News

VAUGHAN, ON, March 31, 2016 /CNW/ - Cara Operations Limited (TSX:CAO) ("Cara" or the "Company") is pleased to announce that it has entered into a definitive agreement to acquire 100% of Groupe St-Hubert Inc. ("St-Hubert"), Québec's leading full-service restaurant operator as well as a fully-integrated food manufacturer, for $537 million.

"The two companies share similar management philosophies and fundamental values," said Jean-Pierre Léger, Chairman and CEO of St-Hubert.  Mr. Léger added, "This alliance, which will ensure St-Hubert's sound development, opens up excellent future prospects for our employees.  It also provides them with more career opportunities by creating jobs in Québec, since it will enable us to carry out major expansions of our food manufacturing programs and sales throughout Canada.  Our customers will have access to the broad range of products offered by a national leader."

Bill Gregson, Chair of the Board and Chief Executive Officer of Cara said, "This is a historic day for Cara, coming together with such an iconic and prominent Québec-based business. The acquisition of St-Hubert is an excellent strategic fit for both companies. This transaction gives St-Hubert the opportunity to drive its restaurant growth through the addition of Cara brands in Québec and to drive a national retail food program for Cara, based in Québec, utilizing the existing manufacturing facilities and supplier base".  Mr. Gregson elaborated, "The acquisition provides Cara with a restaurant chain that resonates with guests in Québec as well as with a food retail solution for the Cara brands – these are two areas of Cara's existing business where we have tremendous opportunities. It also provides Cara with a head office in Québec, manufacturing facilities, and a skilled management team that will grow and manage the Cara Québec restaurant expansion and national retail food initiative."

Transaction Overview and Rationale

The acquisition of St-Hubert provides Cara with:

• 117 restaurants generating System Sales of approximately $403 million
  • Québec focused, with 108 restaurants or 92% of the total restaurant portfolio located in Québec
  • Franchise focused business model, with 108 locations operated by franchisees
  • Three formats, including traditional full-service rotisseries, resto-bars and express formats
• 2 Québec-based food manufacturing plants and 2 distribution centers generating sales of $225 million
  • Approximately 34% of sales are internal to the St-Hubert restaurant network
  • Approximately 66% of sales are to external customers, including national grocery chains that include Sobeys, Loblaws, Costco and Metro
• A valuable real estate portfolio consisting of 28 owned properties including 2 manufacturing plants

The acquisition of St-Hubert adds a major iconic brand to Cara's portfolio. Management believes the acquisition presents several compelling strategic benefits, including:

• An iconic brand, which is ranked the #1 full service restaurant operator in Québec and #4 in Canada, based on sales¹
• Increases Cara's presence in Québec, a region in which Cara has a limited footprint.  Over time and under the guidance of the St-Hubert management team, Cara will look to expand other Cara brands into Québec
• Leveraging Cara's and St-Hubert's combined businesses to achieve an estimated $10 million of annual run-rate synergies within 3 years.  Anticipated synergies are expected to come from areas such as purchasing, cost reduction and additional EBITDA from food retail operations. Further EBITDA opportunities are anticipated beyond the initial 3 year period and these will be driven by fully developing Cara branded retail products in the food retail sector.  St-Hubert has a well-developed food manufacturing infrastructure and strong customer relationships both inside and outside of Québec
• The transaction is immediately accretive to Adjusted Net Earnings per Share
• Significantly increases Cara's System Sales and Operating EBITDA, taking consolidated Pro Forma System Sales, Pro Forma Operating EBITDA and Pro Forma Operating EBITDA Margin on System Sales to approximately $2.5 billion, approximately $161 million and approximately 6.5% respectively, as at December 27, 2015

Cara does not currently have an office in Québec. Post-closing, Cara will maintain St-Hubert's existing head office in Laval, Québec.  St-Hubert is highly successful in Québec in both the restaurant and retail segments.  Cara intends to build off of that success, relying on existing St-Hubert management to further expand St-Hubert's restaurant business in Québec. Expanding St-Hubert's existing retail operations in Québec as well as expanding retail operations on a national scale is a key growth opportunity for Cara.  The acquisition will allow Cara to expand its limited retail product offering by leveraging the knowledge and success of St-Hubert's food division management team.  St-Hubert's team will lead the development and expansion of Cara's retail portfolio by adding Cara branded retail products to be manufactured in Québec, using existing suppliers, to be sold across Canada.  

Financial Highlights

St-Hubert generated approximately $620 million in System Sales, including the food operations division, and approximately $44.8 million in Operating EBITDA. 

Pro forma for the acquisition and after adjusting for the full-year impact of the New York Fries acquisition, Cara's Pro Forma System Sales, Pro Forma Operating EBITDA and Pro Forma Operating EBITDA Margin on System Sales for the 52-week period ended December 27, 2015 will increase to approximately $2.5 billion, approximately $161 million and approximately 6.5%, respectively. This brings Cara very close to the starting position of its 5-7 year growth targets that it set out in April of 2015.  As a result of the St-Hubert acquisition, Cara now expects it will exceed its 5-7 year targets.  

"We are excited by the St-Hubert acquisition and the potential synergies that exist", Mr. Gregson commented.  "Combining the best of both companies will lead to increased economies of scale and we expect to see several win-wins for each existing business and for the Province of Québec."       

Financing of the Transaction

Cara is acquiring St-Hubert for a purchase price of $537 million on a cash-free, debt-free basis.  The purchase price is inclusive of certain working capital balances and it is subject to customary working capital adjustments on closing.

Cara intends to finance the acquisition and expected transaction costs with the following facilities:

• Credit facility upsized from $150 million to $700 million, including a $200 million 2-year term loan
• $50 million from the issuance of Cara subordinate voting shares to the vendor

Scotiabank and a syndicate of lenders have provided Cara with fully committed credit facilities for the full purchase price plus transaction expenses.  While Cara can fully finance the acquisition with debt, depending on market conditions it will consider financing a portion of the acquisition with an equity offering. Any equity offering, that may be undertaken, will eliminate or reduce the need for the 2-year term loan and provide room on the balance sheet for further growth, including acquisitions.

At closing and after the $50 million issuance of Cara subordinate voting shares to the vendor and assuming a $200 million equity issuance, Cara's Pro Forma Net Debt to Operating EBITDA ratio is expected to be approximately 2.2x, providing Cara with significant financial flexibility. 

Continuing its track record of being a committed partner to the Company, Cara's largest shareholder Fairfax Financial Holdings Limited ("Fairfax") has provided a commitment such that Fairfax will either exercise its pre-emptive right in full to purchase its pro-rata share of any subordinate voting shares Cara offers to the public provided that the offering price does not exceed $30.00 per share or, alternatively, will purchase $200 million of subordinate voting shares at a price of $26.20. Fairfax shall also maintain its pre-emptive right to purchase its pro rata share of any subordinate voting shares Cara offers to the public at a price above $30.00.

Closing of the Transaction and Other Information

Closing of the transaction is subject to customary conditions, including the receipt of relevant regulatory approvals.  The transaction is targeted to close in the summer of 2016.

There can be no assurance that the transaction will close or that an equity offering will be undertaken, and if undertaken, will be completed in whole or in part.  This press release does not constitute a solicitation of an offer to purchase or sell Cara securities. 

Cara Conference Call

Bill Gregson, Chief Executive Officer and Ken Grondin, Chief Financial Officer, will hold an investor conference call to discuss this announcement in further detail at 8:00 a.m. Eastern Time on Thursday, March 31, 2016.

Presentation slides for the conference call will be made available on Cara's website located at www.cara.com.

To access the call, please call (647) 427-7450 or 1-888-231-8191, five to ten minutes prior to the start time. No access code is required. A telephone replay of the call will be available until midnight on April 30, 2016.  To access the replay, please dial (416) 849-0833 or 1-855-859-2056 and enter passcode 82697751.

Non‑IFRS Measures

This press release makes reference to certain non‑IFRS measures. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of the Company's results of operations from management's perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of the Company's financial information reported under IFRS. The Company uses non-IFRS measures including "System Sales", "Operating EBITDA", "Pro Forma System Sales", "Pro Forma Operating EBITDA", "Pro Forma EBITDA Margin on System Sales", "Operating EBITDA Margin on System Sales", "Adjusted Net Earnings per Share" and "Adjusted EBITDA" to provide investors with supplemental measures of its operating performance and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. The Company also believes that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. The Company's management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets, and to determine components of management compensation.

"System Sales" represents top line sales received from restaurant guests at both corporate and franchise restaurants including take-out and delivery customer orders. System Sales includes sales from both established restaurants as well as new restaurants.  Pro forma System Sales for the acquisition of St-Hubert include third party sales from the food division which consist of sales to franchise restaurants, grocery, industrial and food service clients net of commercial expenses.  Management believes System Sales provides meaningful information to investors regarding the size of Cara's restaurant network, the total market share of the Company's brands and the overall financial performance of its brands and restaurant owner base, which ultimately impacts Cara's consolidated financial performance.

 "EBITDA" is defined as net earnings (loss) from continuing operations before: (i) net interest expense and other financing charges; (ii) loss (gain) on derivative; (iii) write-off of financing fees; (iv) income taxes; (v) depreciation of property, plant and equipment; (vi) amortization of other assets; and (vii) impairment of assets, net of reversals.

 "Operating EBITDA" is defined as net earnings (loss) from continuing operations before: (i) net interest expense and other financing charges; (ii) gain (loss) on derivative; (iii) write-off of financing fees; (iv)  income taxes; (v) depreciation of property, plant and equipment; (vi) amortization of other assets; (vii) impairment of assets, net of reversals; (viii) losses on early buyout / cancellation of equipment rental contracts; (ix) restructuring; * conversion fees; (xi) net (gain) / loss on disposal of property, plant and equipment; (xii) stock based compensation; (xiii) change in onerous contract provision; and (xiv) lease costs and tenant inducement amortization.

 "Operating EBITDA Margin" is defined as Operating EBITDA divided by total gross revenue from continuing operations.

"Operating EBITDA Margin on System Sales" is defined as Operating EBITDA divided by System Sales.

"Adjusted Net Earnings per Share" is defined as net earnings per share attributable to shareholders of the Company adjusted for the following: (i) gain (loss) on derivative; (ii) write-off of financing fees; (iii) impairment of assets, net of reversals; (iv) losses on early buyout / cancellation of equipment rental contracts; (v) restructuring; (vi) conversion fees; (vii) net (gain) / loss on disposal of property, plant and equipment; (viii) change in onerous contract provision; (ix) normalized interest expense, which adjusts for proceeds from the IPO and certain capital changes related to the IPO; and, normalized income tax expense.

"Adjusted EBITDA" is defined as St-Hubert's EBITDA adjusted for certain expenses not anticipated to be incurred post-acquisition, non-recurring expenses and acquisition of certain franchisees.

"Pro Forma System Sales" is defined as System Sales adjusted for full-year contribution of New York Fries and the St-Hubert acquisition, as if the acquisitions had occurred on December 31, 2014.

"Pro Forma Operating EBITDA" is defined as Operating EBITDA adjusted for full-year contribution of New York Fries and the St-Hubert acquisition, as if the acquisitions had occurred on December 31, 2014.

"Pro Forma Operating EBITDA Margin on System Sales" is defined as  Pro Forma Operating EBITDA divided by Pro Forma System Sales.

Forward Looking Information

This press release contains "forward-looking information" within the meaning of applicable securities laws. Forward-looking information in this press release includes statements regarding the timing and completion of the proposed acquisition, final financing breakdown, timing and value of expected synergies, the effective accretion (which may be impacted by the offering price of any equity offering and other final financing arrangements), growth prospects, future business strategy and expectations regarding operations. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "targets", "expects", "estimates", "intends", "anticipates", "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might", "will" or "achieve".

Forward-looking information is necessarily based on a number of assumptions and estimates that, while considered reasonable by the Company as of the date such statements are made, are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results to be materially different from those expressed or implied by such forward-looking information, including: completion of the transaction on terms set out in the share purchase agreement and in a manner consistent with management's expectations; completion of any financing arrangements; the accuracy of management's assessment of the effects of the acquisition, including the ability to generate synergies consistent with management's expectations; and the ongoing performance of the businesses of Cara and St-Hubert. These assumptions and estimates are not intended to represent a complete list of the assumptions and estimates that could affect the Company.

There are several factors that could cause actual results to differ materially from those contained in forward-looking information, including: future operating results; future general economic and market conditions, including equity capital markets; changes in laws and regulations; and such other factors and risks as described in detail from time to time in documents filed by Cara with securities regulatory authorities in Canada. There can be no assurance that such information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information. Accordingly, readers should not place undue reliance on forward-looking information. The Company does not undertake to update any forward-looking information contained herein, except as required by applicable securities laws.

About St-Hubert

St-Hubert was originally founded by the Léger family in 1951. Today, Jean-Pierre Léger ("Mr. Léger") acts as CEO and Chairman to the Board.  In addition, Mr. Léger helped start the St-Hubert Foundation which takes an active role in the communities in which St-Hubert operates. Since its inception, the St-Hubert Foundation has donated $2 million towards the health and well-being of families and children who live in St-Hubert's communities.  

St-Hubert is one of Québec's most admired and recognized restaurant companies and is known for its great tasting rotisserie chicken, courteous service and warm, trendy atmosphere.  Based on total sales, St-Hubert is Québec's top full-service restaurant operator and Canada's fourth largest full-service restaurant operator.  As at December 31, 2015, St-Hubert had 117 restaurants: 80 full-service restaurants & 37 express locations. 89% of St-Hubert restaurants are operated by franchisees and 92% are based in Québec.

In addition to its restaurant business, St-Hubert manufactures and distributes fresh, frozen and non-perishable food products under the St-Hubert brand name as well as under several private label brands.  The company operates 2 manufacturing plants in Boisbriand and Blainville and 2 distribution centers in Anjou and Boisbriand. Further information about the company is available at www.st-hubert.com.

About CARA

Founded in 1883, Cara is Canada's oldest and largest full-service restaurant company.  The Company franchises and/or operates some of the most recognized brands in the country including Swiss Chalet, Harvey's, Milestones, Montana's, Kelsey's, East Side Mario's, New York Fries, Prime Pubs, Bier Markt and Landing restaurants.  As at December 27, 2015, Cara had 1,010 restaurants, 973 of which were located in Canada and the remaining 37 locations were located internationally.  88% of Cara's restaurants are operated by franchisees and 66% of Cara's locations are based in Ontario.  Cara's shares trade on the Toronto Stock Exchange under the ticker symbol CAO.  More information about the Company is available at www.cara.com.

¹ Source: Technomic report

SOURCE Cara Operations Limited