BEV.H-V new 52 week high, $1.99 on news
Benev Capital June 30, '14 has entered into an agreement with Franworks Franchise Corp. of Calgary, Alta., to acquire an approximate $12-million annual top-line royalty for a purchase price of $103-million. The purchase price will be satisfied through the use of approximately $64-million of the cash resources of BCI, the use of $8.7-million of the proceeds of a private placement of approximately 5.2 million BCI common shares at $1.66 per share to Maxam Opportunities Fund II LP, proceeds from borrowings by BCI of $15-million, and the issuance to Franworks of $14.9-million of BCI common shares at $1.66 per share (approximately 9.0 million shares).
Following completion of the transaction, BCI expects to pay regular monthly dividends of 1.6 cents per share (approximately 19 cents annually), representing an annual dividend yield of 10.2 per cent based on the 20-day volume-weighted average price of the BCI common shares up to, and including, June 27, 2014 ($1.86 per common share).
Completion of the transaction remains subject to a number of conditions including approval by the TSX Venture Exchange and by the shareholders of BCI at a special meeting expected to be held in mid-August, 2014.
Background
Since the election of the current board of directors of BCI in June, 2011, the company has sought a transformational transaction to utilize the cash resources of BCI and to provide value to shareholders. In its news release of May 27, 2014, BCI announced its current business strategy to seek opportunities to purchase top-line royalties from a number of growing multilocation businesses and franchisors.
Calgary-based Franworks is one of the fastest-growing, mid-casual dining groups in Canada. On March 31, 2014, Franworks had 62 Original Joe's, seven State & Main and 16 Elephant & Castle restaurants in operation, located in Western Canada (72), Ontario (three) and the United States (10, all Elephant & Castle). Approximately 40 per cent of the restaurants are wholly owned and operated by Franworks, and 60 per cent are franchised locations (65 per cent of which are joint ventures with Franworks). Franworks restaurants had total gross sales of approximately $205.6-million for the 12 months ended March 31, 2014, and employ approximately 3,100 people.
Original Joe's and State & Main are neighbourhood gathering places, providing scratch-cooked meals, craft beer and an approachable wine list in a casual restaurant and bar setting. Elephant & Castle is an English-style pub serving an extensive list of draught beer along with classic pub dishes. All three brands focus on providing genuine service, good value and quality comfort food to their guests while supporting the communities they serve through charitable programs.
Franworks began operations in 2000. It has opened 49 restaurants over the past five years, and expects to meet or exceed this pace over the next five years. Franworks same-store sales growth has averaged 4.9 per cent per annum over the 39 months ended March 31, 2014.
Sean Morrison, chief executive officer of BCI, stated: "The royalty acquisition from Franworks is a platform transaction for BCI and the first step in our recently announced strategy to purchase top-line royalty streams from a number of growing multilocation businesses and franchisors. Franworks is a fast-growing chain with strong unit-level economics and a superb management team -- key success factors for a top-line royalty acquisition. With the successful completion of this transformational transaction, BCI intends to focus its efforts on acquiring additional royalties from growing multilocation businesses and franchisors."
Lawrence Haber, executive chair of BCI, stated: "The BCI board has been evaluating potential value-enhancing transactions for the past three years and is pleased to be able to present this high-quality transaction to our shareholders. We have consistently stated that we would be patient and that we would seek a transaction that would enhance value for BCI's shareholders. We believe the strong positive response from our shareholders to our business strategy and this specific transaction is proof that our patience has paid off. The board of BCI unanimously supports the Franworks transaction."
Derek Doke, chief executive officer of Franworks, stated: "The transaction with BCI enables Franworks to accelerate its expansion of Original Joe's and State & Main, and provides $8-million to renovate nine of its Elephant & Castle restaurants. As a large shareholder of BCI following completion of the transaction, Franworks is excited to be the first top-line royalty to be purchased by BCI as part of its business strategy. I have witnessed the success of other stand-alone, top-line royalty companies, and believe the multiroyalty component of BCI's strategy enhances a proven business model and will create long-lasting shareholder value."
Summary of the transaction and approvals
The agreement with Franworks provides for the acquisition by BCI of all of the Canadian and U.S. trademarks and other intellectual property rights related to the Original Joe's, State & Main and Elephant & Castle restaurant businesses (FW rights) from various wholly owned subsidiaries of Franworks. The purchase price for the FW rights is $103-million.
Franworks will license the use of the FW rights from BCI for the payment of a royalty equal to 6 per cent of the gross sales of 58 Original Joe's, 13 Elephant & Castle and seven State & Main restaurants in existence on March 31, 2014, that were opened prior to Sept. 30, 2013. The annualized gross sales for these restaurants, for the 12-month period ended March 31, 2014, was $200.1-million, representing an annual payment to BCI of $12-million.
The royalty purchase from Franworks is structured similarly to the existing top-line restaurant royalty funds in Canada. The initial royalty pool may be increased by including the gross sales from new restaurants opened by Franworks, net of gross sales from restaurants that are closed. In addition, Franworks must continue to pay the royalty that was payable from restaurants that are closed and not replaced by new restaurants.
Under its agreement with BCI of Aug. 6, 2013, Maxam will acquire approximately 5.2 million common shares of BCI at a price of $1.66 per common share (representing 9.9 per cent of the issued common shares of BCI following the closing of the transaction). Franworks will be issued approximately 9.0 million common shares at a price of $1.66 per common share (representing 17 per cent of the issued common shares of BCI following the closing of the transaction) in the transaction. The issue price of $1.66 per common share for Maxam and Franworks is based on the estimated net book value per common share of BCI immediately prior to closing before giving effect to the transaction. Mr. Morrison is the chief executive officer of BCI and a managing director of Maxam.
The board of directors of BCI retained Laurentian Bank Securities Inc. to provide a fairness opinion and a sponsorship letter in respect of the transaction. Laurentian Bank Securities is of the opinion that the terms of the agreement are fair, from a financial point of view, to the shareholders of BCI, and the $103-million purchase price paid by BCI to Franworks is fair, from a financial point of view, to the shareholders of BCI. The board of directors of BCI also obtained advice and reports on the transaction from Capital West Partners; KMPG LLP; Farris, Vaughan, Wills & Murphy LLP; and Stikeman Elliott LLP.
The board of directors of BCI, after carefully and thoroughly reviewing the transaction and considering the fairness opinion of Laurentian Bank Securities, and the advice and reports of its other advisors, unanimously approved the transaction and unanimously recommends that shareholders of BCI vote to approve the transaction.
Shareholders of BCI holding in aggregate 33.8 per cent of the issued common shares of BCI, including Second City PE II Limited Partnership, have either agreed to vote in favour, or have indicated their support and intention to vote in favour, of the transaction. The vote will be by ordinary resolution, and dissent rights will not apply.
Credit facility
BCI has received a term sheet from an institutional lender for a senior credit facility of up to $17-million in respect of the transaction. Approximately $15-million is to be used to finance the purchase of the FW rights, and the remainder is to be used for working capital purposes. The credit facility is expected to have a term of 36 months, be non-amortizing, and have either a fixed interest rate or a floating interest rate, currently estimated to be banker's acceptance rate plus 4.15 per cent. The credit facility will be secured by the FW rights and the royalties payable by Franworks, and has covenants usual for this type of a credit facility. The credit facility will also be guaranteed by BCI and be secured against BCI's assets, including its interest in the partnership.
Conditions to complete the transaction
Completion of the transaction is subject to a number of conditions, including approval of the exchange, BCI shareholder approval, completion of the senior credit facility, receipt by BCI of audited financial statements of Franworks, as well as other conditions customary for a transaction of this nature.
Completion of the Maxam private placement is also subject to a number of conditions, including closing of the transaction and approval of the exchange.
The parties have agreed to pay one another a break fee of $2-million in certain circumstances, including payment of the fee to Franworks if the BCI shareholders do not approve the transaction by Sept. 8, 2014, subject to extension in certain circumstances.
There can be no assurance that the transaction or the private placement will be completed as proposed or at all. The BCI management information circular to be prepared in connection with the transaction is expected to be mailed to shareholders in mid-July for a meeting to be held in mid-August.
A copy of the acquisition agreement in respect of the transaction will be filed and available under BCI's profile on SEDAR within 10 days of this news release.
BCI intends to graduate to the Toronto Stock Exchange following closing of the transaction, subject to approval by the TSX.
Trading halt
Trading of BCI's shares on the exchange will remain halted until satisfactory documentation to effect a resumption of trading is filed with the exchange, or the proposed transaction is terminated.
Completion of the transaction is subject to a number of conditions, including exchange acceptance and shareholder approval. The transaction cannot close until the required shareholder approval is obtained. There can be no assurance that the transaction will be completed as proposed or at all.
Investors are cautioned that, except as disclosed herein or in the management information circular to be prepared in connection with the transaction, any information released or received with respect to the change of business transaction may not be accurate or complete and should not be relied upon. Trading in the securities of BCI should be considered highly speculative.
Laurentian Bank Securities, subject to completion of satisfactory due diligence, has agreed to act as sponsor to BCI in connection with the transaction. An agreement to sponsor should not be construed as any assurance with respect to the merits of the transaction or the likelihood of completion. |
