Editor’s note: This story was updated on Nov. 1 to include new information about Omni’s complaint in a Delaware court.
Omni Logistics filed a lawsuit in a Delaware court Tuesday to require Forward Air to close on a proposed merger between the two companies. The company also asked the court to confirm that it has complied with all obligations required under the merger agreement, a matter that has been contested by Forward.
Omni is seeking a trial in the Delaware Court of Chancery before the merger agreement expires on Feb. 10.
The deal was announced on Aug. 10 at an initial price of $3.2 billion. Both Forward’s shareholders and customers have raised concerns with the transaction. A Tennessee court recently dissolved a temporary restraining order blocking the deal. The injunctive relief was sought by shareholders who claimed their rights were violated when they were not given a vote on the transaction.
Shareholders have questioned numerous aspects of the transaction, including the strategic fit, the deal price, the debt leverage required to fund it and a perceived shift in voting power and control toward Omni’s stakeholders. Forward previously defended against those complaints in court but recently said that it may terminate the transaction as it alleges Omni didn’t meet pre-closing obligations, including a failure to provide timely access to information.
A Tuesday open letter from Omni to Forward’s (NASDAQ: FWRD) shareholders called on the company to “comply with their obligations to complete our previously announced combination.”
Omni said that the negative shareholder reaction to the transaction pressured Forward to make “repeated overtures” to “renegotiate the deal in its favor or cancel it altogether,” according to a Tuesday court filing. Omni said Forward’s solutions included transitioning $400 million to $500 million of the deal price to a contingent earnout or proceeding under a joint venture structure, both of which Omni rejected.
Omni said its CEO, J.J. Schickel, was told by Forward Chairman, President and CEO Tom Schmitt that Forward didn’t intend to close the transaction ahead of an Oct. 25 hearing regarding the temporary restraining order. “The reason Forward would not close, Schmitt explained, is that if the deal were to close, he and his board would be fired,” the filing read.
The alleged breach of the merger agreement stems from Forward’s request for Omni’s fourth-quarter projections, according to the filing. Omni, a private company, said it had questions around how estimated deal synergies should be divided and sought Forward’s guidance in preparing the estimates to no avail.
The filing also said that a recent email from Forward’s CFO to Omni said its financial forecast was “substantially lower than what Omni had reaffirmed at due diligence meetings” with lenders. However, Omni said the numbers used in the forecast were a “what if” scenario modeling “no growth” as communicated to it by Forward and its financial adviser.
Omni defends deal
Omni defended the transaction, saying the market is “evolving towards a more integrated service model for customers” and that the combination would remove “a meaningful layer of cost and complexity” for end customers.
“This is a winning model that will enhance Forward Air’s competitive strength in the logistics space and create an industry innovator with attractive margins and growth prospects,” Schickel stated in the letter.
He said the deal would give Forward access to its 7,000 domestic customers and position the combined entity as a “low unit-cost provider to our customers with direct relationships.”
Omni said its LTL pipeline has increased 480% since the deal’s announcement and pointed to a 14% increase in Forward’s daily volumes with freight forwarders over the same time. That metric was disclosed in Forward’s Monday earnings release.
“We believe shareholders should question what has changed — particularly as our respective customers ramp up their business with us and give positive feedback on the deal,” Schickel stated.
Schickel said Forward largely operates without direct relationships with shippers, which he believes “is not a position for long-term strength.” However, Forward noted on its third-quarter earnings call on Tuesday that it would materially ramp those efforts, potentially increasing the sale force of its direct-selling channel threefold.
“Omni believes Forward Air’s threat to terminate the transaction is unenforceable under our binding contractual agreement — and we are confident that no impediment exists to closing the transaction immediately,” the letter said.
Schmitt said otherwise on the Tuesday call.
“We feel very strongly that we are not under an obligation to close,” Schmitt said. “I’m a big fan of when things get longer, they don’t get better, so we should be getting out of the circus and into our business 100% full time as quickly as possible.”
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