TORONTO--(BUSINESS WIRE)--Acasta Enterprises Inc. (TSX: AEF) (“Acasta” or the “Company”) today provided an update on the proposed sale (the “Proposed Transaction”) of its Stellwagen business unit (“Stellwagen”) to Martello Finance Company Limited (“Martello”) and the strategic review being overseen by a special committee of independent directors (the “Special Committee”).
“On February 6, 2018, we announced a transaction to sell Stellwagen back to Doug Brennan and various other shareholders. We have launched a comprehensive restructuring plan that is crucial to preserving the long-term value of our consumer products businesses. Given the Company’s financial position and aggregate indebtedness, we believe this is the most prudent course of action. We remain focused on completing this transaction and in doing so achieving a significant improvement to the Company’s financial position,” commented Geoff Beattie, Chairman of Acasta. “We are taking immediate and decisive actions to reduce our cost structure and our indebtedness. We will execute this plan in a timely and prudent manner and remain focused on meeting our financial commitments, which will allow us to re-assess our strategic alternatives.”
Status of Negotiations with Martello
Acasta and Martello are engaged in ongoing negotiations on a definitive agreement with respect to the Proposed Transaction. The parties are making progress and expect to be in a position to enter into a definitive agreement by March 21, 2018. The Proposed Transaction contemplates the sale of Stellwagen to an affiliate of Martello (the “Purchaser”), the previous owner of Stellwagen, in exchange for:
- the cancellation of 26 million class B shares in the capital of Acasta (“Class B Shares”) beneficially owned by Martello and other Acasta shareholders that are shareholders of the Purchaser, representing approximately 27% of the issued and outstanding Class B Shares;
- the payment to Acasta of U.S.$35 million in cash;
- downside protection of up to U.S.$5 million if the proceeds realized from the monetization of Acasta’s profit participating notes (“PPNs”) of Stelloan Investment Company I DAC, which have a book value of U.S.$47.5 million, are at specified levels below a certain threshold; and
- termination of the earn-out from Acasta’s acquisition of Stellwagen in January 2017.
Extension Agreement with Lenders
In light of the progress being made in the negotiations, Acasta has entered into a second extension agreement (the “Second Extension Agreement”) with the lenders (the “Lenders”) under its U.S.$150 million credit facility (the “Credit Facility”) to extend the deadline for payment of U.S.$25 million that would have otherwise been due today (the “Principal Payment”). Under the terms of the Second Extension Agreement, the Lenders and Acasta have agreed, among other things, to further extend the deadline for the Principal Payment to March 21, 2018. The Second Extension Agreement also provides that if Acasta has received the prior written consent of the Lenders to enter into a Proposed Transaction and has subsequently entered into a definitive agreement with respect to the Proposed Transaction on or before March 21, 2018, but the Proposed Transaction has not closed by March 21, 2018, the deadline for the Principal Payment will automatically be extended further to March 31, 2018.
Strategic Review and Board and Management Changes
The Special Committee is considering a number of alternatives in addition to the Proposed Transaction to maximize shareholder value and pay down debt. Acasta currently has approximately U.S.$183.5 million aggregate principal amount of bank indebtedness outstanding, excluding the indebtedness pursuant to the MS Credit Agreement (as defined below) and other indebtedness relating to Stellwagen’s aircraft. Acasta’s bank indebtedness consists of approximately U.S.$115 million outstanding under the Credit Facility and approximately U.S.$68 million aggregate principal amount of indebtedness under a credit facility with TD Canada Trust and Canadian Imperial Bank of Commerce to which Apollo Health and Beauty Care Partnership and Apollo Laboratories Inc. (collectively, “Apollo”) and JemPak Corporation (“JemPak”) are parties. All of the available proceeds from the Proposed Transaction and the sale of the PPNs will be used to reduce amounts outstanding under the Credit Facility.
To generate additional proceeds to facilitate further repayment of the debt outstanding under the Credit Facility, Acasta has engaged a leading international investment bank to help monetize the PPNs. The Special Committee is also in the process of completing a review of the consumer products group (“CPG”) platform and evaluating the potential sale of a portion of the CPG assets, and has hired a leading Canadian investment bank to assist with this review.
The Special Committee is also focused on restructuring Acasta’s corporate overhead with a view to reducing Acasta’s corporate cost structure. This review will be undertaken in the context of the decision by the Special Committee to pursue managed strategic change and focus on its consumer products platform and options for value creation in this sector, for which a private equity strategy is no longer relevant. In connection with this change in approach, there will be organizational changes to more appropriately support Acasta’s redirected focus. Recognizing that his professional experience is not in the consumer products sector, Dr. Anthony R. Melman has stepped down as Chief Executive Officer and as a director of Acasta, effective today. Ian Kidson, the Chief Financial Officer, will serve as interim Chief Executive Officer.
Exemptive Relief Application
Martello owns 21,280,160 of the outstanding Class B Shares, representing an approximate 22.4% ownership interest (calculated on a non-diluted basis). All of the share capital of Martello is held in trust for Douglas Brennan, who is the Chief Executive Officer of Stellwagen.
In addition, Alon Ossip and Martin Goldfarb, the co-Chief Executive Officers of JemPak, a wholly-owned subsidiary of Acasta, and Belinda Stronach, a founder of Acasta, are part of the purchasing group (the “Purchasing Group”) and will be investing in the Purchaser, including by tendering some of their Class B Shares to Acasta as partial consideration pursuant to the Proposed Transaction. Accordingly, the Proposed Transaction is a “related party transaction” under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”). In addition, since the Proposed Transaction will involve the acquisition by Acasta of 26 million Class B Shares held by the Purchasing Group, it is also an “issuer bid” under National Instrument 62-104 – Take-Over Bids and Issuer Bids (“NI 62-104”).
The Proposed Transaction would ordinarily be subject to valuation and minority approval requirements under MI 61-101 because the fair market value of the subject matter of and the fair market value of the consideration for the Proposed Transaction, insofar as it involves “interested parties” (as defined in MI 61-101), exceeds 25% of Acasta’s market capitalization. Acasta will be relying on the “financial hardship” exemption from both the valuation and minority approval requirements of MI 61-101, for the reasons set out in more detail below.
Acasta has also applied to the Ontario Securities Commission (the “OSC”) for relief from the issuer bid requirements under NI 62-104 and MI 61-101. In the exemptive relief application, Acasta has proposed that the relief be conditioned upon Acasta having received executed written consents from Acasta shareholders representing a majority of holders of Class B Shares (a) who are fully informed in respect of the Proposed Transaction, and (b) none of whom are interested parties or their related parties or joint actors (such shareholders, the “Disinterested Shareholders”). Acasta expects that it will be able to obtain these consents. Acasta has also proposed that the relief be conditioned upon the receipt by the Special Committee of an opinion from Blair Franklin Capital Partners Inc. (“Blair Franklin”) that the consideration to be received by Acasta in connection with the Proposed Transaction is fair, from a financial point of view to Acasta. Furthermore, Acasta has also agreed, as part of its application, that it will not close the Proposed Transaction until at least 7 calendar days from the granting of the exemptive relief. There can be no assurances as to whether such exemptive relief will be granted, and the exemptive relief, if granted, may impose additional restrictions, conditions and/or obligations.
Acasta understands that the OSC will communicate its decision as to whether to issue the exemptive relief on or about March 14, 2018. If a definitive agreement in respect of the Proposed Transaction is executed and the relief is obtained, Acasta expects to be able to complete the Proposed Transaction approximately one week following the granting of the relief.
Alleviation of Financial Hardship
As noted above, the Special Committee intends to rely on the financial hardship exemption to the valuation and minority approval requirements under MI 61-101. In order to rely on this exemption, MI 61-101 requires that certain detailed disclosure be provided about the factors and events that led to the financial hardship and how the Proposed Transaction will alleviate it. This disclosure is set out below.
The Special Committee has unanimously determined in good faith that (a) Acasta is currently in serious financial difficulty, as absent the closing of the Proposed Transaction, Acasta would be unable to make the Principal Payment at the required time, and (b) the Proposed Transaction is designed to, and will improve Acasta’s financial position, as all available cash proceeds to be obtained on closing will be used to make the Principal Payment and will improve Acasta’s debt to EBITDA ratio, which is estimated to be 5.15 as at December 31, 2017. Provided that (i) an acceptable definitive agreement for the Proposed Transaction can be negotiated with Martello; (ii) the required prior written consents of the Lenders are obtained by Acasta with respect to the Proposed Transaction; (iii) a majority of Disinterested Shareholders sign written consents in support of the Proposed Transaction; and (iv) Blair Franklin delivers an opinion that the consideration to be received by Acasta in connection with the Proposed Transaction is fair, from a financial point of view, to Acasta, the Special Committee is prepared to unanimously approve the Proposed Transaction and conclude that the terms of the Proposed Transaction are reasonable in the circumstances.
In December 2017, Acasta announced that Stellwagen entered into a revolving credit and security agreement with Morgan Stanley Asset Funding Inc. (the “MS Credit Agreement”). The intended use of proceeds of the MS Credit Agreement required consent of a majority of the Lenders. Accordingly, Acasta reached out to its majority lender (the “Majority Lender”) to negotiate the terms under which the Majority Lender would provide consent.
During the course of discussions with the Majority Lender on the terms of the consent, Acasta’s expectations for the 2018 results of operations of its businesses declined. In addition, management of Stellwagen communicated that it was going to require additional working capital liquidity support during the first quarter of 2018. In early January 2018, management alerted the board of directors of Acasta (the “Board”) that, based on projected performance, Acasta was at risk of failing to comply with its covenants under the Credit Facility as of March 31, 2018. Specifically, Acasta was at risk of breaching a covenant under the Credit Facility that required Acasta to maintain a debt to EBITDA multiple of under 5.25.
While the discussions were ongoing with the Majority Lender, Acasta was simultaneously in discussions with Martello and Almada Inc. (“Almada”), a company controlled by Alon Ossip and Martin Goldfarb, in respect of a potential aircraft operating lease fund. Among other things, it was expected that his fund would generate fee revenue for Stellwagen and provide funding for its developing fund business. However, Acasta, Martello and Almada were unable to reach agreement on acceptable business terms for the fund. Shortly afterwards, on January 19, 2018, Martello sent a letter to the Board demanding changes to the Board. Martello also issued a press release and filed an updated early warning report on January 22, 2018 noting that it had delivered this letter.
Acasta continued to negotiate with the Majority Lender during January. Geoff Beattie, the Chairman of Acasta and the Chair of the Special Committee led the negotiations with the Majority Lender. In response to the ongoing deterioration of Acasta’s business, projections that showed that Acasta’s expected 2018 financial performance was going to be weaker than expected and Martello’s delivery of the letter to the Board, the Majority Lender required more stringent terms than Acasta originally contemplated in order to provide its consent. In particular, the Majority Lender demanded an immediate U.S.$5 million repayment of debt plus the Principal Payment by March 1, 2018.
Acasta and the Majority Lender agreed that the Majority Lender would provide its consent in exchange for an immediate paydown of U.S.$5 million of principal plus the Principal Repayment by March 1, 2018 pursuant to an amending agreement executed by Acasta and the Lenders (as amended, the “Amending Agreement”). In order to fund the Principal Payment, Acasta entered into the Term Sheet on February 6, 2018 and the Amending Agreement and the Term Sheet were publicly disclosed.
Management and the Special Committee considered various alternatives to the sale of Stellwagen, but in each case were constrained by the immediate need to make the Principal Payment. Specifically, management and the Special Committee considered the sale of other assets in order to raise funds to pay the obligations under the Credit Facility and improve Acasta’s financial situation. Management and the Special Committee concluded that such sales were either impracticable or would require more time to complete than was available to Acasta in the circumstances. Management and the Special Committee also considered the potential for an equity or rights offering, but received advice that this was not feasible.
The Proposed Transaction is, in the judgment of management and the Special Committee, the only transaction available to Acasta that is reasonably capable of generating sufficient proceeds to make the Principal Payment within the timeframe required under the Second Extension Agreement. Absent the Proposed Transaction, Acasta will default under the Credit Facility by failing to make the Principal Payment as required under the Second Extension Agreement and would also potentially breach its debt to EBITDA covenant of 5.25 under the Credit Facility during 2018. This in turn would result in a cross-default under Acasta’s other debt arrangements and could put Acasta at risk for an insolvency filing.
The proceeds from the Proposed Transaction will remedy Acasta’s immediate financial problems by enabling Acasta to make the Principal Payment. It should also ensure that Acasta remains onside its debt to EBITDA covenant under the Credit Facility.
The Special Committee has retained the services of Blair Franklin Capital Partners Inc. to provide an independent financial assessment as to the fairness, from a financial point of view, of the consideration to be received by Acasta pursuant to the Proposed Transaction, and has engaged Osler, Hoskin & Harcourt LLP as independent legal advisor to the Special Committee.
Cautionary Note Concerning Forward Looking Statements
This news release includes forward looking statements. All such statements constitute forward looking information within the meaning of applicable securities law and are made pursuant to the “safe harbour” provisions of applicable securities laws. Forward looking statements include, but are not limited to, negotiation of a definitive agreement for the Proposed Transaction, selling a portion of the CPG assets, monetizing the PPNs, obtaining exemptive relief from the OSC, obtaining consents for the Proposed Transaction from a majority of the Disinterested Shareholders, making the Principal Payment, remaining onside the debt to EBITDA covenant under the Credit Facility, and obtaining a fairness opinion from Blair Franklin and statements about other anticipated future events or results, including comments with respect to Company’s future financial performance and condition. Forward looking statements are statements that are predictive in nature, depend upon or refer to future events or conditions and are identified by words such as “will”, “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates” or similar expressions concerning matters that are not historical facts. Such statements are based on current expectations of the Company’s management and inherently involve numerous risks and uncertainties, known and unknown, including economic factors. The forward looking information contained in this news release is presented for the purpose of assisting readers in understanding the Company’s business and strategic priorities and objectives. A number of risks, uncertainties and other factors may cause actual outcomes or financial results to differ materially from the forward looking statements contained in this news release, including, among other factors, those referenced in the section entitled “Risk Factors” in the Company’s annual information form for the year ended December 31, 2016, a copy of which is available on the SEDAR website at www.sedar.com under the Company’s profile. Forward looking statements contained in this news release are not guarantees of future outcomes performance and, while forward looking statements are based on certain assumptions that the Company considers reasonable, actual events could differ materially from those expressed or implied by forward looking statements made by the Company. Readers are cautioned to consider these and other factors carefully when making decisions with respect to the Company and to not place undue reliance on forward looking statements. Circumstances affecting the Company may change rapidly. Except as may be expressly required by applicable law, Acasta does not undertake any obligation to update publicly or revise any such forward looking statements, whether as a result of new information, future events or otherwise. These cautionary statements expressly qualify all forward looking statements in this new release.