What is CBRE Holding acquiring, and what will Insignia shareholders receive?

CBRE Holding, through its subsidiary Apple Acquisition Corp., agreed to acquire Insignia Financial Group under a merger agreement dated February 17, 2003. Insignia common stockholders would receive $11.00 in cash per share, plus up to $1.00 more per share if net proceeds from selling Insignia's designated real estate assets exceed a $45.0 million threshold, with total consideration capped at $12.00 per share. Series A and B preferred shares would be cashed out at $100.00 per share plus accrued dividends, and options and warrants would be settled for their in-the-money value.

How will the acquisition be financed, and how much will leverage increase?

Financing includes a $100.0 million cash equity contribution from the Blum funds in exchange for 6.25 million Class B shares at $16.00, $200.0 million of new senior notes, and a $75.0 million add-on to the tranche B term loan. Up to $45.0 million more may come from the Blum funds to purchase any designated real estate assets not sold beforehand. Pro forma long-term debt rises to about $785 million, and pro forma 2002 interest expense is about $94.4 million, which the company describes as a substantial debt burden.

Are the projected cost savings and Adjusted EBITDA reliable?

Adjusted EBITDA of $207.4 million adds $34.0 million of expected cost savings to pro forma EBITDA of about $173.4 million. These savings relate to executive compensation and overlapping administrative functions at Insignia during 2002. The company states it cannot assure when or if the savings will be realized, and that they may be offset by higher severance, lease termination costs, integration delays, or unexpected overhead. Investors should treat the Adjusted EBITDA figure as management's estimate, not a guaranteed result.

What control and governance implications come from this transaction?

The Blum funds already hold a majority of CBRE Holding's voting power through a securityholders' agreement covering about 96% of Class A and Class B voting power. After the transaction they could own up to about 69.7% of total Class A and Class B equity and up to 97% of voting power under the agreement, with the right to appoint a board majority. Minority shareholders would have limited ability to influence outcomes or block a change of control, and the Blum funds' interests may diverge from theirs.

CBRE 8-K SEC Disclosure

01—Abstract

Summary

Summary of the 8-K filed April 30, 2003. Cited figures are marked; the original filing is the authoritative source.

CBRE Holding, Inc., parent of CB Richard Ellis Services, filed this Form 8-K on April 30, 2003 to furnish information under Regulation FD in connection with its pending acquisition of Insignia Financial Group, announced under a merger agreement dated February 17, 2003.

Insignia holders would receive $11.00^a in cash per common share, with up to an additional $1.00 per share tied to the sale of Insignia's designated real estate assets, capped at $12.00 total. The deal is financed partly by a $100.0 million equity investment from the Blum funds (6,250,000 Class B shares at $16.00) and $200.0 million of new 2010 senior notes, plus a $75.0 million add-on to the tranche B term loan. The filing is largely a set of pro forma financials: on a combined 2002 basis, revenue would be about $1.74 billion and Adjusted EBITDA about $207.4 million, which includes $34.0 million of expected cost savings that management cannot guarantee.

The balance sheet and leverage profile become considerably heavier. Pro forma long-term debt is about $785 million^b, and pro forma interest expense is about $94.4 million, against Adjusted EBITDA of $207.4 million, a ratio of roughly 3.6x debt to Adjusted EBITDA. The company describes itself as highly leveraged and notes that its senior secured facilities are floating-rate, so rising rates would raise interest costs.

Control also stays with the Blum funds, which will hold up to about 69.7% of total Class A and Class B equity after the deal and control the board and most shareholder votes. For first-quarter 2003 preliminary results, CBRE Holding reported revenue of $263.7 million^c (up 17.7%) and operating income of $10.8 million (up 212.5%). Insignia reported revenue of $133.5 million (up 8%) but an operating loss of about $10.0 million, which included roughly $2.0 million of merger-related costs.

These figures are unaudited and not yet reviewed by auditors, and the filing warns they could change materially. Investors should weigh the value of the deal against a more leveraged company, integration and asset-sale risks, and a dependence on the Blum funds.

02—Key points

Key Highlights

Pending acquisition of Insignia Financial Group for $11.00 cash per share, plus up to $1.00 more per share tied to sales of Insignia's designated real estate assets, capped at $12.00 total
Pro forma 2002 revenue of approximately $1.74 billion and Adjusted EBITDA of $207.4 million, including $34.0 million of expected cost savings that are not assured
Pro forma long-term debt of about $785 million (roughly 3.6x Adjusted EBITDA) and pro forma interest expense of about $94.4 million, with floating-rate senior secured debt
Financing includes a $100.0 million Blum funds equity investment (6.25 million Class B shares at $16.00), $200.0 million of new senior notes, and a $75.0 million tranche B term loan add-on
Blum funds would control up to about 69.7% of total Class A and Class B equity and the board majority after the transaction
Q1 2003 preliminary: CBRE Holding revenue $263.7 million (+17.7%) and operating income $10.8 million; Insignia revenue $133.5 million (+8%) but an operating loss of about $10.0 million
Q1 2003 results are unaudited and unreviewed by auditors, and the company warns they could change materially

03—Questions

Frequently Asked Questions

What is CBRE Holding acquiring, and what will Insignia shareholders receive?
CBRE Holding, through its subsidiary Apple Acquisition Corp., agreed to acquire Insignia Financial Group under a merger agreement dated February 17, 2003. Insignia common stockholders would receive $11.00 in cash per share, plus up to $1.00 more per share if net proceeds from selling Insignia's designated real estate assets exceed a $45.0 million threshold, with total consideration capped at $12.00 per share. Series A and B preferred shares would be cashed out at $100.00 per share plus accrued dividends, and options and warrants would be settled for their in-the-money value.
How will the acquisition be financed, and how much will leverage increase?
Financing includes a $100.0 million cash equity contribution from the Blum funds in exchange for 6.25 million Class B shares at $16.00, $200.0 million of new senior notes, and a $75.0 million add-on to the tranche B term loan. Up to $45.0 million more may come from the Blum funds to purchase any designated real estate assets not sold beforehand. Pro forma long-term debt rises to about $785 million, and pro forma 2002 interest expense is about $94.4 million, which the company describes as a substantial debt burden.
Are the projected cost savings and Adjusted EBITDA reliable?
Adjusted EBITDA of $207.4 million adds $34.0 million of expected cost savings to pro forma EBITDA of about $173.4 million. These savings relate to executive compensation and overlapping administrative functions at Insignia during 2002. The company states it cannot assure when or if the savings will be realized, and that they may be offset by higher severance, lease termination costs, integration delays, or unexpected overhead. Investors should treat the Adjusted EBITDA figure as management's estimate, not a guaranteed result.
What do the Q1 2003 preliminary results show, and how reliable are they?
CBRE Holding reported preliminary unaudited Q1 2003 revenue of $263.7 million, up 17.7%, and operating income of $10.8 million, up 212.5%, driven by stronger worldwide sales transaction revenue. Insignia reported revenue of $133.5 million, up 8%, but an operating loss of about $10.0 million, which included roughly $2.0 million of merger costs and a New York bonus-plan change that added over $3.0 million of expense. Neither set of results has been finalized, certified, or reviewed by auditors, and the company warns they could change materially.
What control and governance implications come from this transaction?
The Blum funds already hold a majority of CBRE Holding's voting power through a securityholders' agreement covering about 96% of Class A and Class B voting power. After the transaction they could own up to about 69.7% of total Class A and Class B equity and up to 97% of voting power under the agreement, with the right to appoint a board majority. Minority shareholders would have limited ability to influence outcomes or block a change of control, and the Blum funds' interests may diverge from theirs.

04—Continue

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