Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
In addition to the risks and uncertainties discussed in this quarterly report on Form 10-Q, particularly those disclosed in the MD&A, see Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to the Risk Factors except as set forth below:
Risks Related to the Merger with Elkay
There can be no assurances when or if the Merger will be completed.
Although Zurn and Elkay expect to complete the Merger in early the third quarter of 2022, there can be no assurances as to the exact timing of completion of the Merger or that the Merger will be completed at all. The completion of the Merger is subject to numerous conditions, including, among others:
• the absence of any law, order or injunction prohibiting the Merger;
• the accuracy of each party’s representations and warranties;
• each party’s compliance with its covenants and agreements contained in the Merger Agreement; and
• approval of the Merger share issuance proposal (the "Merger Share Issuance Proposal") by the stockholders of Zurn and the Elkay Merger proposal (the "Elkay Merger Proposal") by the stockholders of Elkay.
There can be no assurance that the conditions required to complete the Merger, some of which are beyond the control of Zurn and Elkay, will be satisfied or waived on the anticipated schedule, or at all.
Additionally, the Merger Agreement also provides for certain termination rights for both Zurn and Elkay, including if the Merger is not consummated on or before November 14, 2022, with an extension of three months if the parties are awaiting approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”) with such waiting period having expired on March 30, 2022, and if stockholders of Zurn fail to approve the Merger Share Issuance Proposal or by either party if the other party breaches the Merger Agreement, subject to the cure rights set forth in the Merger Agreement.
Obtaining required approvals and satisfying closing conditions may prevent or delay completion of the Merger.
The Merger is subject to a number of conditions to closing as specified in the Merger Agreement. These closing conditions include, among others, obtaining Zurn stockholder approval of the Merger Share Issuance Proposal, obtaining Elkay stockholder approval of the Merger Agreement and Merger, the listing on the NYSE of the Zurn Common Stock issuable in accordance with the Merger Agreement, and the absence of governmental restraints or prohibitions preventing the consummation of the Merger. The obligation of each of Zurn and Elkay to consummate the Merger is also conditioned on, among other things, the accuracy of the representations and warranties as set forth by the other party in the Merger Agreement (subject to certain materiality qualifications) and the performance by the other party, in all material respects, of its obligations under the Merger Agreement required to be performed at or prior to the Effective Time. The required stockholder consents and approvals may not be obtained and the required conditions to closing may not be satisfied, and, if all required consents and approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of such consents and approvals. Any delay in completing the Merger could cause Zurn and Elkay not to realize, or to be delayed in realizing, some or all of the benefits that Zurn and Elkay expect to achieve if the Merger is successfully completed within its expected time frame.
The market price for Zurn Common Stock following the completion of the Merger may be affected by factors different from, or in addition to, those that historically have affected or currently affect the market prices of Zurn Common Stock.
Zurn’s businesses differ in some regards from those of Elkay and, accordingly, the results of operations of Zurn following completion of the Merger will be affected by some factors that are different from those currently or historically affecting the results of operations of Zurn. In addition, following the closing of the Merger, Zurn may seek to raise additional equity financing through one or more underwritten offerings and/or private placements and/or rights offerings, or issue stock in connection with acquisitions, which may result in downward pressure on the share price of the Zurn Common Stock.
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The opinions of Zurn’s financial advisor will not reflect changes in circumstances between the signing of the Merger Agreement and the completion of the Merger.
Zurn has received an opinion from its financial advisor in connection with the signing of the Merger Agreement, but will not obtain an updated opinion prior to the closing of the Merger. Changes in the operations and prospects of Zurn or Elkay, general market and economic conditions and other factors that may be beyond the control of Zurn, and on which Zurn’s financial advisor's opinions was based, may significantly alter the value of Zurn or Elkay or the price of the shares of Zurn Common Stock by the time the Merger is completed. The opinion does not speak as of the time the merger will be completed or as of any date other than the date of such opinion.
Zurn and Elkay may be adversely affected by negative publicity related to the proposed Merger and in connection with other matters.
From time to time, political and public sentiment in connection with the proposed Merger and in connection with other matters could result in a significant amount of adverse press coverage and other adverse public statements affecting Zurn and/or Elkay. Adverse press coverage and other adverse statements, whether or not driven by political or public sentiment, may also result in investigations by regulators, legislators and law enforcement officials or in legal claims. Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceeding, can divert the time and effort of senior management from the management of Zurn’s and Elkay’s respective businesses. Addressing any adverse publicity, governmental scrutiny or enforcement or other legal proceedings is time consuming and expensive and, regardless of the factual basis for the assertions being made, can have a negative impact on the reputation of Zurn and Elkay, on the morale and performance of their employees and on their relationships with their respective regulators. It may also have a negative impact on their ability to take timely advantage of various business and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may have a material adverse effect on Zurn’s and Elkay’s respective businesses, financial condition, results of operations and cash flows.
Failure to complete the Merger could have material and adverse effects on Zurn.
If the Merger is not completed, due to the inability to satisfy any of the closing conditions or for any other reason, Zurn’s ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Merger, Zurn will be subject to a number of risks, including the following:
• Zurn will be required to pay its costs relating to the Merger, such as legal and accounting, whether or not the Merger is completed;
• time and resources committed by Zurn’s management and employees to matters relating to the Merger could otherwise have been devoted to pursuing other beneficial opportunities; and
• the market price of the Zurn Common Stock could decline to the extent that the current market price reflects a market assumption that the Merger will be completed.
In addition to the above risks, if the Merger Agreement is terminated under certain circumstances and the Zurn Board of Directors seeks another acquisition, Zurn may be required to pay Elkay a termination fee of $50.0 million.
Zurn may waive one or more of the closing conditions without re-soliciting stockholder approval.
Zurn may determine to waive, in whole or part, one or more of the conditions to closing the Merger prior to Zurn being obligated to consummate the Merger. Zurn currently expects to evaluate the materiality of any waiver and its effect on stockholders in light of the facts and circumstances at the time, to determine whether any re-solicitation of proxies is required in light of such waiver. Any determination whether to waive any condition to the Merger or to re-solicit stockholder approval will be made by Zurn at the time of such waiver based on the facts and circumstances as they exist at that time.
Zurn and Elkay will be subject to business uncertainties while the Merger is pending, which could adversely affect their respective businesses.
In connection with the pendency of the Merger, it is possible that certain persons with whom Zurn or Elkay have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with Zurn or Elkay, as the case may be, as a result of the Merger, which could negatively affect Zurn’s or Elkay’s revenues, earnings and cash flows as well as the market price of the Zurn Common Stock, regardless of whether the Merger is completed. Also, Zurn’s and Elkay’s ability to attract, retain and motivate employees may be impaired until the Merger is completed, and Zurn’s ability to do so may be impaired for a period of time thereafter, as current and prospective employees may experience uncertainty about their roles within Zurn following the Merger.
Under the terms of the Merger Agreement, Zurn and Elkay are subject to certain restrictions on the conduct of business prior to the consummation of the Merger, which may adversely affect Zurn’s and Elkay’s ability to execute certain of Zurn’s and Elkay’s business strategies, including the ability in certain cases to modify or enter into certain contracts, acquire or dispose
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of certain assets, incur or prepay certain indebtedness, incur encumbrances, make capital expenditures or settle claims. Such limitations could negatively affect Zurn’s and Elkay’s businesses and operations prior to the completion of the Merger.
Zurn and Elkay will incur significant transaction costs in connection with the Merger.
Zurn and Elkay have incurred and are expected to continue to incur a number of non-recurring costs associated with the Merger, combining the operations of Elkay with Zurn’s and achieving desired synergies. These costs have been, and will continue to be, substantial and, in many cases, each of Zurn and Elkay would bear its own transaction costs whether or not the Merger is completed. A substantial majority of non-recurring expenses will consist of transaction costs and include, among others, fees paid to financial, legal, accounting and other advisors and employee retention, severance, and benefit costs. Zurn will also incur costs related to formulating and implementing integration plans. Although Zurn expects that the elimination of duplicative costs, as well as the realization of synergies and efficiencies related to the integration of the assets and operations of Elkay, should allow Zurn to offset these transaction costs over time, this net benefit may not be achieved in the near term or at all. Moreover, if the Merger is not completed, Zurn will have incurred substantial expenses for which no ultimate benefit will have been received. Zurn and Elkay have incurred out-of-pocket expenses in connection with the Merger for investment banking, legal and accounting fees and financial printing and other costs and expenses, much of which will be incurred even if the Merger is not completed.
Until the completion of the Merger or the termination of the Merger Agreement in accordance with its terms, Zurn and Elkay are each prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to Zurn or Elkay and their respective stockholders.
From and after the date of the Merger Agreement and prior to completion of the Merger, the Merger Agreement restricts Zurn and Elkay from taking specified actions without the consent of the other party and generally requires that the business of each company and its respective subsidiaries be conducted in all material respects in the ordinary course of business consistent with past practice. These restrictions may prevent Zurn or Elkay from making appropriate changes to their respective businesses or organizational structures or from pursuing attractive business opportunities that may arise prior to the completion of the Merger and could have the effect of delaying or preventing other strategic transactions. Adverse effects arising from the pendency of the Merger could be exacerbated by any delays in consummation of the Merger or termination of the Merger Agreement.
Securities class action and derivative lawsuits may be brought against Zurn and/or Elkay in connection with the Merger, which could result in substantial costs and may delay or prevent the Merger from being completed.
Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into acquisition, merger or other business combination agreements that could prevent or delay the completion of the Merger and result in significant costs to Zurn and/or Elkay, including any costs associated with the indemnification of directors and officers. Even if such a lawsuit is without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on Zurn’s and/or Elkay’s liquidity and financial condition.
Lawsuits that may be brought against Zurn, Elkay or Zurn’s or Elkay’s directors could also seek, among other things, injunctive relief or other equitable relief, including a request to enjoin Zurn from consummating the Merger. One of the conditions to the closing of the Merger is that no injunction by any court or other tribunal of competent jurisdiction has been entered and continues to be in effect and no law has been adopted or is effective, in either case that prohibits or makes illegal the closing of the Merger. Consequently, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Merger, that injunction may delay or prevent the Merger from being completed within the expected timeframe or at all, which may adversely affect Zurn’s business, financial position and results of operation.
Zurn may record goodwill and other intangible assets that could become impaired and result in material non-cash charges to the results of operations of the combined company in the future.
Zurn will account for the Merger as an acquisition of a business in accordance with GAAP. Under the acquisition method of accounting, the assets and liabilities of Elkay and its subsidiaries will be recorded, as of the completion of the Merger, at their respective fair values and added to Zurn’s. Zurn’s reported financial condition and results of operations for periods after completion of the Merger will reflect Elkay’s balances and results after completion of the Merger but will not be restated retroactively to reflect the historical financial position or results of operations of Elkay and its subsidiaries for periods prior to the Merger.
Under the acquisition method of accounting, the total purchase price will be allocated to Elkay’s tangible assets and liabilities and identifiable intangible assets based on their fair values as of the date of completion of the Merger. The excess of the purchase price over those fair values, if any, will be recorded as goodwill. To the extent the value of goodwill or intangibles, if any, becomes impaired in the future, Zurn may be required to incur material non-cash charges relating to such impairment.
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Zurn’s operating results may be significantly impacted from both the impairment and the underlying trends in the business that triggered the impairment.
If the Merger is consummated, Zurn may be unable to successfully integrate Elkay’s business into its business or achieve the anticipated benefits of the Merger.
The success of the Merger will depend, in part, on Zurn’s ability to realize the anticipated benefits and cost savings from combining Zurn’s and Elkay’s businesses, and there can be no assurance that Zurn will be able to successfully integrate or otherwise realize the anticipated benefits of the Merger. Difficulties in integrating Zurn and Elkay may result in Zurn performing differently than expected, in operational challenges, or in the failure to realize anticipated expense-related efficiencies or other synergies. Potential difficulties that may be encountered in the integration process include, among others:
• the inability to successfully integrate Elkay in a manner that permits the achievement of full revenue, expected cash flows and cost savings anticipated from the Merger;
• not realizing anticipated synergies;
• integrating personnel from Elkay and the loss of key employees;
• potential unknown liabilities and unforeseen expenses or delays associated with and following the completion of the Merger;
• integrating relationships with customers, vendors and business partners;
• performance shortfalls as a result of the diversion of management’s attention caused by completing the Merger and integrating Elkay’s operations; and
• the disruption of, or the loss of momentum in, Zurn’s ongoing business or inconsistencies in standards, controls, procedures and policies.
Zurn may not be able to accomplish this integration process successfully.
Our results may suffer if we do not effectively manage our expanded operations following the Merger.
Following completion of the Merger, the size of Zurn’s business will increase significantly beyond its current size. Zurn’s future success will depend, in part, on Zurn’s ability to manage this expanded business, which poses numerous risks and uncertainties, including the need to integrate the operations and business of Elkay into Zurn’s existing business in an efficient and timely manner, to combine systems and management controls and to integrate relationships with customers, vendors and business partners.
Zurn’s current stockholders will have a reduced ownership and voting interest after the Merger compared to their current ownership and will exercise less influence over management.
Immediately after the Merger is completed, it is expected that Zurn’s current stockholders will collectively own approximately 71% and the Elkay stockholders are expected to receive up to 52.5 million newly issued shares of Zurn Common Stock, which on a pro forma basis assuming closing of the Merger on December 31, 2021 (and assuming no adjustments pursuant to the Merger Agreement), would have represented approximately 29% of the outstanding shares of Zurn Common Stock on a fully diluted basis as of such date. As a result of the Merger, Zurn’s current stockholders will own a smaller percentage of Zurn than they currently own, and as a result will have less influence on Zurn’s management and policies.
Sales of substantial amounts of the Zurn Common Stock in the open market by the Elkay Stockholders could depress Zurn’s stock price.
The former Elkay stockholders may wish to dispose of some or all of the Zurn Common Stock that they receive in the Merger, and as a result may seek to sell their Zurn Common Stock. These sales (or the perception that these sales may occur), coupled with the increase in the outstanding number of shares of Zurn Common Stock, may affect the market for, and the market price of, the Zurn Common Stock in an adverse manner.
If the Merger is completed and Zurn’s stockholders, including the former Elkay stockholders, sell substantial amounts of Zurn Common Stock in the public market following the closing of the Merger, the market price of the Zurn Common Stock may decrease. These sales might also make it more difficult for Zurn to raise capital by selling equity or equity-related securities at a time and price that it otherwise would deem appropriate.
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Certain stockholders of Elkay will have registration rights, the exercise of which could adversely affect the trading price of Zurn Common Stock.
Concurrently with the closing of the Merger, Zurn and certain stockholders of Elkay will enter into a Registration Rights Agreement, pursuant to which Zurn will grant such stockholders a right to demand registration of one public offering within the first three years after the closing of the Merger, subject to certain minimum and maximum thresholds and other customary conditions. Zurn will pay certain expenses of the parties incurred in connection with the exercise of their rights under the Registration Rights Agreement and indemnify them for certain securities law matters in connection with any registration statement. The existence and potential or actual exercise of such rights, and the perception that a large number of shares will be publicly sold in the market, could adversely impact the trading price of Zurn Common Stock.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.