VANCOUVER, Nov. 10 /CNW/ - A&W Revenue Royalties Income Fund (the "Fund", TSX-AW.UN) today announced it intends to make a substantial issuer bid (the "Offer") to all its unitholders, including A&W Food Services of Canada Inc. ("Food Services"), who holds shares of the Fund's subsidiary, A&W Trade Marks Inc. ("Trade Marks") which are exchangeable for Units of the Fund ("Exchangeable Securities").
Under the Offer, the Fund will offer to purchase for cancellation 2,500,000 of its Units, at a price of $20.00 per Unit. In setting the purchase price to be paid for the Units under the Offer, the Trustees considered, among other things, the weighted average trading prices of the Units on the TSX for the twenty and thirty trading days ended November 9, 2010, of $20.27 and $19.91 respectively.
The Fund will finance the aggregate amount to be paid for the Units pursuant to the Offer by increasing the existing loan from HSBC Bank Canada to Trade Marks from $10 million to $60 million (the "New Loan").
As a result of the purchase of the Units under the Offer and the New Loan, distributable cash available for distributions to unitholders is expected to increase by approximately 10.2 cents (8%) per Unit per annum. Therefore, subject to completion of the purchase of Units under the Offer and the New Loan, the Trustees of the Fund have approved an increase in monthly distributions to unitholders to 11.7 cents per Unit per month, from the current rate of 10.6 cents per Unit per month. The new monthly distribution rate will be effective January 1, 2011 and will be payable as and from February 28, 2011. Trade Marks will pay dividends to Food Services on its Exchangeable Securities of Trade Marks at the same rate.
Food Services has agreed to deposit to the Offer Exchangeable Securities exchangeable for a total of 2,500,000 Units. If more than 2,500,000 Units are tendered to the Offer, the Fund will purchase the Units on a pro rata basis according to the number of Units deposited by unitholders, with fractions rounded down to the nearest whole Unit. The Offer is not conditional on any minimum number of Units being deposited. The number of Units to be purchased by the Fund from Food Services will depend on the number of Units deposited to the Offer by other unitholders. In the event that all unitholders tender all their Units, the Fund will purchase 576,568 Units from Food Services and 1,923,432 Units from other unitholders (in which event Food Services' interest in the Fund will increase from approximately 43% of the outstanding Units on a fully diluted basis to approximately 47%). In the event that no unitholders other than Food Services deposit Units to the Offer, the Fund will purchase 2,500,000 Units from Food Services (in which event Food Services' interest in the Fund will decrease from approximately 43% of the outstanding Units on a fully diluted basis to approximately 31%).
"Since the Fund was created in 2002, the growth of the A&W business has generated strong distribution growth for unitholders" said John McLernon, Chairman of the Board of Trustees of the Fund. "We are pleased that through the purchase of Units under this Offer, we are able to further increase cash distributions per Unit to unitholders."
The New Loan will mature five years after the payment by the Fund of the Units taken up pursuant to the Offer and bear interest at 5.03% per annum under an interest rate swap maturing on the same date. Interest only will be payable monthly.
At the annual general and special meeting of unitholders held on May 4, 2010, the unitholders approved a reorganization (the "Reorganization") of the Fund. As a result of the Reorganization, the effective rate of tax to be paid effective January 2011 by Trade Marks on its net income is 18%, leaving 82% of its net income available for distribution to the Fund and Food Services as dividends on the shares of Trade Marks, and by the Fund to unitholders. Details of the Reorganization were contained in the information circular of the Fund dated March 25, 2010, a copy of which is available on SEDAR at www.sedar.com.
To understand the impact of the Reorganization, the Offer and the New Loan, the following table shows the distributable cash of the Fund for the 4 quarters beginning with the fourth quarter of 2009 and ending with the third quarter of 2010. The first column shows the impact on distributable cash after giving effect to the Reorganization only, and the second column after giving effect to the Reorganization, the Offer and the New Loan, in each case effective at the beginning of the fourth quarter of 2009:
|Q4 2009 to Q3 2010, inclusive|
|(Dollars in thousands except per Unit amounts)||After Giving Effect to the Reorganization, but before the Offer and New Loan||After Giving Effect to the Reorganization, the Offer and New Loan|
|Fund and Trade Marks cash flows from operating activities||$22,831||$22,831|
|Changes in non-cash working capital||(163)||(163)|
|Interest on existing loan||(582)||-|
|Interest on the New Loan||-||(3,018)|
|Distributable cash before income taxes||22,070||19,634|
|Income taxes (estimate)||(3,396)||(2,945)|
|Distributable cash after income taxes||$18,674||$16,689|
|Weighted average outstanding Units (fully diluted)||14,575,874||12,075,874|
|Distributable cash per Unit (after-tax)||$1.281||$1.382||$0.101|
The distributable cash measure is provided as it identifies the amount of actual cash available to pay distributions to unitholders and dividends to Food Services. Distributable cash is not an earnings measure recognized by Canadian Generally Accepted Accounting Practices and therefore may not be comparable to similar measures presented by other issuers.
Distributable cash is calculated as the combined operating cash flows of the Fund and Trade Marks (which includes A&W Trade Marks Limited Partnership (the "Partnership")), the Partnership's 0.1% distributions to Food Services, and changes in non-cash working capital. Changes in non-cash working capital are excluded as Trade Marks and the Fund's working capital requirements are not permanent and are primarily due to the timing of payments between related parties. No deduction is made for capital expenditures as neither the Fund nor Trade Marks have capital expenditures. There are no restrictions on distributions arising from compliance with financial covenants. With respect to the guidance issued by Canadian Institute of Chartered Accountants on the measurement and disclosure of distributable cash in income trusts and other flow-through entities, the Fund believes that this method of calculating distributable cash is appropriate and provides appropriate disclosure to Unitholders.
As of November 10, 2010, there were 14,622,716 Units outstanding on a fully diluted basis including the Units issuable upon the exchange of the Exchangeable Securities held by Food Services and, accordingly, the Offer is for approximately 17.1% of the outstanding Units on a fully diluted basis. The Offer is subject to various conditions typical of transactions of this nature. It is anticipated that the offer to purchase and issuer bid circular and other related documents (the "Offer Documents"), containing the terms of the Offer and the instructions for tendering Units will be mailed to unitholders and filed with applicable securities regulators on or about November 12, 2010. The Offer will remain open for acceptance until December 17, 2010 unless withdrawn or extended by the Fund.
Neither the Fund nor its Trustees makes any recommendation to unitholders as to whether to tender or refrain from tendering their Units to the Offer. Unitholders are strongly encouraged to review the Offer Documents carefully and to consult with their financial and tax advisors prior to making any decision with respect to the Offer.
About A&W Revenue Royalties Income Fund
The Fund is a limited purpose trust established to invest in Trade Marks, which through its interest in the Partnership, owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. The A&W trade-marks comprise some of the best-known brand names in the Canadian foodservice industry. In return for licensing Food Services to use its trade-marks, Trade Marks (through the Partnership) receives royalties equal to 3% of the sales of A&W restaurants in the Royalty Pool. Food Services is the second largest quick-service hamburger restaurant chain in Canada. Operating coast-to-coast, A&W restaurants feature famous trade-marked menu items such as The Burger Family, Chubby Chicken and A&W Root Beer.
The Royalty Pool is adjusted annually to reflect sales from new A&W restaurants, net of the sales of any A&W restaurants that have permanently closed. The limited partnership interest of Food Services is increased each year to reflect the annual adjustment. Food Services' limited partnership interest may be exchanged for additional shares of Trade Marks which shares are exchangeable for Units.
Food Services currently owns securities of Trade Marks exchangeable for approximately 43% of Units of the Fund on a fully diluted basis.
Trade Marks' distributions to the Fund and to Food Services, and the Fund's distributions to unitholders are based on top-line revenues of the A&W restaurants in the Royalty Pool, less interest, general and administrative expenses and current income taxes of Trade Marks, and are thereby isolated from many of the factors that impact an operating business.
Certain statements in this report may be forward-looking in nature. Actual results may differ materially from those expressed or implied in these forward-looking statements. The forward-looking statements are based on assumptions that management considered reasonable at the time they were prepared. These forward-looking statements are subject to a number of risk factors, including general economic and business conditions, unemployment, harmonization of sales taxes, financial and political instability, changes in income tax laws or their application to the Fund and other factors disclosed previously and from time to time in the Fund's public filings. Forward-looking information is provided as of the date hereof and, except as required by law, we assume no obligation to update or revise forward-looking information to reflect new events or circumstances.
Don Leslie, Chief Financial Officer: (604) 983-7291 or email@example.com