Fairfax Financial to combine Cara Operations and Keg Restaurants

Cara Operations Limited (TSX: CARA) and Keg Restaurants Ltd. (KRL), both portfolio companies controlled by Fairfax Financial Holdings Limited (TSX: FFH; FFH.U), have agreed to combine.

Vancouver based Keg Restaurants Ltd. is the owner/operator and franchisor of casual dining steakhouse restaurants operating under the trade name “The Keg Steakhouse & Bar” in Canada and select markets in the United States.

David Aisenstat, currently President & CEO of KRL, will remain in this position while overseeing the three additional Cara brands. Aisenstat will also join the Cara board of directors as Vice Chairman. Bill Gregson will remain as President & CEO of Cara and will remain as Chairman of the Cara board of directors.

In February 2014, Fairfax Financial acquired [mepr-active rule=”374″ ifallowed=”hide”]##Subscribe today to see our research on this and all other subscriber ONLY items##[/mepr-active][mepr-active rule=”374″]51% interest in KRL from Aisenstat for $85 million.

Fairfax Financial currently controls 13.97% of Cara’s subordinate voting shares and 57.9% of multiple voting shares, representing approximately 56.6% of the total votes attached to all classes. The Phelan family controls 42.1% of multiple voting shares, representing 40.9% of the total votes attached to all classes.[/mepr-active]

Under the transaction, Cara will pay $200 million to KRL’s shareholders, Fairfax Financial and Aisenstat, comprising of $105 million in cash and 3,801,123 Cara subordinate voting shares (based on Cara’s closing price of $24.93 per subordinate voting shares on the Toronto Stock Exchange on January 22, 2018). In addition, Cara may be required to pay up to an additional $30 million of cash consideration upon the achievement of certain financial milestones within the first three fiscal years following closing.

Of the subordinate voting shares being issued, 3.4 million will be issued to Fairfax as partial consideration which will result in Fairfax beneficially owning 7,224,180 subordinate voting shares following closing, representing approximately 25.8% of the issued and outstanding subordinate voting shares, and 19,903,378 multiple voting shares of Cara, representing approximately 57.9% of the issued and outstanding multiple voting shares.

Cara intends to change its corporate name following the closing of the transaction.

The addition of 106 The Keg restaurants will provide Cara with a network of 1,365 restaurants. The combination of The Keg with the 2016 St-Hubert and Original Joe’s transactions gives Cara best in class in full service, preeminence in the Quebec market with a strong retail capability and a strong Western presence along with its historical strength in Ontario.

The Keg restaurants generate approximately $612.1 million in annual System Sales and approximately $23.5 million in Normalized EBITDA. When the transaction closes, Cara’s Pro Forma System Sales (for the 12 months ended September 24, 2017) will increase to $3.4 billion and its Pro Forma Operating EBITDA (for the same period) will increase to $207.9 million, putting Cara on track to achieve the top end of its long-term (2020-2022) System Sales target and well within the Operating EBITDA target range.

The Keg Royalties Income Fund (TSX: KEG.UN) owns certain trademarks, and other related intellectual property used by KRL in both the operation and franchise of its Keg restaurants in Canada and the United States. The trademarks are licensed to KRL for 99 years for which KRL pays the Fund a royalty of 4% of gross sales of Keg restaurants included in a pool of Keg steakhouses.

Cara and KRL have confirmed to the Fund that, notwithstanding the merger, The Keg will continue to operate as it has previously under Aisenstat’s leadership, without any change in management’s focus on the Fund’s unitholders as key stakeholders in the business or the factors that have established The Keg brand’s leadership position and supported the consistent payment and growth of the royalty.

The Fund will remain in its current form and will continue to receive royalties from Keg restaurants operated by KRL following the merger. The trustees of the Fund have considered the effect of the transaction on the interests of the Fund’s unitholders and the rights of The Keg Rights Limited Partnership under its agreements with KRL, which will be preserved without modification.

Fairfax Financial and Scotiabank’s 1832 Asset Management L.P. are two largest unitholders of the Fund, controlling [mepr-active rule=”374″ ifallowed=”hide”]##Subscribe today to see our research on this and all other subscriber ONLY items##[/mepr-active][mepr-active rule=”374″]24.1% and 14.4% of the total units on fully-diluted basis.[/mepr-active]

photo credit: Keg Restaurants