Hedge fund urges AutoCanada to launch strategic review

Clearwater Capital Management has urged AutoCanada Inc (TSX: ACQ), a Canadian automobile dealership group, to initiate a strategic review. In a letter addressed to the chairman, Roland Keiper, president of the Toronto-based hedge fund, expressed concern about AutoCanada’s first quarter performance, a concern he says is held by other shareholders. He said AutoCanada’s board should form a special committee to consider options that offer the “potential opportunity to sell at an attractive premium and avoid the risk of further operating performance risks.” AutoCanada is based in Edmonton.

PRESS RELEASE

Clearwater Capital Urges AutoCanada Board to Initiate Strategic Process

TORONTO, June 11, 2018 /CNW/ – Clearwater Capital Management Inc. (“Clearwater”), on behalf of its managed accounts, holders of common shares of AutoCanada Inc. (“AutoCanada”), announced today that it has strongly urged AutoCanada to form a special committee of the board to initiate a strategic process. In a letter to the Chair of AutoCanada (attached), Clearwater outlines its past successful engagement with AutoCanada, its concerns with respect to recent operating performance, and the importance of initiating a strategic process at this juncture to fulfill the best interests of the corporation. Clearwater’s concerns are shared, and its request for the initiation of a strategic process is supported, by other significant AutoCanada shareholders.

Clearwater hopes that the board will constructively respond Clearwater’s request, and has requested public confirmation from AutoCanada that it has taken action to form a special committee and pursue a strategic process.

DELIVERED BY EMAIL: gbarefoot@shaw.ca

June 11, 2018

Mr. Gordon Barefoot
Chairman
AutoCanada Inc.
200 – 15511 123 Ave NW
Edmonton, AB T5V 0C3

Dear Gord:

Re: Formation of Special Committee of Board to Explore Sale of Business

The purpose of this letter is to formally request that the board form a special committee of the board to undertake a strategic process to explore strategic alternatives, and publicly disclose same. As you know, Clearwater Capital Management Inc. (“Clearwater”) has engaged productively in the past with your board and AutoCanada management, and those interactions lead to increased value for shareholders. For the reasons outlined below, and based on our discussions with other AutoCanada shareholders, we strongly believe that the company’s best interests require that such a process be undertaken, due to the company’s performance in both general and comparative terms. The background to, and need for, a strategic process is outlined further in this letter. We hope and expect that the AutoCanada board will fulfill our request in furtherance of its responsibilities.

Background

Clearwater has a long history and record of successful and value-enhancing engagement with management teams and boards, including with AutoCanada. As you will recall, Clearwater, on behalf of its managed accounts, held a significant position in AutoCanada from 2008 to 2011, and through that period engaged in a regular dialogue with senior management and the board on a variety of issues. Those issues included offering to refinance term debt maturing 2009, discussions concerning disappointing operating performance in Q3 2010, a request for the appointment of Chris Cumming to the board of directors that was accepted in May 2011 and a change in dividend policy that was implemented in June 2011. Our perspectives were supported by several AutoCanada shareholders who, together with Clearwater’s interest, represented over 60% of the public float.

Our engagement with AutoCanada management and board in that period resulted in increased value for the company and helped set it on a path for significant growth in the business and share price in 2013-2014.

Current Situation

We hold a favourable view towards auto retailing, based on invested returns on capital and the acquisition opportunities presented by the fragmented ownership of Canadian and US dealerships and dealer groups offer the opportunity to employ capital at attractive rates of return. US public dealer group shares have significantly outperformed the S&P 500 Total Return Index since January 2009 and Berkshire Hathaway’s acquisition of Van Tuyl Group, in 2005, the largest private dealer group in US and the 5th largest US dealer group, highlight the attractive business conditions for large dealer groups.

As I discussed with you in our telephone conversation on June 6, Clearwater, on behalf of its managed accounts, recently acquired a new investment position in AutoCanada common shares, and I have spoken to several of AutoCanada’s largest shareholders. There appears to be significant concern about the poor margins experienced by AutoCanada in Q1. I understand from you that the board has met with management several times since the Q1 results were released to set a course for sales and margin improvements and to closely monitor the integration of the recently acquired US dealer group. Closer oversight and accountability of management are certainly welcome developments. However, concurrent with these efforts, the time has come for AutoCanada to pursue a strategic alternatives process that will offer AutoCanada and its shareholders the potential opportunity to sell at an attractive premium and avoid the risk of further operating performance risks.

US public auto dealer groups, in many cases, generate materially higher operating margins than those of AutoCanada, and if those margins were to be applied to AutoCanada’s revenue base, AutoCanada could materially increase its EBITDA, operating and net earnings. We believe, for these reasons and based on our discussions with senior management of one of these public dealer groups (that enjoys much higher margins than AutoCanada), that potential acquirors (particularly those with a track record of improving underperforming dealer groups) would regard AutoCanada as an attractive and accretive acquisition target, one that would also extend geographic footprint in the case of US dealer groups.

The Path Forward

As noted, the purpose of this letter is to formally request that the board form a special committee of the board to initiate and pursue a strategic process to explore a sale of the business, and confirm the same by issuing a press release so that shareholders are informed this action has been taken. Among the AutoCanada shareholders with whom I have spoken there is a clear support for the prompt implementation of a strategic process notwithstanding the effort to improve operating margins that you have communicated. We trust the board will take a constructive approach, as it has taken in the past, and promptly initiate a strategic process to consider the sale of the company while moving forward to improve the business. We note that there is strong shareholder will for these steps to be pursued and that AutoCanada is now a widely-held company, without a key management shareholder.

We would request you distribute a copy of this letter to your board colleagues and advisors. We intend to make our letter available to AutoCanada’s shareholders via a press release.

Yours truly,

Roland Keiper
President
Clearwater Capital Management Inc.

For further information: For additional information: 416 642 5700