Deal or No Deal

Update: So, as I was about to publish the post below, ADW Capital dropped this bombshell of a press release. I left my post as it was in order to allow you to compare my rationale to his. To be radically honest, I think his press release is definitely better. You can jump straight to his or keep reading mine 🙂 Enjoy, and please feel free to reach out to me if you have any questions.

For more background, please read my previous Imvescor post here.

Timeline: So, on October 27th Imvescor sent out a press release to say they had received a preliminary non-binding indication of interest from a 3rd party rumored to be Cara. Stock went up 11% from 3.6 to 4. Apparently MTY then quickly reacted and sent a letter to Imvescor’s board expressing interest which eventually culminated in Dec 12th deal for MTY to acquire Imvescor for $4.10 in cash and stock.

Deal Terms: Imvescor shareholders will receive approximately $50 million in cash (20%) and the remainder in common shares of MTY (80%). $0.8259 in cash per share and 0.0626 MTY shares for each Imvescor share held representing a total consideration of approximately $248 million and a premium of 13.3% to Imvescor’s volume weighted average price on October 26, 2017.

Q417 and FY17 Earnings Release: Yesterday (December 19th), Imvescor reported Q4 and FY17 numbers with SRS up 4.9% in Q4. That now makes 10 straight quarters of SRS growth. For FY17 SRS is up 3.4% vs 1.4% in FY16. Ben & Florentine’s SRS was up a whooping 10.6%. For Q417 16 franchisees participated in the restaurant rejuvenation program (RRP), to make that 34 for year and 67 in total now, with the goal being 100. System sales were up 12.1% in the quarter mainly from the Ben & Florentine purchase but up 6.9% on normalized basis. Q417 operating EBITDA was up 26.7%, 15.1% on a normalized basis for FY17. Despite the increase in Operating EBITDA, results from operating activities and net earnings for Q417 decreased 22.8% and 33.7%, respectively, as a result of an additional investment in the RRP of $0.8 million, reorganization costs of $0.5 million and $0.4 million for the re-measurement of the contingent consideration related to the Ben & Florentine acquisition. For fiscal 2017, results from operating activities decreased 4.3% while net earnings increased 0.3% on a normalized basis over fiscal 2016.

Is the deal fair: In my opinion MTY needs Imvescor more than Imvescor needs MTY. To be fair there are obviously many benefits of the operating leverage implicit in the larger plaform but MTY is more exposed to mall food courts which have been having a hard time and has experienced either flat or declining SRS sales in recent years vs Imvescor’s 10 straight quarters of positive SRS. On the call announcing the deal both managements guided to $5M in synergies which I believe might possibly be on the lowside. Question is, how do I come to synergies of $10M vs $5M announced:

-For FY17 Imvescor recorded $2M in professional fees. According to its AIF audit and tax preparation fees are closer to $0.3M. Subtract $0.3M from $2M to get an estimate of $1.7M savings in professional fees.

-$4.8M in executive leadership & board salaries were recorded at Imvescor in FY17. CEO is probably on his way out, CFO has already announced she is leaving in January. COO, Legal Counsel should be gone too. Only 1 individual from the IRG board is getting nominated to the MTY board if the deal goes through. MTY is known to completely slash the leadership deck of the acquired after acquisition so I think it is fair to share they could be at least $3M in savings over here.

-Roughly 400K in corporate rent expense will be gone. The 2 headquarters are only a 7 minute drive away from each other and it is most likely the Imvescor HQ will be gone.

-So, $1.7M + $3M + $0.4M, we are now already at roughly the $5M figure announced as the synergies in the deal. The combination of MTY and IRG will create a multi-brand industry leader with a portfolio of over 5,700 stores under 75 brands and approximately $2.9 billion in system sales. Surely it should not be difficult to find another $5M of top and bottom line synergies (only 1.7% of system sales) from additional leverage of shared services, grouping of purchasing, renegotiation of leases, borrowing from MTY’s stronger knowledge of the retail channel. In addition there is $10M of compensation expense allocated to the franchising segment that is not broken down. Who knows how much of that is duplicative in a combined firm?

-Bringing it all together you get actual FY17 operating EBITDA of $19.5M plus $10M of synergies at a 10x multiple for EV of $295M less $11M in net debt. So $284M of equity value over 61.6M fully diluted shares gives $4.61 per share which implies the possibility of an improved offer from MTY or other possible bidders. Shares closed December 20th at $4.23, above the deal price of $4.10 due most likely to MTY closing Dec 20th at $54.81 compared to the deal reference price of $52.26. The market might possibly be pricing in the fact that this is no the last we’ve seen of this deal.

-Playing around with the numbers abit, if Imvescor can truly earn the $23.3M of operating EBITDA in FY2018 I estimate, with $10M in synergies, 10x multiple, Debt paydown from operating cash flows, approximately 61.6 fully diluted shares, it is entirely possible to get at least $5.40 per share a year down the line.

Will the deal happen: So on the day the deal was announced Adam Wyden (ADW Capital) acquired another 2% of Imvescor, with his total now up to 14.01%. In the press release ADW Capital announced its view “that this price grossly undervalues Imvescor and a higher price can be obtained by continuing as a going concern or through a superior or enhanced offer.” In an interview with Quebec media outlet La Presse Wyden has been on record as saying Imvescor was worth $6.60. On the other end of the spectrum Imvescor’s management has locked in 18% of the shareholder base in support and voting agreements led by Eric Shahinian of Camac Partners who holds 8.4% of the stock. Mawer Investment Management owns close to 18% of Imvescor in several of its mandates and I believe they will cast the deciding vote at the special meeting in February 2018. Mind you, Imvescor, a stock that used to find it difficult to trade 50,000 shares daily has traded almost 12M shares since Dec 12 so maybe the shareholder base has changed significantly.

Conclusion: Humility is in order, it is entirely possible management is right and I am wrong. Maybe the benefits of partnering with MTY in this increasingly competitive space outweigh cutting short the path of momentum Imvescor is on. On the flipside the individual (Wyden) who knows Imvescor much better than me and has followed the story since 2011 has even higher estimates than me ($6.60 per share). To be fair critics might say he is just talking his book but this was not what I came away with from my conversation with him. Anyway, the information circular for the deal comes out in January so maybe more colour will be provided. This experience has shown me it is much better to partner with individuals who own a lot of stock and have complete skin in the game. A final question to ask is this, if Stanley Ma, who is a great owner/operator, was CEO and principal shareholder of Imvescor instead of MTY, will he accept this deal?

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