Leonard,
Following our August 15 conference call — which included Marcus Adler, Diana, Tobias, and me from Harrowgate; Jonathan Caldecott and Philip from Veldran; you, Sylvia Hartwell, and Garrett Simmons from Calderwood & Harkness; and Priya from Whitfield & Gage — and subsequent internal discussions here at Harrowgate, I am writing to inform you that Harrowgate has determined to pause indefinitely the proposed pro rata spin-off of Meridian Flow Technologies, Inc. from Veldran Industries Holdings, Inc. This decision has been discussed with and is supported by the Veldran board, chaired by Diana.
Three principal considerations drove this determination. First, deteriorating industrial-sector equity valuations during mid-2022 make the timing of the spin-off, and any potential post-spin capital markets activity, unattractive. Samuel Ng at Brackenridge & Co. has similarly advised that current market conditions are unfavorable for the separation. Second, as you flagged in your July 22 email and as we discussed at length on the August 15 call, articulating sufficiently robust corporate-level business purposes for the spin-off — independent of HPE Fund IV's fund-level strategic objectives — has proven more challenging than we initially anticipated. Both Jonathan Caldecott and Sandra Waverly were unable to identify additional corporate-level justifications beyond the two preliminary purposes (independent capital-allocation strategies and management focus/operational efficiency), and we understand Calderwood & Harkness's view that these may be insufficient to support a "should" level opinion. Third, Margaret Tsao at Ashfield National Bank, N.A. has indicated that consents under the first lien credit agreement (the $1.1 billion Term Loan B) would require significant negotiation and potentially a refinancing, adding material cost and complexity that is not justified under current conditions.
With that context, I would ask that Calderwood & Harkness take the following steps:
1. **Suspend active work** on the matter (engagement number 1003-00005 / matter code HRW-SPIN-001) effective immediately.
2. **Preserve all work product** so that the engagement can be reactivated efficiently if and when Harrowgate determines to proceed. This includes the draft tax opinion letter circulated on August 5; the analysis memoranda (the comprehensive § 355 analysis, the § 355(b) active trade or business / Kestrel analysis, the § 355(e) plan analysis, the business purpose memorandum, and the device test analysis); the draft Representation Letter (second draft dated July 11); the draft Tax Matters provisions; the draft Tax Sharing Agreement outline; and all supporting diligence materials.
3. **Provide a summary of unbilled work-in-progress (WIP)** through the date of this email, in addition to the $310,000 already billed across the two interim invoices (Invoice #22-7831-001 for $165,000 dated June 15, 2022 and Invoice #22-7831-002 for $145,000 dated August 1, 2022).
We will advise Calderwood & Harkness when we are ready to reactivate, and the timing will depend on market developments and further strategic assessment on our end. To be clear, no draft opinion or other deliverable issued to date should be treated as reflecting a concluded view, consistent with the draft nature of all materials produced in the engagement so far.
I want to thank you, Sylvia, Garrett, and Leila Nazari for your thorough and diligent work over the past several months. We recognize the complexity of the tax analysis, particularly the § 355(e) plan-risk assessment given the September 2019 acquisition and the § 355(b) issues surrounding Kestrel Precision Controls. We very much hope to reengage when circumstances are more favorable. Priya at Whitfield & Gage will be separately suspending the corporate workstreams, and Philip at Veldran will coordinate on the Thornapple McCord side.
Best regards,
Christine Yeung General Counsel Harrowgate Capital Advisors LLC 600 Lexington Avenue, 38th Floor New York, NY 10022