Fairfax Financial to invest $150 mln in Mosaic Capital

Fairfax Financial Holdings Ltd has agreed to invest in Mosaic Capital Corp, a Calgary-based private equity firm. Fairfax agreed to subscribe for $150 million of senior preferred securities, secured debentures and common share purchase warrants. If the warrants are fully exercised, it would own about 66 percent of Mosaic’s shares. With the deal’s close, expected in January, Fairfax President Paul Rivett will be appointed as a director. As part of the deal, Mosaic and Fairfax agreed to work together on mid-market private equity opportunities. Mosaic appointed Mark Gardhouse as its CEO in July. In August, it agreed to buy Mackow Industries.

Photo: Prem Watsa, chairman and CEO, Fairfax Financial Holdings Ltd. 

PRESS RELEASE

Fairfax Financial to Invest $150 Million in Mosaic Capital

CALGARY, Dec. 22, 2016 /CNW/ – Mosaic Capital Corporation (“Mosaic”) (TSX-V: M, M.PR.A and M.DB) is pleased to announce that Fairfax Financial Holdings Limited through certain of its subsidiaries (collectively “Fairfax”) (TSX: FFH and FFH.U), has agreed to invest $150 million in Mosaic on a private placement basis (the “Fairfax Financing”).

Fairfax has agreed to subscribe for $100 million principal amount of 6% senior preferred securities (the “6% Senior Preferred Securities”), $50 million principal amount of 5% seven-year term secured debentures (the “5% Secured Debentures”) and common share purchase warrants entitling Fairfax to acquire up to 17,026,106 common shares of Mosaic at an exercise price of $8.81 per share for seven years. If it fully exercises its warrants, Fairfax, through its subsidiaries, would own approximately 66% of Mosaic’s common shares, based on the number of shares currently outstanding.

Mosaic and Fairfax each have long term, value oriented investing styles and have access to significant mid-market investment opportunities in Canada and, in the case of Fairfax, internationally. As part of the transaction, Mosaic and Fairfax have agreed to work together as preferred partners to share mid-market private equity opportunities. Mosaic believes this strategic relationship, combining lower cost of capital, greater access to deal flow and unique transactional opportunities, will accelerate its ability to make long term acquisitions and investments in Canada and internationally.

Fairfax will have the right to nominate two directors to the board of Mosaic. Paul Rivett, President of Fairfax, will be appointed as a director of Mosaic at closing of the Fairfax Financing which is expected to occur in late January 2017.

“We are excited to partner with John Mackay, Harold Kunik and Mark Gardhouse and their team through a direct investment in Mosaic” said Paul Rivett, President of Fairfax. “John and Harold have a long track record of successfully applying value investing principles to acquire majority positions in strong cash flow producing small and medium sized businesses. They have been successfully applying a decentralized approach that ensures the management remains invested and operating on a day-to-day basis. Over time, some of these investments are expected to grow to a size where they may need additional capital from Fairfax. Fairfax often receives opportunities that are difficult to act on because of their smaller size which may be of interest to Mosaic. We look forward to having a partner whose expertise and experience in mid-market private equity acquisitions over the last decade can be combined with our flow of opportunities.”

John Mackay, Executive Chairman of Mosaic, added “It is great to have a partner that shares our long term, value oriented approach to investing. We also expect to benefit from the vast experience and investment knowledge of Prem Watsa, Fairfax’s Chairman, and the entire team at Fairfax.”

“We are very pleased to have Fairfax as a key partner in our business,” said Mark Gardhouse CEO of Mosaic. “Fairfax is one of the best capital allocators in North America and we look forward to working with them. Fairfax is providing Mosaic with a significantly reduced cost of capital which positively impacts our sustainable cash flow. We believe this new capital structure combined with the relationship with Fairfax will significantly accelerate Mosaic’s corporate growth strategy.”

Mosaic will use the proceeds of the Fairfax Financing to:

•redeem all the outstanding Preferred Securities (TSX-V: M.PR.A) and Series A Shares at the prescribed price of $10 per security (plus all accrued and unpaid interest);

•retract the Private Yield Securities pursuant to the mandatory retraction provisions of the private yield securities indenture at $1,000 per security;

•provide a liquidity option for the holders of Mosaic’s outstanding convertible debentures (the “Convertible Debentures”) (TSX-V:M.DB) (as discussed below); and

•repay all or part of Mosaic’s acquisition credit facility and for general corporate purposes.

The terms of Mosaic’s outstanding Preferred Securities, Series A Shares and Private Yield Securities provide for the redemption/retraction at the option of Mosaic with no further action required by the holders. Closing of the redemption of the Preferred Securities, Series A Shares and the Private Yield Securities is expected to occur in early February 2017 and applicable redemption/retraction notices are being provided to the relevant trustees. The Preferred Securities will be delisted from the TSX Venture Exchange.

Mosaic’s recently issued Convertible Debentures will rank junior to the 6% Senior Preferred Securities and the 5% Secured Debentures being issued to Fairfax. As a result, notwithstanding that Mosaic is entitled to issue securities senior to the Convertible Debentures under their terms, Mosaic will be providing holders of the Convertible Debentures with the opportunity, at the holder’s option, to obtain liquidity for their Convertible Debentures at the issue price plus accrued and unpaid interest. Details of the mechanism for the liquidity of the Convertible Debentures will be provided in a future news release.

The lower cost of the Fairfax Financing will reduce Mosaic’s cost of distributions on the equivalent principal amount of Preferred Securities, Series A Shares and Private Yield Securities by approximately $5.58 million per year, or approximately $0.65 per common share, resulting in Mosaic having additional discretionary cash flow to further accelerate the execution of its business strategy.

Closing of the Fairfax Financing is subject to customary closing conditions including, among other things, the settlement of definitive documentation and the approval of the TSX Venture Exchange.

ABOUT FAIRFAX FINANCIAL HOLDINGS LIMITED

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.

ABOUT MOSAIC CAPITAL CORPORATION

Mosaic is a Canadian investment company that owns a portfolio of established businesses which span a diverse range of industries and geographies. Mosaic’s strategy is to create long-term value for its shareholders through accretive acquisitions, long-term portfolio ownership, sustained cash flows and organic portfolio growth. Mosaic achieves its objectives by maintaining financial discipline, acquiring businesses at attractive valuations, performing extensive acquisition due diligence, utilizing optimal transaction structuring and working closely with subsidiary businesses after acquisition.

This news release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. This news release is not an offer of securities for sale in the United States, and the securities may not be offered or sold in the United States absent registration or an exemption from the registration requirements. The securities have not been and will not be registered under the United States Securities Act of 1933, as amended.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

For further information: Mosaic Capital Corporation, 400, 2424 – 4th Street SW, Calgary, AB, T2S 2T4; Attention: Mark Gardhouse, Chief Executive Officer, T: (403) 218-6511, E: mgardhouse@mosaiccapitalcorp.com; Attention: Allan Fowler, Chief Financial Officer, T: (403) 270-4663, E: afowler@mosaiccapitalcorp.com

Photo courtesy of Reuters/Aaron Harris