Exhibit 16(c)(3)
[Tucker Anthony Sutro
Capital Markets
Letterhead]
February 15, 2001
Mr. Greg Benning
Adams Harkness & Hill
Via: Email
GBENNING@AHH.com
Dear Greg:
Thank you for your time on the phone Wednesday. I enjoyed, as only an Investment
Banker would, our debate on the analyses underlying our positions with regard to
the fairness of Aaron Spencer's ("Aaron" or "Controlling Shareholder") proposed
buyout of the remaining minority interest shareholders ("Minority Shareholders")
or ("Minority Buyout Transaction") of UNO Restaurant Corporation ("UNO" or "the
Company"). Tucker Anthony understands that the preparation of a Fairness Opinion
is a complex process and is not susceptible to partial analysis or broad
summary. We appreciate the role of Adams Harkness & Hill ("AHH") in this process
and understand that you are to provide guidance to the Special Committee as to
the range of values which would allow your firm to issue an opinion which states
that the consideration to be received by the Minority Shareholders is fair from
a financial point of view.
Aaron has asked us to analyze the current situation, perform whatever financial
analyses we deem appropriate and provide guidance as to a range of values we
would consider reasonable and fair under the circumstances. Aaron asked me to
share a summary of our analyses and our conclusions with you. The following is a
summary of the material financial analyses performed by Tucker Anthony in
connection with the guidance we provided to Aaron. We have also included our
thoughts as to which analyses and factors are more relevant to the situation and
should be given more consideration. We share these thoughts with you as a second
point of reference as you provide guidance to the Special Committee.
All of the basic methods used to value an entire enterprise could bear on the
value of minority interests in a Minority Buyout Transaction. However, our
experience and study reveal a bias to give more relative weight to certain
valuation factors over others as a starting point for valuing minority interests
in a Minority Buyout Transaction. Perhaps the simplest and most straightforward
approach is by direct comparison with other sales of minority interests.
I. DIRECT COMPARISONS APPROACH
The four material financial analyses involving direct comparison with other
minority interest transactions include:
(1) Historical Stock Trading Analysis of UNO
(2) Comparable Minority Buyout Transaction Analysis
(3) Comparable Companies Trading Analysis
(4) Precedent Acquisition Analysis
The HISTORICAL STOCK TRADING ANALYSIS, as evidenced by the attachment to this
letter, provides clear evidence of the market valuation of a minority interest
in UNO. The presence of Aaron's controlling interest has been present during the
entire five year period detailed on the attachment and, except for the 12 month
period where the market had been given information that a more aggressive growth
plan funded partially with a new equity offering, the market had efficiently
digested the fundamentals of a minority interest in UNO's common stock. The
failure of the equity offering and disclosure that a return to more moderate
growth returned the stock to its historical trading levels.
Based on historical earnings results, (the information available to the Minority
Shareholders) rather than projections, and the continuation of Aaron's
controlling interest, it appears most likely that the minority shares will trade
in the adjusted historical range of $5.23 per share to $8.65 per share with a
mean of $6.51 per share. It is our belief that price range appropriately
reflects the value of UNO as an entire enterprise adjusted for two significant
factors relevant to the Minority Shareholders; the "minority discount" and the
"liquidity discount". In addition, evidence shows that much of the transaction
volume above the mean, except for the period of announced aggressive growth, was
supported primarily by the Company's repurchases of common stock.
The COMPARABLE MINORITY BUYOUT TRANSACTION ANALYSIS reviewed the premiums paid
for Remaining Minority Interest Acquisitions in two categories: 1) stocks
trading under $10 per share and 2) stocks trading over $10 per share. The 26
transactions under $10 per share reveal a range of value for UNO's Minority
Shareholders of $6.01 per share to $12.72 per share with a median of $9.12 per
share based on the premium paid over the price one week prior to announcement.
The over $10 per share study revealed a range of value for UNO's Minority
Shareholders of $5.36 per share to $11.27 per share and a median of $7.60 per
share. It is our belief that the one week prior data is most appropriate since
it more fully reflects the new information available to the market versus the
one month prior data and is more absent of speculation than the one day prior
data.
The combination of the two analyses above provide the strongest evidence for
valuing minority interests in a Minority Buyout Transaction as they are the
analyses most directly comparable to the current position of the Minority
Shareholders. The acquisition of a minority interest in a Minority Buyout
Transaction is accomplished with a premium to the trading value (as discussed
above) applicable to the removal of the liquidity discount, but not applicable
to the removal of the minority discount. In other words, no control premium is
owed to the minority interests in Minority Buyout Transactions.
Consequently, the single strongest proxy for appropriate value for the Minority
Shareholders is UNO's historical trading values plus the premiums paid in other
similar transactions. Aaron's original offer of $8.75 plus or minus 10% would
appear reasonable based on historical and expected trading values of
approximately $6.25 - $6.50 per share plus a premium between 30% and 50%.
The COMPARABLE COMPANIES TRADING VALUE ANALYSIS provided a wide range of
potential outcomes for the valuation of a Minority Buyout Transaction. The small
capitalization casual dining restaurant companies (market capitalization of $300
million to $1.2 billion) provides some guidance but should be considered
somewhat irrelevant given the presence of a much lower liquidity discount and
the evidence of significantly higher growth rates historically and prospectively
versus UNO. The micro-capitalization casual restaurant companies index (5
companies with market capitalizations between $20 million and $130 million) is a
much closer direct comparable to UNO. UNO falls within this range of value, but
has historically traded at a discount to the means and medians of this group
despite margins and performance which have been greater than the means and
medians. Given the historical discount to the mean, Aaron's offer of $8.75 per
share to the Minority Shareholders falls in the range of values for the Microcap
Restaurants plus a premium for the removal of the liquidity discount.
A fourth analysis involving direct comparison with other transactions is the
PRECEDENT ACQUISITION ANALYSIS which calculates the implied value per share of
UNO stock based on several financial multiples or ratios derived from a universe
of comparable casual dining restaurant acquisitions involving a change of
control. Aaron's proposed transaction falls in the valuation range disclosed in
our exhibit, but we did not give much weighting to these results since Aaron's
proposed transaction is not a "change of control" transaction and thus not
directly comparable with any of the transactions in our data.
II. BOTTOMS-UP VALUATION APPROACH
A second approach to valuation is the "bottom up" approach based upon the
discounted future returns the stockholder may expect to realize through
dividends and or liquidation of the interests at some future date. Tucker
Anthony performed two analyses that apply this concept of valuation; 1)
Discounted Cash Flow ("DCF") and 2) Leverage Buyout Analysis ("LBO"). In both
cases we referred to UNO's five-year projections supplied to AHH and its
prospective financial institutions, without adjustment.
Our discount rate for the DISCOUNTED CASH FLOW APPROACH was built from CAPM with
an upward adjustment for the risk of owning a micro capitalization stock. We did
not give much weighting to this analysis since it was based on projections
supplied by the Controlling Shareholders that included rates of growth and
margins that are generally greater than the historical evidence and we believe a
Minority Shareholder would not be in a position to assume any of the positive
changes the existing Controlling Shareholder would contemplate. We did not
perform our own projections, but we believe, based upon historical results, the
projections supplied to AHH should be considered an optimistic case rather than
a more normalized base case.
The LEVERAGED BUYOUT ANALYSIS utilized our knowledge of the available debt
financing for transactions of this type supported by information provided by
Saunders Karp & Megrue, a noted expert in leveraged buyouts of restaurant
companies. We further utilized our knowledge of the expected rates of return for
the equity in LBO transactions. Combined with the projections discussed above
the range of implied equity value was $9.00 to $10.50 per share. We did not give
much weighting to this analysis given that expected rates of return for equity
in these transactions includes control, thus is not comparable to Aaron's
proposed transaction.
III. CONCLUSION
It is our position, and it is supported by many valuation experts, that the
Direct Comparison Approach is the more appropriate method for valuing publicly
traded minority interests. This method does not require the determination of an
enterprise value, which may include a control premium such as the LBO described
above. There are numerous supports for the valuation of a minority interest
based upon a comparison with stocks of comparative public companies. This method
incurs a far less degree of error in the base, thus providing a more accurate
analysis when applying adjustments such as liquidity discounts.
Greg, the analytical summary above is intended to partially describe why we
believe Aaron Spencer is pursuing the proposed acquisition of the Minority
Shareholders in a manner which should be viewed as fair from a financial point
of view. His original offer of $8.75 per share was quite reasonable and I know
that in the course of his arm's length negotiations with the Special Committee
he has agreed to raise his bid to $9.00 per share. I know he is willing to raise
his bid to $9.50 per share which we believe represents a fair price to the
Minority Shareholders.
I know there are numerous other factors to consider which we have not described
in this letter, but I hope your own complete analysis will allow you to give
guidance to the Special Committee that the Minority Shareholders are receiving a
fair price at a value of $9.50 per share. I truly believe that is a far superior
result for the Minority Shareholders than a return to their position as Minority
Shareholders of a closely held micro capitalization restaurant stock.
Good luck in your counsel to the Special Committee. Please call if you care to
discuss this matter further. I look forward to a successful conclusion to this
transaction.
Best regards,
/s/ William C. Sinton
William C. Sinton
Managing Director
cc: Bob Vincent
Gus Alexander
EXHIBIT A. VALUATION SUMMARY
IMPLIED PURCHASE
PRICE PER SHARE ($)
-------------------------------------
LOW MEDIAN HIGH
-------------------------------------
Remaining Minority Interest (Under $10 per share)
One Week Premia $ 6.01 $ 9.12 $12.72
One Month Premia 7.16 10.57 13.63
Remaining Minority Interest (Over $10 per share)
One Week Premia 5.36 7.60 11.27
One Month Premia 4.05 8.76 13.29
Precedent Acquisition Analysis
Sales 6.53 15.81 28.00
EBITDA 6.14 13.81 24.79
EBIT 5.91 16.02 29.90
One Week Premia 6.58 7.64 10.39
One Month Premia 7.16 8.63 11.99
Discounted Cash Flow Model 10.57 - 16.40
Leveraged Buyout 9.00 - 10.50
Comparable Companies Trading Value
Small-Cap Companies
Sales 22.18 26.92 56.20
EBITDA 13.75 18.95 50.25
EBIT 8.87 14.19 39.30
Micro-Cap Companies
Sales 5.39 10.16 15.23
EBITDA 5.60 14.27 17.57
EBIT 4.86 14.1 15.16
[CHART DEPICTING IMPLIED PURCHASE PRICE PER SHARE]
EXHIBIT B. FIVE YEAR PRICE VOLUME PERFORMANCE
[CHART DEPICTING FIVE YEAR PRICE VOLUME PERFORMANCE
FROM FEBRUARY 14, 1996 TO FEBRUARY 12, 2001]