Power Solutions International Inc. (PSI), a leader in the design, engineer and manufacture of emissions-certified, alternative-fuel power systems, announces a share purchase agreement with Weichai America Corp. (Weichai America), who will invest $60 million in PSI through a combination of newly issued common equity and preferred shares. Weichai America is a fully owned subsidiary company of Weichai Power Co., Ltd. (Weichai), a China-based leading global designer and manufacturer of diesel engines, having sold more than 4 million heavy-duty diesel engines, with products sold in more than 110 countries around the world.
The two companies have also agreed to a strategic collaboration agreement under which they will work together to accelerate market penetration opportunities for each company's respective product lines across various geographic markets and end user segments. Through the alliance, PSI will gain access to Weichai's international manufacturing facilities and supply chain network.
Gary Winemaster, Chairman and Chief Executive Officer of PSI, comments, "The opportunity to partner with a global leader like Weichai enables PSI to strengthen our capital structure and significantly accelerate our growth trajectory. Through this alliance, we will dramatically expand adoption of our engines and technologies for transportation, power generation, and industrial applications within our current markets, including China, the world's largest market opportunity. In addition, through access to Weichai's extensive and complementary product offering, we will greatly expand our range of products, increasing the size of our overall addressable market across all of our end user segments. The combination of a broader and deeper product set, enhanced financial strength and expanded geographic reach will enable PSI to better serve a larger customer base and deliver long-term shareholder value. Lastly, it positions us nicely to exceed our original long-term sales target of $1 billion."
Shaojun Sun, Executive President of Weichai comments, "Our strategic investment into PSI will further enhance Weichai's globalization strategy and brand recognition by strengthening our presence in the key North American markets. Our collaboration with PSI will create synergies particularly in the areas of product manufacturing, sales and marketing and cost reduction by leveraging the experience, expertise and resources of Weichai and PSI, and will lay a solid foundation for PSI's future growth in the Chinese and other new markets."
The alliance will provide significant strategic benefits to PSI by leveraging Weichai's strengths and capabilities in engine research and development, manufacturing capabilities, procurement, distribution and extensive sales channels in China and other emerging markets. The collaboration will enable PSI to broaden its existing product portfolio to meet the demands of its customers, improve its speed to market, and provide expanded access and exposure to new markets. The parties will collaborate on a wide range of areas with the aim to increase the revenue and profitability of PSI.
Under the terms of the strategic collaboration agreement, PSI and Weichai have identified specific areas of initial cooperation including the development of engines for stationary natural gas applications based on Weichai's base engines, the identification of suitable Weichai products to be developed for sale in North America and commitment to a long term supply agreement under which Weichai will provide castings to PSI at a competitive cost. The companies have also agreed to a detailed program for sharing of best practices across both organizations to capitalize on the strengths of each operation.
As part of the agreement, Weichai America will purchase 2,728,752 newly issued shares of Common Stock of PSI at $8.00 per share, for cash consideration of $21,830,016. Weichai will also purchase 2,385,624 shares of Series B Convertible Perpetual Preferred Stock of the Company (Preferred Stock; automatically convertible into 4,771,248 shares of Common Stock 20 days following the distribution of an information statement relating to stockholder written consent) for an aggregate purchase price of $38,169,984, reflecting an as converted price of $8.00 per share of Common Stock. Following the transactions, Weichai America will own an aggregate of 40.71% of PSI's total issued and outstanding Common Stock on a fully diluted basis (assuming the conversion of the purchased Preferred Stock into Company Common Stock as of such time).
If the Preferred Stock has not been automatically converted into Common Stock within 180 days after the closing date (the Accrual Date), holders of Preferred Stock shall be entitled to participate equally and ratably with the holders of shares of Common Stock in all dividends on the shares of Common Stock as if the Preferred Stock were converted into shares of Common Stock. Following the Accrual Date, the holder of Preferred Stock shall be entitled to quarterly cumulative dividends at the annual rate of 10% of the $16.00 per share liquidation preference.
Additionally, Weichai America will be issued a stock purchase warrant upon the closing date which will have a limited exercise window of 90 days beginning on the eighteen month anniversary of the date of issuance. The warrant is exercisable for 4,055,709 shares of Common Stock, or such number of additional shares of Common Stock such that upon exercise Weichai America holds an aggregate number of shares of Common Stock equal to 51% of the total Common Stock outstanding. The warrant will be exercisable at a price per share of Common Stock equal to 85% of the VWAP during the preceding 20 consecutive trading day period prior to exercise, or 50% of such preceding VWAP price if the company is delisted from Nasdaq. The exercise price is subject to further reduction pursuant to a formula that provides for such adjustment in case the company's 2017 adjusted EBITDA is less than $22,000,000 or its net book value per share as of December 31, 2016 (in each case as determined from the company's audited financial statements for such fiscal years) is less than $8.00, provided that the aggregate amount of such downward adjustments in the 2018 Warrant exercise price shall not exceed $15,000,000. The warrant is also subject to other conditions and terms which are outlined in the Company's Form 8-K filing with the Securities and Exchange Commission.
Strengthened Financial Position and Capital Structure
The $60 million in total proceeds will be used as an opportunity to refinance the company's debt structure, which will result in a significantly improved capital structure and support the company's long-term growth objectives. The company presently expects to negotiate a restructured short-term debt facility with one or more of its existing lenders, which will include appropriate consents and waivers from its debt holders. The company believes that the Weichai investment positions the company to secure a longer-term debt structure which is appropriate for current and future needs.
On the date of closing, the size of the company's board of directors will be increased to seven and the company will appoint as directors two individuals designated by Weichai America, one of whom will be chairman of the board. Thereafter, at the next annual meeting of company stockholders the company will nominate three individuals designated by Weichai America, one of whom will be chairman of the board.
In addition, PSI and Weichai will establish a steering committee to oversee the implementation of the strategic collaboration, comprising three top-level executives from each company. The committee will provide strategic direction and make informed decisions regarding the direction, management and implementation of the collaboration projects.
Timing and Conditions to Close
The closing is anticipated to occur no later than April 4, 2017. The closing is subject to customary closing conditions, including the performance by the company of agreements and covenants required to be performed prior to the closing date including the company obtaining required third party consents.
Wunderlich Securities is acting as financial advisor, and ReedSmith is acting as legal advisor to PSI.