iA invests $25M for 10% stake in AutoCanada’s Online C2C F&I business

CPE News

CPE News (12.28.2023) – AutoCanada Inc. (TSX: ACQ) has announced the investment by iA Financial Group of $25 million for a 10% equity interest in AutoCanada’s business unit that will sell finance, insurance and warranty products to buyers of private owner-sold vehicles on Kijiji’s online marketplaces (Online C2C F&I Business).

iA Financial Group has invested $25 million for a 10% common equity interest in a newly created subsidiary (Newco) of AutoCanada UD LP, that owns and operates the Online C2C F&I Business.

The remaining 90% of Newco is owned by UDLP, with AutoCanada owning 100% of AutoCanada UD LP following the acquisition of the AutoCanada UD LP Minority Interest.

AutoCanada UD LP was formed in 2020 to own and operate the non-OEM used vehicle business of AutoCanada. The business of UDLP currently includes used vehicle dealerships, a used vehicle auction and an online ‘instant cash offer’ used vehicle acquisition solution, in addition to the Online C2C F&I Business.

AutoCanada has also announced the purchase of the minority 19.1% interest from Paul Antony, the Executive Chairman of the company, and others for $23.9 million in cash, funded from the proceeds of the iA investment, and $7.5 million in share units issuable to Paul Antony.

AutoCanada said EdgePoint and BloombergSen, the two largest of its shareholders holding an aggregate of approximately 38% of the outstanding shares, are supportive of the AutoCanada UD LP ownership consolidation on the terms that have been implemented.

photo credit: AutoCanada

News Release

AUTOCANADA RECEIVES $25 MILLION INVESTMENT INTO ONLINE C2C F&I BUSINESS AND CONSOLIDATES OWNERSHIP OF ITS USED DIGITAL DIVISION

EDMONTON, AB, Dec. 27, 2023 /CNW/ – AutoCanada Inc. (“AutoCanada” or the “Company”) (TSX: ACQ), a multi-location North American automobile dealership group, announced the investment by iA Financial Group (“iA”) of $25 million for a 10% equity interest in AutoCanada’s business unit that will sell finance, insurance and warranty products to buyers of private owner-sold vehicles on Kijiji’s online marketplaces (the “Online C2C F&I Business”). AutoCanada has also announced the purchase of the minority 19.1% interest (the “UDLP Minority Interest”) in its Used Digital Division that is owned by AutoCanada UD LP (“UDLP”) from Paul Antony, the Executive Chairman of the Company, and others for $23.9 million in cash, funded from the proceeds of the iA investment, and $7.5 million in share units issuable to Paul Antony. The share units will be settled through the delivery of AutoCanada shares acquired in the market. The former UDLP Minority Interest holders have agreed to use the after-tax cash proceeds to purchase AutoCanada shares in the market.

“This transaction increases the Company’s ownership in the Used Digital Division, while also removing any possible conflicts with other business segments and aligning management with shareholders ahead of a material ramp in the Used Digital Kijiji Online operations,” stated Stephen Green, Lead Independent Director of AutoCanada. “The Board looks forward to working with Mr. Antony and the rest of the team at AutoCanada to advance the Used Digital business, which we believe has significant potential.”

A supplemental investor presentation describing the transactions is available on AutoCanada’s website at https://investors.autocan.ca/.
Investment by iA in Online C2C F&I Business

The Online C2C F&I Business will operate a solution that is placed on Kijiji’s online marketplaces targeted to buyers of private ‘for-sale-by-owner’ vehicles listed on the marketplaces offering finance, insurance and warranty products for the purchased vehicles.

iA, a leading provider of insurance and warranty products for passenger vehicles to dealerships in Canada, has invested $25 million for a 10% common equity interest in a newly created subsidiary of UDLP (“Newco”) that owns and operates the Online C2C F&I Business (the “Newco Investment”). The remaining 90% of Newco is owned by UDLP, with AutoCanada owning 100% of UDLP following the acquisition of the UDLP Minority Interest.

iA has been the exclusive provider of insurance and warranty products for AutoCanada’s new vehicle dealerships since 2018. AutoCanada has renewed this arrangement on a long-term basis and has also extended it to cover AutoCanada’s used vehicle dealerships and the Online C2C F&I Business.

Consolidation of Ownership of UDLP

UDLP was formed in 2020 to own and operate the non-OEM used vehicle business of AutoCanada, subject to certain exceptions, and to facilitate the issuance of equity incentives of UDLP. The business of UDLP currently includes used vehicle dealerships, a used vehicle auction and an online ‘instant cash offer’ used vehicle acquisition solution, in addition to the Online C2C F&I Business.

Prior to the consolidation of UDLP ownership, Paul Antony, the Executive Chairman of the Company, and sellers of certain businesses purchased in the past by UDLP (the “Other Sellers”) held the UDLP Minority Interest. AutoCanada held the remaining 80.9% of the common equity of UDLP.

AutoCanada has purchased the UDLP Minority Interest to consolidate its ownership of UDLP (the “UDLP Ownership Consolidation”), increasing its equity ownership interest in UDLP from 80.9% to 100%. The UDLP Minority Interest purchased by AutoCanada consists of:

Class D units of UDLP held by Mr. Antony representing 15% of the common equity of UDLP (the “Class D Units”), purchased for consideration of $22.5 million in cash and such number of share units of AutoCanada (the “Antony Share Units”) equal to $7.5 million divided by the average closing price of AutoCanada common shares (the “Common Shares”) on the Toronto Stock Exchange (the “TSX”) for the seven trading days after the date of this announcement; and

Class B units of UDLP held by the Other Sellers representing 4.1% of the common equity of UDLP (the “Class B Units”), purchased for aggregate consideration of $1.4 million in cash.

The cash portion of the consideration for the UDLP Ownership Consolidation was funded with the proceeds of the Newco Investment.

Mr. Antony and the Other Sellers have agreed to use their after-tax cash proceeds from the UDLP Ownership Consolidation to purchase outstanding Common Shares in the market within the next two years. The Common Shares to be purchased by Mr. Antony and the Other Sellers with such proceeds may not be sold until the earlier of (i) two years after the date the applicable person has used all after-tax cash proceeds to purchase Common Shares and (ii) the date following such full application of proceeds on which the 10-day volume weighted average price of the Common Shares on the TSX exceeds $75.

The Antony Share Units vest on the earlier of three years from the date of issuance and the date on which the 10-day volume weighted average price of the Common Shares on the TSX exceeds $75. The Antony Share Units are not subject to any other conditions to vesting and are not transferrable.
Performance Share Unit Grant to Key UDLP Management & Employees

Certain UDLP employees and members of UDLP management will receive an aggregate grant of such number of performance share units of the Company (the “Performance Share Units”) equal to $11.275 million divided by the average closing price of the Common Shares on the TSX for the seven trading days after the date of this announcement. The Performance Share Units will be issued pursuant to AutoCanada’s existing share unit plan and will vest at the end of the seventh fiscal year following the grant date subject to certain performance conditions (in a performance multiplier range of 0.25x to 1.75x) and the continued employment of the applicable individuals with AutoCanada.

Each Antony Share Unit and Performance Share Unit will be settled through the delivery of one Common Share, with each such Common Share to be purchased in the market (rather than being issued from treasury). The Company intends to hedge the obligations to settle the Antony Share Units and the Performance Share Units in the ordinary course.

Background and Special Committee Process

In 2022, it became evident that the Company’s RightRide business, which is 100% owned by the Company and held outside of UDLP, was beginning to overlap with the business of UDLP. Although RightRide had been established to focus on selling sub-prime credit solutions to used vehicle customers, the credit profile of RightRide’s customer base organically expanded to include UDLP’s target market. The Board of Directors of the Company (the “Board”) and Mr. Antony began discussing possible solutions to prevent potential conflicts arising from this situation, including transferring the RightRide business to UDLP, as well as consolidation of UDLP ownership by the Company through the purchase of the UDLP Minority Interest.

In March 2023, UDLP reached the key milestone of securing the rights to place the Online C2C F&I Business solution and the ‘instant cash offer’ used vehicle acquisition solution on the Kijiji marketplaces. Following this milestone, the Company and UDLP began building the operational foundation for the Online C2C F&I Business, including engaging in discussions with iA regarding the supply of insurance and warranty products for this new initiative. These discussions resulted in the proposal of a direct investment by iA in the Online C2C F&I Business.

Given iA’s indication of interest in a direct cash investment in the Online C2C F&I Business, Mr. Antony discussed the possibility of the Company using the proceeds to facilitate consolidation of the UDLP Minority Interest with two of the largest shareholders of AutoCanada, EdgePoint Investment Group Inc. (“EdgePoint”) and BloombergSen Inc. (“BloombergSen”). At a meeting of the Board in August 2023, Mr. Antony updated the Board on all discussions related to UDLP and provided the Board with a proposal that the Company purchase the UDLP Minority Interest along with a draft term sheet reflecting preliminary terms for such proposal.

In August 2023, the Board established a committee of independent directors (the “Special Committee” or the “Committee”) with a mandate to consider the proposed UDLP Ownership Consolidation in the context of UDLP’s Kijiji marketplace initiatives, the proposed Newco Investment, finding a pre-emptive solution to the potential for conflicts as RightRide and UDLP operations continued to evolve, alignment of management with shareholders, retention and incentives for key employees who held Class B Units and the liquidity provisions of the Class B Units and the Class D Units.

The liquidity provisions in the partnership agreement for UDLP (the “LP Agreement”) for the Class D Units held by Mr. Antony were different from those applicable to the Class B Units held by the Other Sellers. During the first 10 years of the LP Agreement, Mr. Antony was entitled to give notice to the Company that he intended to sell his interest at a price of his choosing. The Company had the first right to purchase Mr. Antony’s Class D Units and if the Company declined to do so, he was entitled to sell his Class D Units to a third party. After 10 years, Mr. Antony was entitled to require the Company to purchase his Class D Units and the Company was entitled to require Mr. Antony to sell his Class D Units to the Company, in each case at fair market value.

The Class B Units had different liquidity provisions than the Class D Units, entitling the Other Sellers to require the Company to purchase their Class B Units at a price determined by a formula. The price for the Class B Units determined by the formula specified in the liquidity provisions of the LP Agreement would have resulted in an unreasonably low purchase price for the Class B Units. It was determined by the Special Committee that it would be in the best interests of the Company to purchase the Class B Units at a price above such formula specified amount and to implement new compensation incentives to appropriately retain and incentivize key employees who held Class B Units.

During the process, the Special Committee held 15 meetings, with Mr. Antony not being present at any of these meetings. The members of the Special Committee were Stephen Green (Chair), Barry James, Rhonda English and Lee Matheson. Each member of the Committee was determined to be independent for purposes of carrying out the mandate of the Committee. The Committee retained experienced and independent financial advisors and legal counsel. Legal counsel to the Committee attended all the meetings of the Committee. The Committee also received ongoing financial advice from its financial advisor.

The discussions among the Committee, EdgePoint, BloombergSen and Mr. Antony throughout the process resulted in modifications being made to the preliminary terms presented by Mr. Antony to the Board in August 2023. EdgePoint and BloombergSen attended two of the Committee meetings and confirmed to the Special Committee that they supported the UDLP Ownership Consolidation on the terms agreed to by the parties.

On December 26, 2023, the Special Committee unanimously determined that the UDLP Ownership Consolidation is in the best interests of the Company and recommended to the Board its approval, and the Board unanimously (with Mr. Antony abstaining) determined that the UDLP Ownership Consolidation is in the best interests of the Company and approved the UDLP Ownership Consolidation.

The factors and reasons that the Special Committee and the Board considered in making their determinations and approving the UDLP Ownership Consolidation include the following:

While it is difficult to value a business before it has at least several years of operating results, the Committee believes that the terms of the UDLP Ownership Consolidation are reasonable, management is committed to UDLP’s success, UDLP has the human and financial resources to succeed and the potential upside in UDLP’s business is significant.

The Newco Investment implies that Newco may have a value of $250,000,0001, reflecting an arm’s length third-party assessment of significant potential value in Newco. UDLP now owns 90% of Newco as well as 100% of its ‘instant cash offer’ used vehicle acquisition business, its used vehicle dealerships and its auction business, which is a substantial increase from AutoCanada’s 80.9% ownership of all of these businesses previously.

The Company obtained prior valuations of the Class D Units for internal financial reporting purposes attributing a fair market value of $936,000 to $1,166,000 as of December 31, 2022 and $567,000 to $752,000 as of December 31, 2021. The Committee believes these valuations are not relevant in the circumstances because they were obtained before both UDLP’s Kijiji marketplace initiatives and the Newco Investment.

The cash portion of the consideration for the UDLP Ownership Consolidation is funded with the proceeds of the Newco Investment and Mr. Antony has committed to apply all of the after-tax cash proceeds he receives from the sale of the Class D Units to purchase outstanding Common Shares. He has also agreed that he will hold those Common Shares until at least the earlier of two years following the application of the after-tax cash proceeds to purchase the Common Shares and the date following the full application of such proceeds on which the 10-day volume weighted average price of the Common Shares exceeds $75. Under the liquidity provisions applicable to the Class D Units, Mr. Antony could have opted to sell the Class D Units to a third party with no restrictions as to how he would apply any cash proceeds. This feature of the UDLP Ownership Consolidation aligns the interests of Mr. Antony with shareholders of the Company.

Prior to the sale of his Class D Units, Mr. Antony had a direct financial interest in UDLP, providing an incentive to increase the equity value of UDLP. The Committee believes it is strategically important to have Mr. Antony focused solely on the best interests of AutoCanada as a whole, without any direct interest in UDLP. Additionally, the businesses of the Company held outside of UDLP, including RightRide, have become increasingly inter-linked with the businesses of UDLP, due to overlap and synergies between the businesses. This can lead to challenges with respect to the allocation of revenues and costs, personnel, capital and other resources between the businesses. The UDLP Ownership Consolidation eliminates potential conflicts of interest before they become material, thereby simplifying and improving governance.

EdgePoint and BloombergSen, the two largest shareholders of AutoCanada holding an aggregate of approximately 38% of the outstanding Common Shares, are supportive of the UDLP Ownership Consolidation on the terms that have been implemented.

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1 Based solely on an investment of $25 million for a 10% common equity interest in Newco.

Financial Impact

AutoCanada is providing the following preliminary unaudited estimate relating to the financial impact of the UDLP Ownership Consolidation in respect of its fourth quarter 2023 results. For the three month period ended December 31, 2023, on a preliminary unaudited basis (as discussed in further detail below), management estimates the UDLP Ownership Consolidation is expected to generate an expense of approximately $36.7 million (which will be allocated to share-based compensation expense for the Class D Units and the Class B Units based on the revaluation of the initial redemption liabilities to fair market value, with any balance allocated to a new award of compensation) and is estimated to decrease diluted earnings per share by approximately $1.50. Only the amounts allocated to revaluation of the Class D Units and the Class B Units to fair value will be added back to earnings for the purposes of calculating Adjusted EBITDA.2

The Company has not yet completed its financial statements for the quarter or year ended December 31, 2023, and the Company’s unaudited estimate of the financial impact of the UDLP Ownership Consolidation is a preliminary estimate. Actual results may differ materially from the estimate upon the completion of the Company’s financial statements, final adjustments, review by the Company’s auditors and other developments that may arise between now and the time the financial statements are completed. The estimate is not a comprehensive statement of the Company’s financial results for the quarter or year ended December 31, 2023 or for any other period and should not be viewed as a substitute for full financial statements prepared in accordance with International Financial Reporting Standards, and the estimate is not necessarily indicative of the results to be achieved during the quarter or year ended December 31, 2023. The preliminary estimate of the financial impact of the UDLP Ownership Consolidation provided in this press release constitutes a forward-looking statement within the meaning of applicable securities laws, is based on a number of assumptions and is subject to a number of risks and uncertainties. Please see the section below entitled “Forward-Looking Statements”. The preliminary estimate of the financial impact of the UDLP Ownership Consolidation has been prepared by, and is the responsibility of, management of the Company. The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has not reviewed the preliminary estimate of the financial impact of the UDLP Ownership Consolidation. Neither PricewaterhouseCoopers LLP nor any other independent accountants express an opinion or any other form of assurance with respect to the preliminary estimate.

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2 See “Non-GAAP and Other Financial Measures” below MI 61-101

As Mr. Antony is the Executive Chairman and a director of the Company, the purchase of the Class D Units by AutoCanada is considered a “related party transaction” within the meaning of Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”). This related party transaction is exempt from the formal valuation and minority approval requirements of MI 61-101 pursuant to sections 5.5(a) and 5.7(1)(a) of MI 61-101, as the Special Committee and the Board have determined that neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, insofar as it involves related parties, exceeds 25% of the Company’s market capitalization. The Company did not file the material change report in respect of the related party transaction at least 21 days before the closing of the transaction, which the Company deems reasonable in the circumstances so as to facilitate the contemporaneous closing of the UDLP Ownership Consolidation and the transactions with iA.

The material change report to be filed in connection with this press release will contain certain disclosure that is required pursuant to MI 61-101 in addition to the information contained in this press release. Any shareholder of the Company who wishes to receive a copy of the material change report to be filed in connection with this press release may obtain a copy of the material change report without charge by contacting the Company’s Chief Financial Officer, Azim Lalani, at the address set forth below.

About AutoCanada

AutoCanada is a leading North American multi-location automobile dealership group currently operating 83 franchised dealerships, comprised of 28 brands, in eight provinces in Canada as well as a group in Illinois, USA. AutoCanada currently sells Chrysler, Dodge, Jeep, Ram, FIAT, Alfa Romeo, Chevrolet, GMC, Buick, Cadillac, Ford, Infiniti, Nissan, Hyundai, Subaru, Audi, Volkswagen, Kia, Mazda, Mercedes-Benz, BMW, MINI, Volvo, Toyota, Lincoln, Acura, Honda and Porsche branded vehicles. In addition, AutoCanada’s Canadian Operations segment currently operates three used vehicle dealerships and one used vehicle auction business supporting the Used Digital Division, 12 RightRide division locations, and 11 stand-alone collision centres within our group of 27 collision centres. In 2022, our dealerships sold approximately 100,000 vehicles and processed over 900,000 service and collision repair orders in our 1,367 service bays generating revenue in excess of $6 billion.

All dollar amounts referred to in this press release are Canadian dollars.

Additional information about AutoCanada is available at www.sedarplus.ca and the Company’s website at www.autocan.ca.

Forward Looking Statements

Certain statements contained in this press release are forward-looking statements and information (collectively “forward-looking statements”), within the meaning of the applicable Canadian securities legislation. We hereby provide cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in these forward-looking statements. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result”, “are expected to”, “will continue”, “is anticipated”, “projection”, “vision”, “goals”, “objective”, “target”, “schedules”, “outlook”, “anticipate”, “expect”, “estimate”, “could”, “should”, “plan”, “seek”, “may”, “intend”, “likely”, “will”, “believe”, “shall” and similar expressions) are not historical facts and are forward-looking and may involve estimates and assumptions and are subject to risks, uncertainties and other factors some of which are beyond our control and difficult to predict. The forward looking statements included in this press release include those relating to: the significant potential upside in the Online C2C F&I Business and the business of UDLP; management’s estimate of the impact of the UDLP Ownership Consolidation on expense, diluted earnings per share and Adjusted EBITDA; the issuance of Share Units to Paul Antony and Performance Share Units to the Other Sellers; and Mr. Antony and the Other Sellers using the net cash proceeds of the UDLP Ownership Consolidation to acquire Common Shares in the market, which shares will be subject to the agreed contractual hold period following the acquisition thereof.

The Company’s Annual Information Form and other documents filed with securities regulatory authorities (accessible through the SEDAR website at www.sedarplus.ca) describe the risks, material assumptions and other factors that could influence actual results and which are incorporated herein by reference. The assumptions underlying forward looking statements in this press release include assumptions relating to the current value, prospects and growth profile of the Online C2C F&I Business and the business of UDLP and those set out above under “Financial Impact”.

Accordingly, these factors could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Therefore, any such forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this press release and in the Company’s Annual Information Form and other documents filed with securities regulatory authorities.

Further, any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by applicable law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors and to assess in advance the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

Non-GAAP and Other Financial Measures

This press release contains certain financial measures that do not have any standardized meaning prescribed by Canadian GAAP. Therefore, these financial measures may not be comparable to similar measures presented by other issuers. Investors are cautioned these measures should not be construed as an alternative to net earnings (loss) or to cash provided by (used in) operating, investing, financing activities, cash and indebtedness determined in accordance with Canadian GAAP, as indicators of our performance. We provide these additional non-GAAP measures (“Non-GAAP Measures”), capital management measures and supplementary financial measures to assist investors in determining our ability to generate earnings and cash provided by (used in) operating activities and to provide additional information on how these cash resources are used.

Adjusted EBITDA is not an earnings measure recognized by Canadian GAAP and does not have a standardized meaning prescribed by Canadian GAAP. Investors are cautioned that this Non-GAAP Measure should not replace net earnings or loss (as determined in accordance with Canadian GAAP) as an indicator of the Company’s performance, of its cash flows from operating, investing and financing activities or as a measure of its liquidity and cash flows. The Company’s methods of calculating the Non-GAAP Measure may differ from the methods used by other issuers. Therefore, this measure may not be comparable to similar measures presented by other issuers. Further details on this Non-GAAP Measure are provided in the Management’s Discussion and Analysis accompanying the Company’s financial statements filed from time to time on SEDAR+ at www.sedarplus.com.

The definition of Adjusted EBITDA is below:

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is an indicator of a company’s operating performance over a period of time and ability to incur and service debt. Adjusted EBITDA provides an indication of the results generated by our principal business activities prior to:

Interest expense (other than interest expense on floorplan financing), income taxes, depreciation, and amortization;

Charges that introduce volatility unrelated to operating performance by virtue of the impact of external factors (such as share-based compensation amounts attributed to certain equity issuances in connection with the Used Digital Retail Division);

Non-cash charges (such as impairment, recoveries, gains or losses on derivatives, revaluation of contingent consideration and revaluation of redemption liabilities);

Charges outside the normal course of business (such as restructuring, gains and losses on dealership divestitures and real estate transactions); and

Charges that are non-recurring in nature (such as provisions for settlement income).

The Company believes Adjusted EBITDA provides improved continuity with respect to the comparison of our operating performance over a period of time.

SOURCE AutoCanada Inc.

For further information: AutoCanada contact: Azim Lalani, Chief Financial Officer, Phone: 780-732-3157, Email: alalani@autocan.ca