Do All Industries Ltd.

November 08, 2012 12:42 ET

Do All Industries Offer is the Best Choice for Immediate Fair Value and Liquidity for Hyduke Shareholders

ESTEVAN, SASKATCHEWAN--(Marketwire - Nov. 8, 2012) - Do All Industries Ltd. ("Do All") has reviewed the directors' circular filed by the board of directors of Hyduke Energy Services Inc ("Hyduke") on October 22, 2012 (the "Hyduke Directors' Circular") in response to the offer (the "Offer") by Do All to purchase all of the issued and outstanding common shares of Hyduke (the "Shares"), at a price of $0.83 in cash per Share, on the terms and subject to the conditions of the Offer. Do All continues to believe that the Offer provides Hyduke shareholders with the best opportunity to receive certain value and liquidity at a significant premium to historical trading values, which represents the best combination of low risk/high return opportunities for Hyduke's shareholders.

"Our Offer provides immediate fair value, liquidity and certainty for Hyduke shareholders. The Hyduke board's response in its directors' circular is largely based on management's expectations and assertions about the future performance of Hyduke without factoring in contingent liabilities, market realities and performance of Hyduke's management team over the course of the last four years." said Kordel Korf, President of Do All. "When considering Do All's Offer and the Hyduke board's recommendation, shareholders should examine Hyduke's actual track record. Hyduke has consistently failed to meet the targets and expectations that its management team, led by its Chief Executive Officer, who is also a member of the Hyduke board, has provided to investors."

As evidence of the assertion that Hyduke has consistently failed to meet the targets and expectations that its management team has provided to investors, Do All notes that Hyduke repeatedly incurred net losses and net cash outflows from operations under its current management and, for each of the years ended December 31, 2008, 2009 and 2010, Hyduke's consolidated annual financial statements, as prepared by management and audited by Ernst & Young LLP, contained notes cautioning their readers about Hyduke's uncertainty as a going concern. Further, as recently as the unaudited interim financial statements for the period ended March 31, 2011, Hyduke disclosed that "until the company has attained sustained profitability, there is uncertainty as to the ability of the Company to continue as a going concern." If the Hyduke business is as robust as indicated in the Hyduke Directors' Circular, DoAll would expect Hyduke to release its financial results for the third quarter ended September 30, 2012 as soon as possible to show Hyduke shareholders the strength of its financial condition and, in any event, release these results prior to the bid expiry on November 12, 2012.

Having rejected the initial negotiated friendly Arrangement and now the Offer, Hyduke's board and management seem determined to resist an offer that clearly presents considerable opportunity for liquidity and reduced risk to its shareholders, especially given management's lack of performance over the last four years. Some of the more important points in the Hyduke Directors' Circular that require clarification are the following:

  • Valuation discrepancy of the Shares

    • By emphasizing the fair value of the assets of Hyduke, alleged by Hyduke to be $1.66 per Share, the Hyduke Directors' Circular raises questions as to why the Shares traded at $0.66 per Share, on June 20, 2012, the last trading day prior to the announcement of the Arrangement and $0.56 per Share on October 4, 2012, the last trading day prior to the announcement of the Offer. There are many possible reasons for this, including significant contingent liabilities, managerial inefficiencies and lack of investor confidence in Hyduke's direction and prospects.

    • Do All asserts that contingencies and liabilities were not taken into account by Hyduke's financial advisors, Sequeira Partners Inc. ("Sequeira"), in valuing Hyduke. These contingencies and liabilities are estimated (from publicly available information) to be significant, and include:

      • a customer contract dispute relating to timing of delivery of oilfield equipment in which the customer is claiming damages in excess of US$1.5 million, as disclosed in Hyduke's interim financial statements for the period ended June 30, 2012 (the "June 30 Statements");

      • late delivery penalties of up to $1.5 million pursuant to a manufacturing contract, as disclosed in the June 30 Statements;

      • outstanding litigation claims, including two $1 million counterclaims against Hyduke by a drilling services contractor and a wrongful dismissal claim of over $300,000 by Hyduke's former Chairman and Chief Executive Officer, as disclosed by public Alberta court searches;

      • change of control/termination payments of over $1.14 million, as described in Hyduke's management information circular dated July 10, 2012;

      • contingent tax liabilities related to the disposition of assets and entities; and

      • transaction costs associated with the Arrangement and expenses incurred by Hyduke and its board in resisting the Offer, including the fees of Sequeira.

    • Hyduke's CEO, Gordon McCormack, was recently quoted publicly in Canadian Business as pegging Hyduke's book value at a lower amount of between $1.50 and $1.60 per Share. The book value of assets used by Hyduke is, in these circumstances, a misleading valuation methodology as it neither accounted for any contingencies and liabilities associated with Hyduke and its operations nor did it take into account the after tax value of such assets. A disposition of assets could result in corporate tax and any distribution to shareholders of the realized after tax proceeds from the sale of Hyduke assets would be received by Hyduke shareholders subject to the tax associated with such shareholder distribution. The combined corporate and shareholder tax could be significantly higher than the amount of tax that would be associated with a sale of Shares by a shareholder for the same proceeds. Do All's analysis shows that Do All is offering Hyduke shareholders a fair price for the Shares based on disclosed contingencies and liabilities and an after tax calculation of the net asset value.

    • The selective post-announcement trading does not fairly reflect the value of the Shares and only serves to underscore the severe illiquidity of the Shares. Small trading volumes can have a significant effect on the trading price and it appears that current trading is based on the speculation that there will be a sale of the Shares. Do All believes that, in the absence of the Arrangement and the Offer, Hyduke's share price would return to the pre-Arrangement range or continue to decline. This is evidenced by the fact that the Shares did not consistently trade at a price above $0.56 from October 2008 to the announcement of the Arrangement.

  • Industry Realities Facing Hyduke

    • Empirical evidence shows that it will be a long period of recovery and, subsequently, an extended wait for Hyduke shareholders to extract the value allegedly embedded in the Shares. Given the board and executive management's lack of performance over the previous years, there are no assurances that they will be able to execute successfully on their plans. According to the Canadian Association of Oilwell Drilling Contractors, the total rig count in Alberta as of October 16, 2012 is 608, with only 232 actively drilling for a utilization rate of 38%. Further, according to Statistics Canada, profits in the Canadian oil and gas industry fell 31% in the second quarter of 2012 as compared to the previous three months. Do All believes that lower rig utilization rates will negatively impact the short term, and potentially the long term, financial results of Hyduke.

  • Adequate Financing Arrangements

    • In connection with the previously announced Arrangement, Do All confirmed in writing to Hyduke on several occasions that it had a financing commitment in place, subject only to the satisfaction of certain standard conditions most of which were in the control of Hyduke to satisfy in accordance with the Arrangement Agreement. Further, in response to a request by Hyduke and as a show of good faith, Do All provided Hyduke with evidence of such financing commitment from its lender on September 20, 2012. At no point from receipt of the confirmation of such financing to the termination date of the Arrangement Agreement, did Hyduke indicate or advise that such confirmation was insufficient or unsatisfactory.

    • Hyduke continues to incorrectly and inappropriately suggest that Do All did not and does not have financing in place. Hyduke uses the fact that Do All is financing the Offer through a source other than the financial institution which was prepared to finance the Arrangement as evidence of a lack of financing. It is common industry practice to finance an unsolicited offer through bridge financing and no conclusions should be drawn from the fact that Do All is now borrowing funds under a bridge facility.

    • Do All is of the view that Hyduke and its board have, directly and indirectly, attempted to mislead Hyduke shareholders by incorrectly and inappropriately suggesting that Do All did not and does not have financing in place as a way to avoid addressing the failure of Hyduke to satisfy its closing conditions under the Arrangement Agreement.

  • Misleading Statements about the Termination of Arrangement Agreement

    • As previously disclosed in the Offer to Purchase and Circular dated October 5, 2012, Do All was entitled to terminate the Arrangement Agreement between the parties on August 21, 2012. On August 10, 2012, Do All (through its legal counsel) provided notice to Hyduke's legal counsel pursuant to the terms of the Arrangement Agreement that Do All did not believe that Hyduke could satisfy the conditions to closing the Arrangement by the closing date due to a breach of representations relating to material contracts in the Arrangement Agreement and the failure of Hyduke to comply with a material covenant to provide updated and timely financial information to allow Do All to prepare for an orderly integration and combination of the parties' businesses. As such, Do All proposed a later closing date so as to allow Hyduke and opportunity to satisfy its closing conditions prior to closing the Arrangement.

    • Contrary to the statements made in the Hyduke Directors' Circular, Do All continued to advise Hyduke during the months of August and September that it was prepared to complete the Arrangement in accordance with the terms and conditions of the Arrangement Agreement upon satisfactory fulfillment of Hyduke's closing conditions. During such period, Do All further indicated its intention to cause Hyduke to continue to employ certain senior managers of Hyduke and, following completion of the take-over bid pursuant to the Offer, it is similarly Do All's intention to cause Hyduke to continue to employ or engage certain senior managers and directors of Hyduke.

    • Do All exercised its right to terminate under the Arrangement Agreement by delivering a notice of termination to Hyduke on September 27, 2012. After being requested by Hyduke to reconsider its termination, Do All agreed to withdraw its notice of termination and continue to be bound by the Arrangement Agreement, and offered to extend the deadline for Hyduke to satisfactorily meet the closing conditions under the Arrangement Agreement to October 19, 2012 (being approximately an additional three weeks). Do All agreed to the withdrawal and amendment on the condition that Do All be given the unilateral right to terminate the Arrangement Agreement without being required to pay the break fee of approximately $0.04 per Share at any time up to closing (which Do All was already entitled to do pursuant to the terms of the Arrangement Agreement). On the morning of September 28, 2012, Hyduke chose to accept Do All's notice of termination rather than work to close the transaction.

  • Other Misleading Statements

    • The Hyduke Directors' Circular asserts that Do All has onerous conditions to its Offer; however, the conditions contained in the Offer are easily attainable and industry standard for offers of this type and are meant to protect Do All in the event Hyduke undertakes any initiatives to diminish the value of the Shares in the context of the Offer, including any sales of material assets to third parties in foreign jurisdictions. All of the conditions contained in the Offer are fully within the ability of Hyduke to satisfy by not taking any actions to frustrate the Offer.

    • The Hyduke Directors' Circular discloses an opinion prepared for Hyduke by Sequeira; however, neither the Hyduke Directors' Circular nor Sequeira's opinion discloses any of the assumptions used, including whether any contingencies or liabilities were accounted for, in such opinion in order to determine on what basis the Do All Offer should be rejected.

    • The Hyduke Directors' Circular discloses that there can be no assurance that any financially superior alternative will emerge from its strategic process. It appears that neither the special committee nor Hyduke's board has any other alternatives to propose to the Hyduke shareholders given there has been no further announcements on the strategic process. In fact, Sequeira had approached Do All to participate, further evidencing that the process is not yielding any interest from other bidders. In any event, a review or valuation of Hyduke by any bidder will take into consideration the contingencies and liabilities of Hyduke, the recent trading prices of the Shares and significant transaction costs associated with the Arrangement and expenses incurred by Hyduke and its board in resisting the Offer.

Do All strongly encourages Hyduke shareholders to read the offer to purchase and related take-over bid circular (the "Offer and Circular"), which contain the full terms and conditions of the Offer as well as detailed instructions on how shareholders can tender their Shares to the Offer and received immediate fair value, liquidity and certainty. The Offer remains open for acceptance until 4:00 p.m. (Calgary time) on November 12, 2012, or such later date or dates as may be fixed by Do All (the "Expiry Time"), unless the Offer is withdrawn.

Questions and requests for assistance concerning the Offer may be directed to Laurel Hill Advisory Group, the information agent in connection with the Offer, and Olympia Trust Company, the depositary in connection with the Offer. The Information Agent and the Depositary may be contacted as follows:

Certain statements contained in this press release concerning Do All's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of Hyduke, are forward-looking statements. All statements other than statements of historical fact are forward-looking statements. The words "believe"," expect, "intend", "may", "anticipate", "will", "would", "appear" and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. By their very nature, forwardlooking statements involve inherent risks and uncertainties (both general and specific) and the risk that forwardlooking statements will not be achieved. These risks include, but are not limited to, the Offer not being completed; any of the terms and conditions of the Offer not being satisfied; the state of general economic conditions; changes in key personnel; and variations in required capital expenditures. Readers are cautioned that the foregoing list of factors that may affect the Offer and future results is not exhaustive. Given these risks and uncertainties, there can be no assurance that the assumptions, plans, intentions or expectations upon which forwardlooking statements are based will in fact be realized. Actual results will differ, and the difference may be material and adverse to Do All and its shareholders.

The forwardlooking statements contained in this news release are made as of the date hereof and Do All does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, except as required by applicable law. The forwardlooking statements contained herein are expressly qualified by this cautionary statement.

Contact Information

  • The Depositary for the Offer is:
    Olympia Trust Company
    2300, 125 - 9th Avenue S.E.
    Calgary, Alberta T2G 0P6

    Olympia Transfer Services Inc.
    920, 120 Adelaide Street West
    Toronto, Ontario M5H 1T1
    Toll Free: 1-888-353-3138
    Outside North America: 403-668-8884

    The Information Agent for the Offer is:
    Laurel Hill Advisory Group
    North American Toll-Free: 1-877-452-7184
    Banks, Brokers and collect calls outside North America: