February 21, 2003
Board of Directors
Ocean Spray Cranberries, Inc.
One Ocean Spray Drive
Lakeville-Middleboro, MA 02349
Attention: Benjamin A. Gilmore, II, Chairman of the Board
Barbara S. Thomas, Chief Executive Officer
Re: Proposal to Acquire Ocean Spray Cranberries, Inc.'s Juice Business
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Dear Mr. Gilmore and Ms. Thomas:
We are pleased to offer to acquire your juice business, including the Ocean
Spray brand, as more specifically described below, for a purchase price in cash
and stock equal to your net juice sales for the 12-month period ending February
28, 2003 (as determined by generally accepted accounting principles), which we
estimate to be approximately $800 million. As part of this mostly-cash
transaction, we also propose to enter into a 15-year supply agreement with you
pursuant to which we will annually purchase between 2 million to 3 million
barrels of cranberries from you at an initial minimum purchase price of $35 per
barrel for the first year of our contract, and at a price increasing thereafter
by $1 per barrel for each of the next four years and by $0.50 per barrel for
each of the next 10 years. Additionally, in order to further compensate you and
your grower-members for our acquisition of the Ocean Spray brand name, we also
propose to enter into a royalty agreement with you, with a term coincident with
the term of the supply agreement, pursuant to which we will pay you annually an
amount equal to 3% of our net sales (as determined in accordance with generally
accepted accounting principles) and license fees on all of our sales and
licensing of new non-juice products utilizing the Ocean Spray brand name.
This is a very serious and legitimate offer. Our Board of Directors has
authorized, and our controlling shareholder affiliate, Sun Capital Partners
based in Boca Raton, Florida, is in full support of, this offer. Sun Capital
will arrange for the necessary debt and equity capital to consummate this
transaction and allow us to effectively operate our combined business after the
closing. Sun Capital is a leading private investment firm with approximately
$700 million of equity under management. Sun Capital's investors include leading
institutional investors, such as university endowments, corporate pension funds,
foundations and others. Last year, Sun Capital was the most acquisitive private
investment firm in the United States, having acquired 16 companies. Since its
inception in 1995, Sun Capital has invested in 40 portfolio companies
representing approximately $4 billion of combined revenues.
We believe our proposal provides you and your grower-members with both
tremendous short-term and long-term financial benefits and security. Our
estimated $800 million purchase price represents a gross value to your
grower-members of over $200 per share. Additionally, our 15-year commitment to
buy cranberries from you at an initial first-year minimum price of $35 per
barrel, and at an increasing price every year thereafter, should result in
substantially increased per barrel prices payable to your grower-members for the
foreseeable future. When adjusted for the price per barrel we will pay you under
our supply agreement, our purchase price represents an extremely high multiple
of your EBITDA.
The significant cash infusion from our purchase, coupled with the
approximate $70 million of your retained accounts receivable in excess of your
retained accounts payables, should allow you great flexibility in managing your
balance sheet and provide you with substantial additional working capital to
expand your retained operations and further enhance your ongoing profitability
and viability, all for the near-term and long-term benefit of your
grower-members.
Finally, through our issuance, and your pass-through to your
grower-members, of the portion of the purchase price payable in our
freely-tradable and negotiable stock, your grower-members will be allowed the
further opportunity to own a direct equity interest in our combined juice
business and thereby enjoy the future potential financial upside from our
combined operations and marketing power as an ongoing business with its primary
focus on selling cranberry-based products.
We think this proposal is compelling to you and your grower-members.
We are submitting our offer to you at this time because of your recently
announced postponement of your annual shareholders meeting. We originally felt
that it would be inappropriate to present our offer to you while you were
undergoing an internal proxy solicitation contest. As a result, we initially
planned to wait until after your corporate governance issues were clearly
resolved so that your newly elected Board of Directors could direct its entire
fiduciary attention to our offer.
However, we understand from your recent announcement that you have delayed
your annual shareholders meeting so that your grower-members may hear firsthand
the results of a report on your strategic plan and direction by McKinsey &
Company to be presented to your grower-members on Monday, February 24. Although
we obviously are not privy to McKinsey's report, conclusions or recommendations,
given these new circumstances, we felt it would be disingenuous for us to
continue to delay our offer and not, in good faith, allow McKinsey the
opportunity to fully consider, analyze and have the benefit of our offer in
connection with its strategic alternatives analysis and presentation to your
grower-members.
Importantly, our offer is being made without any knowledge, input or
support of the alternative slate of directors which is challenging your Board's
nominees. We are not engaged in any attempt to interfere with your election. We
take no position in support or opposition of either proposed slate of nominees
and we are anxious and willing to work with whichever slate is elected.
Our proposal is fully-negotiable. We are ready, willing and able to meet
with you and your representatives in person at any location to further discuss
this proposal, as well as to explore potential alternatives that you believe
might even further enhance the value of this transaction for you and your
grower-members' benefit.
We understand, of course, that you may desire to delay discussion on our
proposal until after the results of your directors election are known on March
8. To respect your corporate governance process, we are willing to hold our
proposal open until March 18. However, in the interim, we are more than willing
to discuss our proposal with you and your representatives at any time. One way
to do this in advance of your March 8 annual meeting would be to include as part
of your discussion team the three director nominees who have been nominated as
part of both proposed director slates. We would welcome such an opportunity.
Further specifics, as well as additional terms, of our proposal are set
forth below:
1. Purchase Price. The purchase price for the Acquired Assets (as defined
below) will be equal to your net juice sales from 100% juice, juice drinks and
cocktails (excluding any past sales from Nantucket-Allserve, Inc.) for the
12-month period ending February 28, 2003. A mutually satisfactory audit of your
financial statements by Deloitte & Touche LLP would establish your annual net
juice sales for the 12-month period ending on February 28, 2003, in accordance
with generally accepted accounting principles, and the purchase price.
At least 55% of the purchase price will be paid at closing in cash and the
remaining amount will be paid in the form of our fully-registered and
freely-tradable and negotiable Class A Common Stock, and/or preferred stock
convertible into our Class A Common Stock. We fully intend, however, to maximize
the
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cash payable to you at closing above and beyond 55% of the purchase price. Our
stock issued to you at closing would be passed through by you to your
grower-members to allow them to own a direct equity interest in our combined
juice business and realize the future potential financial upside benefits from
our combined operations.
To provide your grower-members with the ability to realize immediate and
ongoing liquidity for our stock issued in the transaction, we will register the
issuance of our newly issued stock with the SEC and will list it for trading and
resale by your grower-members on either Nasdaq or the NYSE at closing.
As indicated above, our controlling shareholder affiliate, Sun Capital
Partners, has committed to raising the equity and debt capital to finance the
cash portion of the purchase price, as well as the working capital needs of our
combined business after closing. As a result, given Sun Capital's financial
strength, track record of success, ready access to various multiple capital and
financing sources, and its reputation, we do not anticipate having any
difficulty obtaining such financing. To provide full assurance to you and your
grower-members that the cash purchase price will be paid at closing, Sun Capital
expects that definitive financing commitments would be obtained and delivered to
you prior to executing a definitive purchase agreement. Sun Capital's senior and
subordinated financing partners have included some of the largest and best known
banks and mezzanine lenders, including JP Morgan Chase, Bank One, Fleet Boston,
CIT, Deutsche Bank, Key Bank, LaSalle Bank, Ableco, Congress, Foothill, Midwest
Mezzanine, Met Life and Equinox.
2. Acquired Assets. The "Acquired Assets" would include all free and clear
right, title and interest to: (a) the Ocean Spray brand name and trademark
(other than with respect to our grant back to you of an exclusive, perpetual,
international, royalty-free license of the Ocean Spray brand name and trademark
to allow you to continue to market and sell your identified existing non-juice
products that use the Ocean Spray name, and further subject to our payment to
you of a 3% royalty on our post-closing net sales of, and license fees from, any
new non-juice products we develop and sell (or license) post-closing utilizing
the Ocean Spray brand name, as described below); (b) your Kenosha, Wisconsin
facility and all fixtures, assets and equipment therein or associated therewith;
(c) your Lakeville-Middleboro, Massachusetts corporate headquarters facility and
all fixtures, assets and furnishings therein or associated therewith; (d) a
mutually agreed upon level of finished goods juice inventory; (e) a mutually
agreed upon level of raw materials inventory (excluding cranberries and
grapefruit) to support our initial post-closing juice operations and production;
(f) all trade secrets, formulae, process techniques, goodwill and other
intangibles related to or utilized in your juice business; (g) all books and
records and MIS hardware and related software (including software owned by third
parties and licensed by you) related to or utilized in your juice business; and
(h) other identified necessary assets related to or utilized in your juice
business.
3. Your Retained Business. Our proposal is purposefully structured so that
you can be maintained as a viable and profitable enterprise and you can continue
to operate your existing non-juice business (i.e., fresh cranberries, cranberry
sauce, craisins, etc), as well as your ongoing sale of grapefruit, cranberries
and cranberry concentrate, and products not purchased by us under our supply
agreement, for the continued benefit of your grower-members. We believe that the
enhanced profitability from your retained operations, together with the
substantial cash payment to be made to you at closing and your excess retained
accounts receivable over your retained accounts payable, should allow you to
remain an active and viable entity for the long-term benefit of your
grower-members. As a result, we will not acquire your cash, accounts receivable,
existing inventories of cranberries or grapefruit, existing additional
facilities or your investment in Cobank. As indicated above, to facilitate your
ongoing successful operation of your retained business, we will license back to
you the exclusive, perpetual, international, royalty-free right to use the Ocean
Spray brand name and trademark in connection with your ongoing sale of your
identified existing non-juice products, such as fresh cranberries, cranberry
sauce, craisins, etc.
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4. Supply Agreement. At closing, we will enter into a 15-year supply
agreement with you pursuant to which we will annually purchase a minimum of 2
million barrels of cranberries that are cleaned and binned for freezer storage.
The price for these cranberries in the first year of our contract will initially
be $35 per barrel FOB at your receiving stations and will be paid in 12 equal
monthly installments beginning upon our first receipt of delivery of the fruit.
The price per barrel will increase by $1 in each of the next four years and by
$0.50 per barrel in each of the last 10 years. However, if you decide to sell
cranberries or cranberry concentrate to others at a per barrel equivalent price
less than the per barrel price we are then paying to you under our supply
agreement, then our price per barrel will decrease, both retroactively and
prospectively, to be equal to that lower per barrel equivalent price for all of
our cranberry purchases from you for that year.
In addition, we will have the option to purchase up to an additional 1
million barrels of your cleaned and binned cranberries from your freezer
facilities annually. By February 28 of each year after harvest, we will inform
you of what portion, if any, of these additional barrels of cranberries we will
purchase. The price for these cranberries will be the same price per barrel at
which we are then paying for our initial 2 million barrels, plus up to an
additional $5 per barrel for transportation and freezer storage costs. These
additional cranberry purchases will be FOB at your freezer facilities, and the
purchase price therefor will be payable to you within 60 days of our receipt of
delivery. Such per barrel price will also be subject to decrease in the same
manner as described above if you decide to sell your remaining cranberries or
cranberry concentrate at an equivalent per barrel price less than what we are
then paying. Additional purchases by us of cranberries from you in excess of 3
million barrels per year will be subject to mutual agreement, but on the same
pricing and payment terms described immediately above.
Finally, the supply agreement will include evergreen 5-year mutual renewal
options which will be exercisable no later than 10 years after closing and no
later than every 5 years thereafter. The terms and conditions of each such
renewal will be mutually negotiated and agreed upon.
During the term of the supply agreement, we will also agree to purchase
from you all of our requirements for grapefruit, at the then current spot market
price, to allow us to continue to operate the acquired grapefruit juice
business. Such purchases will be FOB your facilities and payment therefor will
be made within 60 days of our receipt of delivery.
5. Assumed Liabilities. Other than specifically agreed upon and identified
assumed contractual liabilities arising after the closing associated with the
Acquired Assets, we will not assume any of your known or unknown liabilities,
whether or not associated with the operation of the Acquired Assets (including,
without limitation, liabilities for future trade deductions for deals that occur
prior to closing, pre-closing trade payables, accruals or liabilities for any
employee benefits, bonuses, pension or severance payments, whether or not
related to the sale of the Acquired Assets, amounts due your grower-members,
etc.).
6. Northland Board Seats. For as long as the supply agreement remains in
effect, you will have the right to nominate directors representing not less than
one-fourth of our then-existing Board of Directors, and Sun Capital will agree
to vote for the annual election of your nominees.
7. Royalty Agreement. In order to further compensate you and your
grower-members for our acquisition of the Ocean Spray brand name, and to further
help ensure your ongoing viability and prosperity, at closing we will enter into
a royalty agreement with you, with a term coincident with the term of the supply
agreement, pursuant to which we will pay you annually an amount equal to 3% of
our net sales (as determined in accordance with generally accepted accounting
principles) and license fees on all of our sales and licensing of new non-juice
products utilizing the Ocean Spray brand name.
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8. Co-Packing and Support Agreements. To further facilitate your successful
operation of your retained business at closing, if you so desire, (a) we are
willing to enter into a joint co-packaging agreement with you, with a term
coincident with the term of the supply agreement, that could provide that (i)
you will co-pack for us our acquired products at your retained plants and (ii)
we will co-pack for you your retained products at our acquired facilities, in
each case, on terms and conditions to be mutually agreed upon, but substantially
similar to your Nestle co-packing agreement, and (b) we are willing to enter
into a service and support agreement with you, with a term coincident with the
term of the supply agreement, pursuant to which we could provide you with sales,
marketing, administrative, operational and accounting services and support at
mutually agreed upon rates.
9. Ocean Spray Juice Business Employees. We will interview your current
juice business employees prior to closing and attempt to offer employment to as
many of your current employees who meet our hiring criteria that we believe are
necessary to operate the acquired business after closing. We anticipate, of
course, that we will honor the currently existing union contracts associated
with your Kenosha plant.
10. Acquisition Agreement and Exclusivity. Our valuation of the Acquired
Assets anticipates a purchase agreement containing mutually agreeable
representations, warranties, indemnities, break-up provisions, covenants
(including a covenant not to compete in the branded juice business, but allowing
and excluding your bottling and co-packing for other brands or private label
products at your retained facilities), shareholder corporate governance support
agreements, a mutually agreed upon one-year escrow for non-assumed liabilities
associated with the Acquired Assets (including liabilities for future trade
deductions for deals that occur prior to closing), and other terms and
conditions substantially similar to the type and kind that are typically
provided to the purchaser in transactions of this nature. After we reach an
agreement in principle with you on the material terms and conditions of your
sale to us of the Acquired Assets, we will require at least a 90-day exclusivity
period (subject to your fiduciary duties), during which time you and your
representatives will, directly and indirectly, suspend all further discussions
and information sharing regarding any sale of the Acquired Assets (or any
significant part thereof) with other third parties so that we can both dedicate
our mutual full attention and resources to the negotiation and completion of a
definitive purchase agreement and our review of requested due diligence
materials. During this period of exclusivity, we will conduct our due diligence
review (including meeting with your management and key personnel and completing
inspections of your Kenosha and Lakeville-Middleboro facilities) and our
attorneys and your attorneys will draft a mutually acceptable definitive
purchase agreement, along with the other agreements described herein and other
necessary and customary documents. While our preliminary valuation range
anticipates a purchase agreement containing representations, warranties,
indemnities, covenants, shareholder corporate governance support agreements,
break-up provisions, escrow and other terms and conditions customary for buyers
in similar types of transactions, our attorneys are fully authorized and
prepared to be flexible and creative on how best to mutually resolve issues that
are important to both parties.
11. Conditions. Our proposal is subject to the following standard
conditions:
o absence of any material adverse changes to the juice or cranberry
businesses;
o the continued operation of the Acquired Assets in the ordinary course
(including continued ordinary course capital maintenance and
expenditures);
o the receipt of any necessary material third party consents, waivers
and approvals related to our acquisition of the Acquired Assets
o all necessary and applicable approvals that may be required, or
termination of the waiting period, under the Hart-Scott-Rodino Act
(with the filing costs thereof to be shared between you and us);
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o a completed satisfactory audit of the financial statements of the
Acquired Assets by Deloitte & Touche LLP meeting the SEC requirements
applicable to us;
o our ability to retain the ongoing employment or consulting services of
the key members of your management team who we identify in our due
diligence investigation as being critically important to the
post-closing success of the Acquired Assets;
o our ability to obtain financing on satisfactory terms for the cash
portion of the purchase price and to fund the Acquired Assets'
post-closing working capital requirements which, as we explained
above, we anticipate being able to obtain without difficulty based on
Sun Capital's financial strength, record of success, access to
multiple various capital and financing sources, and its industry
reputation;
o approval of the finally agreed upon terms and conditions of the
transaction, and definitive purchase agreement and related agreements,
by our Board of Directors, which we will obtain prior to executing a
definitive purchase agreement with you;
o approval by our shareholders of the issuance of the stock portion of
the purchase price and related matters prior to closing, which will be
assured prior to our signing a definitive purchase agreement by Sun
Capital agreeing to vote all of its shares to approve such stock
issuance and related matters;
o approval of the transaction by your Board of Directors, which you will
obtain prior to executing a definitive purchase agreement; and
o approval of the transaction by your grower-members prior to closing,
provided that grower-members holding at least 50% of your outstanding
shares would agree to vote to approve the transaction prior to our
entering into a definitive purchase agreement.
12. Effect of This Letter. This letter is only a preliminary expression of
interest and is not to be deemed to be a legally binding offer or a contract
between us. This letter creates absolutely no legal duties or obligations by or
between us and you.
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As indicated above, we are eager and fully prepared to move quickly to
negotiate a transaction that is in the best interest of you and your
grower-members, commence and complete our due diligence, and enter into a
definitive purchase agreement as soon as possible. Questions or clarifications
regarding our proposal may be directed to me at (715) 422-6803 (fax no. (715)
422-6844), or to our legal counsel, Jeff Jones or Steve Barth of Foley & Lardner
at (414) 271-2400 (fax no. (414) 297-4900). Together with representatives of Sun
Capital and our advisors, we are available and willing to meet with you, your
representatives and any members of your Board you consider appropriate under the
circumstances in person at any time to further discuss our proposal.
In any event, we look forward to receiving your response to our proposal
before its expiration on March 18.
Very truly yours,
NORTHLAND CRANBERRIES, INC.
By: /s/ John Swendrowski
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John Swendrowski
Chairman of the Board and Chief Executive
Officer
cc: Rodger R. Krouse (Sun Capital Partners)
Marc J. Leder (Sun Capital Partners)
C. Deryl Couch (Sun Capital Partners)
Jeffrey Jones (Foley & Lardner)
Steve Barth (Foley & Lardner)