A&W last year consolidated with its income fund while Keg unitholders are set to vote this week to do the same
The last year has seen two attempts to buy out Vancouver-based restaurant income funds. An open question is whether there will be a third.
The first of these attempts, for A&W’s income fund, was successful last year while the other one, for the Keg’s income fund, is readying for a unitholder vote Aug. 1.
A third one, which would reduce the number of Metro Vancouver-based restaurant income funds to zero is unlikely, one analyst told BIV.
That is because the other remaining income fund, Boston Pizza Royalties Income Fund (TSX:BPF-UN), is performing as intended and ownership has less incentive to follow the path to privatization followed by others, said Acumen Capital Finance Partners Ltd. research analyst Nick Corcoran.
North Vancouver-based A&W Food Services of Canada Inc. swallowed the former A&W Revenue Royalties Income Fund last October and the combined company (TSX:AW) now trades on the Toronto Stock Exchange.
Before the transaction there was an operating company for A&W and a separate royalties fund, which owned trademarks and leased them to the operating company in exchange for a fee that was equivalent to a small percentage of the restaurants’ revenue. Money that the fund generated flowed through to unitholders in the form of distribution payments.
Income funds trade more like bonds than stocks because their revenue is from royalties payments. They are not affected by the operating company’s profits or losses.
A&W CEO Susan Senecal told BIV before the consolidation that the drive to create a single A&W entity was to attract more institutional investors, analysts and stock liquidity. The combined company, she said, would also trade with a higher price-to-earnings multiple because analysts would assign the profitable company with a valuation similar to those of other large fast-food chains.
Investors in the Keg Royalties Income Fund (TSX:KEG-UN) are now readying to vote on a similar consolidation, though it would be one where the combined company would not trade on a stock exchange.
Fairfax Financial Holdings Ltd. owns Recipe Unlimited Corp., which owns restaurant banners such as Harvey’s and Swiss Chalet in addition to the Keg’s operating company.
It signed a letter of intent in May to buy the Keg’s income fund, and unitholders are set to vote on whether to agree to Fairfax’s takeover offer of $18.60 per unit.
The fund’s units closed at $14.22 on the day before Fairfax made its offer, so the offer is a 30.8 per cent premium on that value.
Analysts expect the offer to get approved in part because Fairfax owns more than half of the fund’s units. For the takeover bid to get approved, more than two-thirds of all unitholders’ votes must support the deal.
This leaves Boston Pizza as potentially the only Vancouver-based restaurant income fund left.
Its unit price has increased following Fairfax’s offer to buy the Keg’s income fund, perhaps because investors believe a similar deal could be in the works from Jim Treliving, who fully owns Boston Pizza’s operating company, Boston Pizza International.
Boston Pizza’s income fund units closed priced at $18.60 on the last trading day before Fairfax made its offer to buy the Keg’s income fund. Since then, units rose to a 52-week high of $20.11 each on July 16, and then have faded back to close at $19.19 per unit this afternoon.
Corcoran said the main takeaway that he has received from speaking with people at Boston Pizza is that “the income fund is executing against its mandate.”
That means that it is “unlikely” that Treliving would make an offer to consolidate his company with the fund.
Given that the fund is doing what it is intended to do, “you have to think of what Jim Treliving’s incentive of buying the income fund would be,” Corcoran said.
It is possible that a combined company could have more value to a potential buyer were Treliving to want to sell Boston Pizza International. Treliving has not said anything publicly about wanting to sell Boston Pizza International.
Buying Boston Pizza’s income fund would also require a large capital outlay.
A source within Boston Pizza told BIV that Boston Pizza International owns about 13 per cent of the units in the income fund and that most units in the fund are owned by retail investors.
Boston Pizza’s income fund confirmed to BIV in an email that Boston Pizza International owns units in the income fund but would not specify how many. It said the fund is operating as intended by providing stable distributions to unitholders.
“We do not have any plans to announce or comment on potential structural changes at this time,” it said.
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