or violation
of any such agreement, except where the failure to obtain relief
is not reasonably likely to have a material adverse effect on
Holdings after the mergers. This relief has been obtained.
Change in
Control Provision in Hanovers Equipment Leases
The Hanover merger will constitute a change of control under the
8.50% Senior Secured Notes due 2008 of Hanover Equipment
Trust 2001A and the 8.75% Senior Secured Notes due 2011 of
Hanover Equipment Trust 2001B. Taken together, there was an
aggregate of $383.0 million of these senior notes and
$11.9 million in related minority interest obligations
outstanding as of March 31, 2007. Upon the change of
control, the equipment trusts (with funds supplied by Hanover)
must make an offer to the noteholders to purchase their notes at
101% of the outstanding principal amount of the notes and
related minority interest obligations plus accrued interest to
the purchase date, unless the obligations of the equipment
trusts have been earlier satisfied and discharged. If Hanover
and Holdings cannot arrange a standby facility or alternative
financing, they may not have sufficient funds to purchase the
notes if a substantial amount are tendered. Hanover and
Universal intend to monitor the trading levels of the notes and
will consider arranging a standby facility that could be drawn
to fund the purchase of any tendered notes or seeking a waiver
of the repurchase obligation from the noteholders, if, in their
judgment, it appears likely that a substantial amount of the
notes would be tendered in response to the tender offer. See
Risk Factors Risks Relating to the
Mergers As a result of the mergers, the repurchase
of a significant portion of Hanovers and Universals
outstanding debt may be required and
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additional funds to finance the repurchase may not be available
on terms favorable to Holdings, if at all beginning on
page 23.
MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGERS
In
General
The following summary discusses the material U.S. federal
income tax consequences of the mergers to holders of Hanover
common stock and holders of Universal common stock. This summary
is based upon the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code), Treasury regulations
promulgated thereunder, administrative rulings and court
decisions, all of which are subject to change. Any such change,
which could be retroactive, could alter the tax consequences
that are described in this summary.
This summary applies only to persons who hold Hanover common
stock or Universal common stock as a capital asset within the
meaning of Section 1221 of the Internal Revenue Code. This
summary applies only to holders of Hanover common stock or
Universal common stock that are U.S. holders. For purposes
of this summary, a U.S. holder means
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an individual who is a citizen or resident of the United States,
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a corporation or other entity taxable as a corporation created
or organized under the law of the United States, any State
thereof, or the District of Columbia,
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a trust, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more
U.S. persons have the authority to control all substantial
decisions of the trust or it has a valid election under
applicable treasury regulations to be treated as a
U.S. person, or
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an estate that is subject to U.S. federal income tax on its
income, regardless of its source.
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This summary does not apply to a person that is subject to
special rules such as:
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a financial institution or an insurance company,
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a tax-exempt organization,
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a pass through entity or an investor in such an entity,
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a dealer or broker in securities or foreign currency,
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a trader in securities who uses a mark to market method of
accounting,
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a small business investment company,
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a mutual fund,
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a real estate investment trust,
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a person who has a functional currency other than the
U.S. dollar,
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a person who holds its Hanover common stock or Universal common
stock as part of a straddle, a hedge against currency risk or a
constructive sale or conversion transaction, or
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a person who acquired its Hanover common stock or Universal
common stock through the exercise of options, otherwise as
compensation or through a tax-qualified retirement plan.
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The description of the material U.S. federal income tax
consequences of the mergers to holders of Hanover common stock
is the opinion of Vinson & Elkins L.L.P., counsel to
Hanover, as to such matters, and the description of the material
U.S. federal income tax consequences of the mergers to
holders of Universal common stock is the opinion of Baker Botts
L.L.P., counsel to Universal, as to such matters. Such opinions
are based upon certain representations made by Hanover,
Universal and Holdings.
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Neither Hanover nor Universal has requested a ruling from the
IRS with respect to any of the U.S. federal income tax
consequences of the mergers, and there is no assurance that the
IRS will agree with any of the conclusions herein.
U.S. Federal
Income Tax Consequences of the Hanover Merger
The material U.S. federal income tax consequences of the
Hanover merger to holders of Hanover common stock are as follows:
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A holder of Hanover common stock will not recognize gain or loss
upon the receipt of Holdings common stock in exchange for
Hanover common stock in the Hanover merger except to the extent
of cash, if any, received in lieu of a fractional share of
Holdings common stock.
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The aggregate basis of the Holdings common stock received in the
Hanover merger will equal the aggregate basis of the Hanover
common stock surrendered in the Hanover merger reduced by the
tax basis allocable to a fractional share for which cash is
received.
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The holding period of Holdings common stock received in the
Hanover merger (including any fractional shares deemed received
and redeemed as described below) will include the holding period
of the Hanover common stock surrendered in the Hanover merger in
exchange therefor.
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A person who receives cash in lieu of a fractional share of
Holdings common stock will be treated as having received that
fractional share of Holdings common stock and then as having
received cash in exchange for that fractional share. Such a
holder should generally recognize capital gain or loss equal to
the difference between the amount of cash so received and the
holders tax basis that is allocable to the fractional
share. Any such capital gain or loss will be long-term capital
gain or loss if the holding period of the Hanover share that is
exchanged for such fractional share is more than one year when
the Hanover merger occurs.
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Holders of Hanover common stock who hold shares of Hanover
common stock with different bases or holding periods should
consult with a tax advisor with regard to identifying the bases
and holding periods of the shares of Holdings common stock
received in the Hanover merger.
It is a condition to the consummation of the mergers that
Hanover receive an opinion of Vinson & Elkins L.L.P.
dated the closing date to the effect that for U.S. federal
income tax purposes no gain or loss shall be recognized by a
holder of Hanover common stock upon the receipt of Holdings
common stock in exchange for Hanover common stock in the Hanover
merger except for gain that is recognized with respect to cash
received in lieu of a fractional share of Holdings common stock.
In rendering such opinion, Vinson & Elkins L.L.P. may
rely upon representations of Hanover, Universal and Holdings.
Although the merger agreement allows Hanover to waive its tax
opinion closing condition, Hanover does not anticipate that it
will waive this closing condition. If Hanover waives this
condition, Hanover will inform you of the decision to waive this
condition and will ask you to vote on the Hanover merger taking
such waiver into consideration.
Backup Withholding. Non-corporate holders of
Hanover common stock may be subject to information reporting and
backup withholding on any cash payments received in lieu of a
fractional share of Holdings common stock. You will not be
subject to backup withholding, however, if you
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furnish a correct taxpayer identification number and certify
that you are not subject to backup withholding on the substitute
Form W-9
or successor form included in the letter of transmittal to be
delivered to you, or
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are otherwise exempt from backup withholding.
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U.S. Federal
Income Tax Consequences of the Universal Merger
The material U.S. federal income tax consequences of the
Universal merger to holders of Universal common stock are as
follows:
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A holder of Universal common stock will not recognize gain or
loss upon the receipt of Holdings common stock in exchange for
Universal common stock in the Universal merger.
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The aggregate basis of the Holdings common stock received in the
Universal merger will equal the aggregate basis of the Universal
common stock surrendered in the Universal merger.
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The holding period of Holdings common stock received in the
Universal merger will include the holding period of Universal
common stock surrendered in the Universal merger in exchange
therefor.
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Holders of Universal common stock who hold shares of Universal
common stock with different bases or holding periods should
consult with their tax advisor with regard to identifying the
bases and holding periods of the shares of Holdings common stock
received in the Universal merger.
It is a condition to the consummation of the mergers that
Universal receive an opinion of Baker Botts L.L.P. dated the
closing date to the effect that for U.S. federal income tax
purposes no gain or loss shall be recognized by a holder of
Universal common stock upon the receipt of Holdings common stock
in exchange for Universal common stock in the Universal merger.
In rendering such opinion, Baker Botts L.L.P. may rely upon
representations of Hanover, Universal and Holdings. Although the
merger agreement allows Universal to waive its tax opinion
closing condition, Universal does not anticipate that it will
waive this closing condition. If Universal waives this
condition, Universal will inform you of the decision to waive
this condition and will ask you to vote on the Universal merger
taking such waiver into consideration.
Reporting
Requirements
Treasury regulations require each person who owns immediately
after the mergers five percent or more of the then outstanding
Holdings stock to attach to its federal income tax return a
statement containing certain information as to the mergers,
including the tax basis of the shares of Hanover common stock or
Universal common stock surrendered, as applicable, and the fair
market value of the Holdings common stock received and to retain
permanent records of these facts relating to the mergers.
This summary does not address tax consequences that may vary
with, or depend upon, individual circumstances. Moreover, it
does not address any U.S. non-income tax or any state,
local or foreign tax consequences of the mergers. Accordingly,
you should consult a tax advisor to determine the
U.S. federal, state, local and foreign tax consequences to
you of the mergers taking into account your particular
circumstances.
THE
MERGER AGREEMENT
The following summary of the merger agreement is qualified in
its entirety by reference to the complete text of the merger
agreement, which is incorporated by reference and a composite
copy of which is attached as Annex A to this joint
proxy statement/prospectus. The rights and obligations of the
parties are governed by the express terms and conditions of the
merger agreement and not by this summary or any other
information contained in this joint proxy statement/prospectus.
We urge you to read the merger agreement carefully and in its
entirety, as well as this joint proxy statement/prospectus,
before making any decisions regarding the mergers.
The merger agreement has been included with this joint proxy
statement/prospectus to provide you additional information
regarding its terms. The merger agreement sets forth the
contractual rights of Hanover and Universal but is not intended
to be a source of factual, business or operational information
about Hanover or Universal. That kind of information can be
found elsewhere in this joint proxy statement/prospectus and in
the other filings each of Hanover and Universal makes with the
SEC, which are available as described in Where You Can
Find More Information.
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As a stockholder, you are not a third party beneficiary of
the merger agreement and therefore you may not directly enforce
any of its terms or conditions. The parties
representations, warranties and covenants were made as of
specific dates and only for purposes of the merger agreement and
are subject to important exceptions and limitations, including a
contractual standard of materiality different from that
generally relevant to investors. In addition, the
representations and warranties may have been included in the
merger agreement for the purpose of allocating risk between
Hanover and Universal, rather than to establish matters as
facts. Certain of the representations, warranties and covenants
in the merger agreement are qualified by information each of
Hanover and Universal filed with the SEC prior to the date of
the merger agreement, as well as by disclosure schedules each of
Hanover and Universal delivered to the other party prior to
signing the merger agreement. The disclosure schedules have not
been made public because, among other reasons, they include
confidential or proprietary information. The parties believe,
however, that all information material to a stockholders
decision to approve the mergers is included or incorporated by
reference in this document.
You should also be aware that none of the representations or
warranties has any legal effect among the parties to the merger
agreement after the effective time of the mergers, nor will the
parties to the merger agreement be able to assert the inaccuracy
of the representations and warranties as a basis for refusing to
close the transaction unless all such inaccuracies as a whole
have had or would be reasonably likely to have a material
adverse effect on the party that made the representations and
warranties.
Furthermore, you should not rely on the covenants in the
merger agreement as actual limitations on the respective
businesses of Hanover and Universal, because either party may
take certain actions that are either expressly permitted in the
confidential disclosure letters to the merger agreement or as
otherwise consented to by the appropriate party, which may be
given without prior notice to the public.
Form and
Effective Times of the Mergers
The merger agreement contemplates that, in connection with the
closing under the merger agreement, two mergers will occur.
The
Universal Merger
First, Ulysses Sub, a direct, wholly owned subsidiary of
Holdings, will merge with and into Universal, with Universal
surviving as a direct wholly owned subsidiary of Holdings. At
the effective time of the Universal merger, Universal will
contribute to Holdings each share of Holdings common stock
outstanding before the effective time of the Universal merger.
The
Hanover Merger
Second, Hector Sub, a direct, wholly owned subsidiary of
Holdings, will merge with and into Hanover, with Hanover
surviving as a direct wholly owned subsidiary of Holdings.
The
Closing and the Effective Times of the Mergers
The closing of the mergers will take place in Houston on the
date specified by the parties to the merger agreement, which
will be no later than the third business day after all of the
conditions to the mergers described below in
Conditions to the Mergers are
fulfilled or waived (other than those conditions that by their
nature are to be fulfilled at the closing, but subject to the
fulfillment or waiver of those conditions). The Universal merger
will be effective at the time Universal designates in a
certificate of merger filed with the office of the Secretary of
State of the State of Delaware, and the Hanover merger will be
effective one minute later.
Consideration
to be Received in the Mergers
Consideration
to be Received in the Universal Merger
In the Universal merger, each holder of shares of Universal
common stock will have the right to receive one share of
Holdings common stock in exchange for each share of Universal
common stock.
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Consideration
to be Received in the Hanover Merger
In the Hanover merger, each holder of shares of Hanover common
stock will have the right to receive 0.325 shares of
Holdings common stock in exchange for each share of Hanover
common stock. Holders of Hanover common stock will have the
right to receive cash for any fractional shares they otherwise
would receive in the Hanover merger. The amount of cash for any
fractional shares of Holdings common stock will be determined
based on the average New York Stock Exchange closing price of
Universal common stock during the 15 trading days ending on the
third trading day immediately preceding the effective time of
the Universal merger.
Conversion
of Ulysses Sub and Hector Sub Common Stock in the
Mergers
At the effective time of the Universal merger, each issued and
outstanding share of common stock of Ulysses Sub will
automatically be converted into one share of common stock of
Universal, as the surviving entity of the Universal merger.
At the effective time of the Hanover merger, each issued and
outstanding share of common stock of Hector Sub will
automatically be converted into one share of common stock of
Hanover, as the surviving entity of the Hanover merger.
Cancellation
of Certain Shares of Hanover and Universal Common Stock in the
Mergers
At the respective effective times of the mergers, each share of
Universal common stock issued and held in Universals
treasury and each share of Hanover common stock issued and held
in Hanovers treasury will be canceled without payment of
any consideration.
Assumption
by Holdings of Certain Outstanding Equity Awards
For a discussion of provisions in the merger agreement relating
to the assumption by Holdings of certain outstanding equity
awards, please see The Mergers Workforce and
Employee Benefits Matters Continuation of
Agreements and The Mergers Workforce and
Employee Benefits Matters Effect on Awards
Outstanding Under Stock Plans beginning on pages 75 and 76,
respectively.
Adjustment
to the Exchange Ratios
If, before the completion of the mergers, the outstanding shares
of Hanover common stock or the outstanding shares of Universal
common stock increase, decrease, change into or are exchanged
for a different number or class of shares, in each case, by
reason of any reclassification, recapitalization, stock split,
split-up,
combination or exchange of shares or a stock dividend or
dividend payable in other securities is declared with a record
date prior to the consummation of the mergers, or any other
similar transaction occurs, the Hanover or Universal merger
ratio, as applicable, will be adjusted appropriately.
Rule 16b-3
Approval
Before the completion of the mergers, Holdings, Hanover and
Universal, and their respective boards of directors or
committees thereof, must use their reasonable best efforts to
take all actions to cause any dispositions of Hanover common
stock or Universal common stock (including any derivative
securities) and any acquisitions of Holdings common stock
(including any derivative securities) in the transactions
contemplated by the merger agreement by each individual who is
subject to the reporting requirements of Section 16(a) of
the Securities Exchange Act of 1934 to be exempt from
Section 16(b) under
Rule 16b-3
under that act.
Procedures
for Exchange of Share Certificates
Holdings will choose a bank or trust company reasonably
satisfactory to Hanover to act as exchange agent. Holdings will
deposit with the exchange agent certificates representing common
stock of Holdings to be issued pursuant to the merger agreement,
as well as sufficient cash to pay cash in lieu of fractional
shares of
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Holdings common stock in accordance with the merger agreement.
Promptly after the effective time of the mergers, Holdings will
cause the exchange agent to mail to each holder of record of one
or more certificates that, immediately prior to the effective
time of the mergers, represented shares of the common stock of
Hanover or Universal:
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a letter of transmittal (which will specify that delivery will
be effected, and risk of loss and title to the certificates will
pass, only upon delivery of the certificates to the exchange
agent and will be in such form and have such other provisions as
Holdings may reasonably specify); and
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instructions for use in effecting the surrender of the
certificates in exchange for certificates representing shares of
the common stock of Holdings, any unpaid dividends and
distributions on those shares and cash in lieu of any fractional
shares.
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Upon surrender of a certificate representing the common stock of
Hanover or Universal, as the case may be, for cancellation to
the exchange agent, together with the letter of transmittal
described above, duly executed and completed in accordance with
the instructions that accompany the letter of transmittal, the
holder of that certificate will be entitled to receive in
exchange (1) a certificate representing that number of
whole shares of Holdings common stock and (2) a check
representing the amount of cash in lieu of fractional shares of
Holdings common stock, if any, and unpaid dividends and
distributions, if any, the holder has the right to receive
pursuant to the provisions of the merger agreement, after giving
effect to any required withholding tax. The surrendered
certificate will then be canceled.
No interest will be paid or accrued on the cash in lieu of
fractional shares and unpaid dividends and distributions, if
any, payable to holders of any certificates representing shares
of common stock of Hanover or Universal. Further, no dividends
or other distributions declared or made after the effective time
of the mergers with respect to shares of Holdings common stock
with a record date after the effective time of the mergers will
be paid to any holder of any unsurrendered certificate
representing shares of common stock of Hanover or Universal with
respect to the shares of Holdings common stock issuable upon the
surrender of such certificate until such certificate is
surrendered.
In the event of a transfer of ownership of common stock of
Hanover or Universal that is not registered in the transfer
records of Hanover or Universal, respectively, a certificate
representing the proper number of shares of Holdings common
stock, together with a check for the cash to be paid in lieu of
fractional shares, if any, may be issued to the transferee if
the certificate representing such common stock of Hanover or
Universal, as the case may be, is presented to the exchange
agent, accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.
Any former stockholders of Hanover or Universal who have not
surrendered their certificates representing Hanover or Universal
common stock within one year after the effective time of the
mergers should only look to Holdings, not the exchange agent,
for delivery of certificates representing shares of Holdings
common stock and cash in lieu of any fractional shares and for
any unpaid dividends and distributions on the shares of Holdings
common stock deliverable to those former stockholders pursuant
to the merger agreement.
Notwithstanding the procedures described above, the merger
agreement permits the parties to implement a direct registration
system at the closing of the mergers. Hanover and Universal
intend to implement such a system, under which all shares of
Holdings common stock would be in uncertificated book-entry form
unless a physical certificate is requested in writing by a
holder of certificates representing Hanover or Universal common
stock.
Covenants
and Agreements
Interim
Operations
Each of Hanover and Universal has agreed to customary covenants
that place restrictions on it and its subsidiaries until the
effective time of the mergers. Except as set forth in the
disclosure schedules provided by each of Hanover and Universal,
as expressly permitted or provided for by the merger agreement,
as required
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by applicable laws or with the written consent of the other
party, each of Hanover and Universal has agreed that it will:
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conduct its operations and cause each of its subsidiaries to
conduct its operations in the usual, regular and ordinary course
in substantially the same manner as previously conducted;
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use its reasonable best efforts, and cause each of its
subsidiaries to use its reasonable best efforts, to:
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preserve intact its business organization and goodwill (except
that any of its subsidiaries may be merged with or into, or be
consolidated with or liquated into, it or any of its
subsidiaries),
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keep available the services of its officers and employees, and
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maintain satisfactory business relationships;
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not amend or propose to amend its organizational documents,
other than bylaw amendments that are not detrimental to the
interests of stockholders;
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not permit or allow Hector Sub or Ulysses Sub to amend their
organizational documents;
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promptly notify the other party of:
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any material change in its or any of its material
subsidiaries condition (financial or otherwise) or
business,
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any termination, cancellation, repudiation or material breach of
material contracts (or communications indicating that the same
may be contemplated), or
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any material litigation or proceedings (including arbitration
and other dispute resolutions proceedings) or material
governmental complaints, investigations, inquiries or hearings
(or communications indicating that the same may be
contemplated), or any material developments in any such
litigation, proceedings, complaints, investigations, inquiries
or hearings;
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not, and will not permit any of its subsidiaries to, issue any
shares of its capital stock or other equity securities, effect
any stock split or otherwise change its capitalization as it
existed on the date of the merger agreement, except pursuant to
the exercise of options or upon the settlement of restricted
stock units existing on the date of the merger agreement,
pursuant to the conversion of any of Hanovers outstanding
convertible notes in accordance with their terms or pursuant to
the grant or exercise of awards granted after the date of the
merger agreement and expressly permitted under the merger
agreement;
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not, and will not permit any of its subsidiaries to, grant any
option, warrant, conversion right or other right not existing on
the date of the merger agreement to acquire or otherwise with
respect to shares of its capital stock or other equity
securities, or grant or issue any restricted stock or
securities, except for awards under the Hanover or Universal
benefit plans in existence as of the date of the merger
agreement to any newly hired employees or to existing officers,
directors or employees in the ordinary course of business
consistent with past practices, as long as the vesting or
exercisability of any award made after the date of the merger
agreement does not accelerate as a result of the pendency,
approval or consummation of the transactions contemplated by the
merger agreement;
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not, and will not permit any of its subsidiaries to, amend or
modify any option, warrant, conversion right or other right to
acquire shares of its capital stock existing on the date of the
merger agreement;
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not, and will not permit any of its subsidiaries to, increase
any compensation or benefits, award or pay any bonuses,
establish any bonus plan or arrangement or enter into, amend or
extend any employment or consulting agreement with any former,
present or future officers, directors or employees, except in
the ordinary course of business consistent with past practices
or as required by law, and except that each of Hanover and
Universal has retained the right to adopt a cash retention plan
for some or all of their respective employees in an aggregate
amount up to $10 million per company;
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not, and will not permit any of its subsidiaries to, adopt any
new employee benefit plan or agreement (including any stock
option, stock benefit or stock purchase plan) or amend (except
as required by law) any existing employee benefit plan in any
material respect, except as expressly permitted by the merger
agreement;
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not, and will not permit any of its subsidiaries to, permit any
holder of an option or |