From today's Globe & Mail
Allen-Vanguard 'regrets' deal means shareholders get nothing
STEVE LADURANTAYE
From Tuesday's Globe and Mail
Last updated on Tuesday, Oct. 06, 2009 04:08AM EDT
Allen-Vanguard Corp. said yesterday that it couldn't survive without a privatization deal that will see the company wipe out its shareholders as it bypasses the bankruptcy process in favour of a negotiated settlement with its lenders.
The Ottawa-based security company, struggling under $232-million in debt, announced a deal last month with U.S.-based Versa Capital Management to pay creditors and keep operating as a recapitalized private company.
"The company believes that in the absence of the transaction it would not have been able to meet its financial obligations as they became due and would likely have been unable to continue to carry on business beyond the very short term," chief executive officer David Luxton said in an update posted to the company's website yesterday.
Investors are upset because the deal won't be put to a vote. Instead, Allen-Vanguard will ask the courts to approve the deal outside of the bankruptcy process so it can maintain customer relationships and avoid liquidation. The alternative, he said, is a filing in which fewer creditors are paid and shareholders are wiped out anyway.
"Given the company's financial condition, and based on advice from its financial adviser, the company concluded that there was no reasonable prospect of any recovery by shareholders," the update read. "In these circumstances, shareholder approval is not required to complete the transaction and the company will not be seeking such approval."
A date has not yet been set for a hearing, though Mr. Luxton hopes to have the deal finalized by the end of the year. "It's not clear what process this will take yet so it's difficult to provide more information," Mr. Luxton said in an interview yesterday "It's possible it would go to the courts under the Canadian Business Corporations Act, but we're not sure yet."
He said the deal is important because it will ensure suppliers receive payment and customers can move ahead with orders knowing the company is on stable financial footing.
"We have received positive feedback from a number of our key customers and suppliers about this agreement," Mr. Luxton said. "While we regret that the transaction will not result in any recovery for our shareholders, we are pleased that customers, suppliers and creditors will be able to continue their normal course dealings with the company."
Allen-Vanguard has struggled during the financial crisis, as customers for its anti-explosion gear have reined in spending and deferred contracts. Last year, it took a $380-million goodwill writedown, and it spent most of this year trying to arrange a deal with its creditors regarding its debt. It is also struggling with a $31-million working capital deficiency, he said.
Mr. Luxton said the lenders would receive $14-million less than they are owed under the Versa deal, meaning they will recoup 94 per cent of outstanding balances. He also said management wouldn't benefit from the deal since their shares are also being rendered worthless.
Meanwhile, the company's shares haven't traded since the Toronto Stock Exchange halted trading on the day the deal was announced. The TSX said the shares will be delisted Oct. 21, since they will "no longer meet the listing requirements."
Siskind Cromarty Ivey & Dowler LLP, a Toronto-based law firm that specializes in class-action lawsuits, has set up a page soliciting information from the company's shareholders. It's an option some are hoping for, given their inability to trade shares following the announcement.
"We understand that as shareholders we are pretty low on the totem pole," said one retail investor.
"But there is a bankruptcy process you'd expect to see followed. They may be able to do this legally, but ethically I'm not sure it's right. It really undermines your confidence in the system."
Meanwhile, Allen-Vanguard has posted hundreds of pages of information on the Internet in an effort to provide disclosure to shareholders, who would also be able to make an appearance before a judge before the deal is finalized. While many pages have been redacted, such as the funding arrangements, Mr. Luxton said the key information is there.
"We're trying to help investors understand as much as they can," he said. "But all the understanding in the world doesn't change the outcome of that which they don't want to have happen to them."
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