Mergers, acquisitions and takeovers are amongst the many key episodes of the business growth strategy. The Australian economy is booming and undergoing rapid transformation with the technological implications, evolving regulatory reforms and rising interests of sophisticated shareholders in the Aussie companies. With too many fishes in the sea already, these M&A events catch the investor’s attention to further cherry-pick stocks for investment.
Firms undergo a vigorous and channelized procedure with utmost vigilance, before finalizing an M&A or an equally significant event. A key aspect within this procedure is the Schemes of Arrangement (SIA), which is defined by the Australian Securities and Investments Commission as a binding, court-approved agreements that enables the reorganisation of the rights and liabilities of members and creditors of a company.
Breaking down the concept further, the SIA is a process wherein a target company and its shareholders face a bidder, who acquires shares in the company in exchange of cash, securities or both, which are provided to the target company’s shareholders. It should be noted that an SIA occurs and proceeds only post the consent of the target stakeholders and then by the Court.
In the light of this context, let us look into a recent example, that is creating buzz in the Australian market. Here, Silver Chef Limited (ASX: SIV) could be deemed as the target company and Next Capital Pty Ltd could be considered as the bidder.
Silver Chef Limited (ASX: SIV) is regarded to be Australia’s first dedicated hospitality equipment funding business. It was incorporated in 1986 and was listed on the ASX in 2005. The company is operational in ANZ and Canada and has a unique Rent-Try-Buy® Solution, that enables businesses to free up their working capital, while keeping options open via flexible, equipment funding.
Next Capital Pty Ltd, is an Australian private equity firm and a specialist provider of buy-out funding for SMEs. The company was incepted in 2005 to capitalise on the prospects in the area of expansion capital and small to mid-market buyouts in the ANZ region. It holds experience in Asian growth markets, where it has sourced products, established production units and paved a way of market penetration of Australian products.
Scheme Implementation Agreement: On 3 July 2019, SIV announced to the market that it had entered into a SIA with a group of investors investing under the leadership of Next Capital Pty Ltd,. This group of investors consists of investment vehicles that are affiliated with Next Capital along with a set of co-investors who are investing through co-investment vehicles.
Agreement History: SIV has been exploring its options to recapitalise for smooth operations and growth in the business. Over a year, the company has been evaluating/undertaking steps to manage its covenant breaches, which required at least $45 million funds to reduce the capital drawn under Syndicated Debt Facility.
The company previously sought the options of sub-debt and entered into an Exclusivity Agreement with a preferred private equity partner and a sub-debt party in the first month of this year. The party stated that it would provide SIV with $45 million of subordinated debt conditional on a minimum equity raising of $20 million. However, the equity raising was delayed due to additional financier conditions imposed within the Securitisation Warehouse Facility.
On 11 April 2019, SIV received an indicative, conditional, non-binding offer of $1.00 per share and one Contingent Value Note from Next Capital. Under an Exclusivity Deed, Next Capital began the due diligence along with the discussions with SIV’s financiers. To establish the understanding and reach a mutual agreement on terms of the recapitalisation of SIV, this deed has been extended, as and when required.
The initial sub-debt proposal was no longer effective post 23 May 2019. There were discussions about a probable public equity solution, but it has been in vain.
Recently on 2 July 2019, the offer was further revised to $0.70 cps and one Contingent Value Note per share post finalization of negotiations with the company’s financiers.
The Scheme Details: The terse funding environment emphasises the urgent need of a negotiation to enable and support SIV’s functionalities. With this objective, SIV’s independent directors have universally expressed their will to vote in favour of the scheme, post careful scrutinization of Next Capital’s offer. They also understand the adverse implications that would arise as a result of no support to repay for SIV’s credit facilities.
SIV is taking the help of Ernst & Young Transaction Advisory Services Limited for the preparation of a report for the Scheme Booklet.
Next Capital is likely to structure the Scheme Consideration, using the Contingent Value Note structure, and part of the net cash to be recouped in the run-off of the GoGetta asset book over $10 million would be paid to the Scheme shareholders. The Contingent Value Notes would be issued by SIV and the transaction would be implemented by a scheme of arrangement under the Australian law. The shareholders would be entitled to a redemption amount to be derived as per 50% of the net proceeds, between the SIA date and 30 June 2021, over $10 million from the GoGetta run-off.
The Scheme Conditions: The scheme would be live on the fulfilment of the below mentioned conditions:
- Green signal from the regulatory authorities- ASIC and ASX.
- FIRB’s approval to Next Capital.
- E&Y Transaction Advisory Services Limited’s approval that the scheme is apt for SIV’s stakeholders.
- no material enforcement by any regulatory authority, to impact SIV’s net assets of $9.8 million or PBT of $1.4 million.
- No waivers from financiers or no default under SIV’s credit facilities, that cannot be resolved within 10 business days.
- no prosecution, litigation or other proceeding into ASIC’s investigation of GoGetta business results or any result that incurs losses of $10 million or more.
- Customary conditions like shareholder approval, Financial Assistance Resolution by majorities, Court approval and no adverse events.
Besides these conditions, the customary exclusivity provisions are also invoked. Breach of the conditions may result in SIV to pay ~ $1.18 million to Next Capital.
Timeline of the SIA (Source: Company’s report)
Silver Chef has received an extension of its existing conditional waivers from its financiers in relation to a breach of its debt covenants as at 30 June 2018.
Financial and Trading Update of SIV: In February 2019, SIV released its 1H19 results and stated that it had incurred a Statutory Net Loss after tax of $11.7 million.
1H19 financial highlights of SIV (Source: Company’s report)
Trading Update: Originations in the second half have continued to be constrained to those that can be funded from available cash flow, posing a threat to operating environment and the near-term financial outlook. The Company continues to meet its targets with the GoGetta asset realisation program within excess of $140 million cash generated since commencement. The Company’s Hospitality business continues to generate over $10 million on average per month operating cash flow after paying operating costs.
The Company has executed the $5 million (annualised) cost out program in the second half. However, it is incurring significant one-off costs associated with the Capital Management Plan.
SIV is currently trading at A$0.665 on 8 July 2019 (2:13 PM AEST).