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Darquea v. Jarden Corp.

May 31, 2007


The opinion of the court was delivered by: Brieant, J.

Memorandum and Order

Before the Court in this consolidated federal securities fraud class action is a motion filed October 20, 2006 (Doc. 28) to dismiss the Complaint brought under Rule 12(b) of the Federal Rules of Civil Procedure ("FRCP"). The action is brought on behalf of all persons who purchased or otherwise acquired the common stock of Jarden between June 29, 2005, and January 11, 2006 (the "Class Period"), and alleges violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 ("the Act"), and of Rule 10b-5. No motion for class certification has yet been filed.

The following facts are either undisputed or presumed true for purposes of this motion only. Defendant Jarden ("the Company") is a global provider of consumer products from brands such as Ball (home canning jars), Mr. Coffee, Sunbeam, Coleman (camping gear) and several others.*fn1 Jarden's shares are listed on the New York Stock Exchange. Defendant Martin Franklin is the Chairman and CEO of the Company. Defendant Ian Ashken is the Vice-Chairman, CFO and Secretary of the Company. Defendant Jarden Consumer Solutions ("JCS") is a wholly-owned subsidiary of Jarden (together "Jarden").

In 2000, Defendants Franklin and Ashken launched a hostile takeover bid, intending to buy the Company and take it private. Upon agreement to keep the Company public, Franklin was given two seats on the Company's Board in June of 2001. Thereafter Franklin and Ashken were made CEO and CFO, respectively, of Jarden.

On January 24, 2005, for a cost of $846 million, Jarden acquired the former Sunbeam Corporation, which emerged from bankruptcy under the name of American Household Incorporated ("AHI"). Compl. ¶5. The AHI acquisition was financed in part by a private equity transaction for a capital infusion of $350 million, which required Jarden to create new classes of in-kind dividend paying preferred stock, the appointment of a designated representative on Jarden's Board, and by its terms, restricted Jarden's ability to raise additional funds for any future acquisitions. Compl. ¶6. The additional funds needed to acquire AHI were raised by Jarden's refinancing of its existing debt, which required the Company to maintain certain debt-to-cash flow ratios, to be maintained in order to comply with a credit agreement, keyed to Jarden's Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA").

After the AHI acquisition, Defendants were approached by the owners of a privately held company, the Holmes Group ("Holmes"), who were interested in combining the business with JCS. Andy Hill, who was the former president of AHI and was then president and CEO of JCS, was familiar with Holmes, due to AHI's prior consideration of acquiring Holmes during Hill's tenure with AHI. Compl. ¶8.

On June 29, 2005, the Company announced an agreement to acquire the Holmes Group, which includes product brands such as Crock-Pot slow cookers, Rival roasters and Bionaire air purifiers. Plaintiffs allege that Defendant represented publicly that the acquisition would be "immediately accretive to earnings" and would permit Jarden to take advantage of product and management synergies between the two entities. On July 18, 2005, Berkshire Partners LLC announced the completed sale of the Holmes Group to Jarden for approximately $420 million in cash and 6.2 million shares of Jarden common stock.

Plaintiffs allege that by at least the start of the Class Period (June 29, 2005), Defendants knew or should have known that the claimed synergies did not exist, that Holmes would not meet its sales and other key financial projections, and that the acquisition would adversely affect Jarden's profitability.

On June 29, 2005, Jarden issued a press release in which it reported that it had agreed to buy the Holmes Group for $625 million, consisting of $420 million in cash and 4.1 million shares of Jarden common stock. It stated:

The transaction is expected to be immediately accretive to earnings and close during the third quarter, subject to customary closing conditions. The Company's waiting period for Hart-Scott-Rodino approval has already expired.

Holmes has annual revenues of approximately $700 million and an adjusted non-GAAP EBITDA [earnings before interest, taxes, depreciation and amortization] of approximately $95 million. Based on a $625 million enterprise value for the business, the acquisition multiple is approximately 6.5 times the adjusted non-GAAP EBITDA run rate, before any synergies.

Compl. ¶34.

During a teleconference held that same day with analysts to discuss the Holmes acquisition, Defendant Franklin stated:

The business has impressive cash flows in the second half of the year and the management team is strong, experienced and eager for the opportunity to take Holmes brands to the next level. Importantly, Holmes has a similar entrepreneurial cultural culture [sic] to that of Jarden, which bodes well for maximizing the synergistic opportunities the transaction will create.

From a financial as well as operational perspective, we believe that the Holmes acquisition is extremely attractive for our existing and new shareholders. The transaction further diversifies our product offerings giving us annualized revenue run-rate of approximately $3.4 billion. The gross margins are similar to our existing business at 27% but the transaction will help improve the time line we established for following the American Household acquisition of returning Jarden to 15% EBITDA margins within the next three to five years. It is not a usual custom to give guidance to the Street. But with June drawing to a closing and given the size of this transaction, I have asked Ian [Ashken] to give you a brief overview of Jarden's Q2 outlook and the impact of the Holmes transaction on earnings for 2005.

During the same call, Defendant Ashken stated: The Holmes transaction should offer a number of synergies. We have not fully quantified these yet, but are comfortable that we will achieve at least $15 million of cost savings within the next 24 months. This will further help to expand margins. Holmes' historical adjusted EBITDA margins of 13 to 14% will help Jarden drive towards its overall EBITDA margins.

In response to a question from a representative of CIBC World Market regarding how quickly the deal came together and inquiring into the familiarity of the Officers with operations, Franklin replied:

Well that is a good question. But we - first of all I would say that the American Household guys are very familiar with it, because of all their history. And second we have been aware of it for well over a year. We had not pursued it and quite frankly if we did not own - if we had not bought American Household and owned Sunbeam, we probably would not have pursued it. I mean the whole logic here was the combination and how it strengthens and enhances our ability to improve margins in what was Sunbeam. So in terms of due diligence, again Ian and I and our team, you know, we have been doing this due diligence with the same hands-on approach that we have on the other transactions. I was in China. I walked the facilities. I visited their offices in Hong Kong. I have been up to Boston - kicked the tires, met the management teams. We have done all the things that we would do to get to know a business and felt very comfortable. In fact I would tell you that the more we got to know the business, the better we felt about it. It is a really first-class team of operators inside that business.

Plaintiffs claim that as a result of Defendants' June 29, 2005 statements, Jarden's stock price rose from $50.22 per share (on the previous trading day) to $55.20 per share on June 29, 2005.

On July 28, 2005, Defendants conducted an earnings conference call with analysts to discuss Jarden's Q2 2005 performance, during which Defendant Ashken stated:

One of the key metrics we use that impacts the balance sheet is maintaining our debt to EBITDA ratio of no higher than approximately 3.5 to 1. ...This is a qualitative difference between Jarden and certain other acquisition-oriented companies. Not only are we disciplined in how we buy businesses, especially our 5 to 7 times EBITDA multiples on historical run rates, pre-synergies, but also our relatively conservative leverage helps us maintain a low risk profile, particularly in light of Jarden's historically strong free cash flow.

During that same call, in response to an analyst's question concerning whether weak earnings in the consumer sector were reflected in the Company's trends, Defendant Franklin stated:

Let me tell you, I'm glad you asked that question. Our third quarter, as we see it at the moment, our retailers, it is trending exactly as we would like. We feel very good about the third quarters. It should be the biggest quarter of the year for us and I think it's all looking exactly as we had hoped. We are aware that other companies have missed, but there was one particularly ...

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