U.S. hedge fund ADW Capital Partners said it opposes the proposed sale of Imvescor Restaurant Group Inc (TSX: IRG) to MTY Food Group Inc (TSX: MTY), arguing the deal substantially undervalues the former. MTY earlier this month agreed to acquire Imvescor, which owns franchised and corporate stores under several brands, for $248 million. ADW, which owns approximately 14 percent of the outstanding shares of Imvescor, said the deal also fails to serve the company’s growth potential. Another Imvescor investor, U.S. hedge fund Camac Partners, favours the acquisition. Both Imvescor and MTY are based in Montréal.
ADW Capital Partners L.P. believes the proposed sale of Imvescor Restaurant Group Inc. SUBSTANTIALLY undervalues the Company
NEW YORK, Dec. 20, 2017 /CNW/ – Adam Wyden of ADW Capital Partners, L.P. (“ADW Capital”), a New York City based hedge fund, is releasing a letter to the public regarding its disapproval of the sale of Imvescor Restaurant Group Inc. (the “Company”) (TSX: IRG) to MTY Food Group Inc. (TSX:MTY). ADW Capital along with its affiliates hold approximately 14% of the Company on a non-diluted basis.
Below is the full text of Mr. Wyden’s letter:
December 20, 2017
Dear Shareholders of Imvescor Restaurant Group Inc.,
ADW Capital Partners L.P. and its affiliates currently own approximately 14.0% of the outstanding common shares of Imvescor Restaurant Group Inc. (“Imvescor” or the “Company”) (TSX: IRG) making us the Company’s largest shareholder. We would like to commend the board and management on the beginning of a successful turnaround of the Company but believe the sale of the Company to MTY, as currently proposed, substantially undervalues the Company, its platform, and potential for future growth. Consequently, we do not intend to support the current transaction at this level and encourage other shareholders to communicate to both the Company and representatives of MTY to express their same views.
We have come to this conclusion for the following reasons:
The Company has strong underlying fundamentals and is not in distress:
The Company has reported ten consecutive quarters of same store sales growth and two consecutive quarters of almost 5 percent same stores sales growth. These numbers are not reflective of a Company in distress. Importantly, we believe the Company is at a trough in store closures and expect substantial re-openings and new store openings in the Company’s legacy brands.
Furthermore, our own market intelligence/channel checks has indicated that there is substantial appeal outside of Canada for the new Ben & Florentine brand. Ben & Florentine is already at 52 units in Quebec alone with little signs of saturation. Based on our conversations with various parties in and outside of Canada, it’s not unreasonable for Ben & Florentine to grow to 200 units (or substantially more) in Canada based on Quebec’s share of the Canadian restaurant market. If Ben and Florentine operated 200 restaurants at a $1.1 Million Dollar Average Unit Volume, it would result, according to our estimation, in $220MM of additional system sales. At an EBIT margin on System Sales of 8%, that would result in a Ben & Florentine contribution of ~18 MM of EBIT without contribution from the US or the rest of the world.
Imvescor can do what Cara and MTY are doing and GROW FASTER:
Based on internal data we have collected, we have compiled a list of 125 KNOWN targets in Canada that have more than 10 locations and significant system sales. Cara and MTY have been acquiring and incubating these growing brands in a relative vacuum with very little competition from other strategic or financial players. While we acknowledge the Company’s existing board and management has less experience executing this strategy, the Company has the balance sheet and the platform (G&A) to participate in this consolidation strategy and leverage the same benefits the others have. Furthermore, given the Company’s smaller absolute size of approximately $24-25 MM of EBITDA, many of these smaller transactions of $3 – 5 MM of EBITDA, would move the needle substantially more for the Company for two reasons. Firstly, we can leverage our costs better that are disproportionately high relative to CARA/MTY on an absolute basis and, secondly, at $200 and $100 MM of EBITDA, respectively these deals move the needle a lot less for CARA and MTY. Why should we take paper in MTY so they can buy these same smaller deals that are available to the Company and have the accretion be that much less?
No Process was run and the deal was not negotiated by the OWNERS of the Company:
It is not a surprise for most of you that my firm has been unhappy with the pace of growth of the Company and its unwillingness to be more aggressive in a consolidation strategy more instructive of Cara and MTY. We have made these views very clear to the Board and Management of Imvescor over the years. On October 27th, we once again communicated these views to two of the Company’s directors and indicated that we would go to greater lengths to ensure the Company was going to embark on the correct strategy. My firm increased its stake and the price correspondingly increased. It is our belief, that both the Board and Management felt their continuity at the Company was at risk and felt a cleaner exit was to be a “white knight” and rescue the Company from a “trouble maker” who demanded better results, accountability, and more structural alignment with the shareholders. Instead of running a full-blown process, the Board decided to “sell the Company” after a mere 40 days or so to a strategic buyer. And it was not just any strategic buyer; it is the one buyer who historically pays the lowest multiple for assets and has garnered substantial returns for its shareholders by paying extremely low multiples for assets. We believe the Board and Management did this to save themselves the embarrassment of a public proxy contest. We also point out that the Company was unable to get any significant support for the deal from its existing shareholders, securing only 18 percent pre-announcement. Importantly, we have reason to believe that one of the shareholders who signed a lock-up agreement was over a 10% holder in the Company but was also a very large, if not larger shareholder, in MTY. We believe this shareholder is naturally conflicted as the transaction will be taking value out of one pocket and putting it into another. We believe the real support the Company achieved pre-announcement is probably closer to 6-7%. In summary, the non-owner/agents of the Company who negotiated this transaction are naturally conflicted and are not representative of truly independent owners who would have been beneficiaries of a full and independent process.
Finally, we believe the consideration MTY is offering SUBSTANTIALLY undervalues the Company based on future prospects and most importantly SYNERGIES:
As outlined above, we believe the Company has significant organic growth ahead of it from same store sales runway from its own Restaurant Rejuvenation Program, system sales growth from re-openings of legacy banners, and most importantly a more aggressive opening schedule of its new “crown jewel” in Ben & Florentine. Even beyond that, we vehemently disagree about the M&A opportunity for Imvescor. We have seen a number of attractive assets “trade away” and based on our own internal research believe there are many more available to Imvescor if the strategy is executed against properly – THIS INCLUDES QUEBEC.
The same way Imvescor can leverage its platform costs, so can MTY. We point out the unwillingness of Mr. Ma to include the synergies available to MTY in a deal with Imvescor. We have spoken to a number of former employees and parties familiar with MTY and they have indicated that some of their brands are being managed with as little as couple hundred thousand of G&A – “one brand leader”. Based on the public filings of Imvescor, we estimate ALL G&A (EX G&A associated with Corporate stores) to be approximately $19 MM. Furthermore, we believe that each of Imvescor’s five brands could be run for approximately $1MM and that estimate is generous based on what MTY pays historically on a per-employee basis! If MTY has duplication on all the other shared services functions then the net-cost synergy number would approximate $14 MM. This also does not include any potential revenue synergies that could exist from leveraging supply chain agreements, gift card programs, etc. which we also estimate could be as much as $4 – 5 MM of EBITDA. Based on our own internal forecasts, we believe the Company on a standalone basis should earn approximately $24 – $25 MM of EBITDA. To MTY, that number could approximate $45 MM of fully synergized EBITDA. Today’s purchase price consideration reflects a number closer to 5x EBITDA than the stated headline multiple. Other deals in the marketplace for larger assets have traded closer to 10x inclusive of synergies. At a 10x purchase price multiple and synergized EBITDA of $35 MM – 45 MM, shareholders should be receiving closer to $5.75 to $7.45 in total consideration.
This deal is one reflected of a conflicted and rushed negotiation. We encourage shareholders to reach out to both parties and express their dissatisfaction at the consideration they have been offered for this particular transaction.
My firm has a tremendous amount of respect for Mr. Ma and MTY and would be happy to join as shareholders at the appropriate price. Unfortunately, today’s transaction is not reflective of the underlying value of this Company.
Adam D. Wyden
Managing Member of ADW Capital Partners, L.P.
For further information: Adam D. Wyden, tel.: 646-684-4086, e-mail: firstname.lastname@example.org
Photo courtesy of Imvescor Restaurant Group Inc