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A&W Revenue Royalties Income Fund (TSX: AW.UN) and A&W Food Services of Canada Inc. have announced a strategic combination to form a new publicly traded growth-focused quick service restaurant (QSR) franchisor, named A&W Food Services NewCo. This transformative transaction aims to provide unitholders with direct access to enhanced growth opportunities and increased capital appreciation potential, while maintaining attractive quarterly dividends.
Details of the Transaction
Under the current structure, unitholders' returns are primarily derived from same-store sales growth (SSSG) of existing restaurants within the royalty pool. This structure offers limited initial benefits from the addition of new restaurants. The Fund currently receives income from A&W Food Services in the form of royalties based on reported sales of A&W restaurants in the royalty pool, which are then distributed to unitholders as monthly payments.
The new structure, however, will integrate A&W Food Services with the Fund to create a simplified corporate entity that aligns more closely with global publicly listed QSR franchisors. This change is expected to offer several key benefits:
Full Participation in Growth
Unitholders will gain full participation in the growth and performance of the entire A&W business. This includes benefits from new restaurant openings, margin expansion through operating leverage and economies of scale, innovative concepts like Pret A Manger, and the retail root beer business. Despite these enhancements, A&W Food Services NewCo plans to maintain the current distribution levels through attractive quarterly dividends.
Share Price Upside Potential
With A&W Food Services' strong operational performance relative to its global peers, the new structure offers substantial share price upside potential. The significant value creation implied by current public trading valuations of global QSR peers positions A&W Food Services NewCo for robust market performance.
Enhanced Liquidity and Profile
The simplified corporate structure and growth mandate of A&W Food Services NewCo are expected to enhance liquidity and attract greater institutional investor interest and research analyst coverage. This increased visibility is anticipated to benefit all shareholders.
Greater Financial Flexibility
A&W Food Services NewCo will have increased financial flexibility to invest in growth opportunities and strategic initiatives. This flexibility will allow the company to optimize its balance sheet to leverage levels typical of publicly traded QSR peers, further supporting its growth objectives.
Unitholder Offer Details
Under the terms of the transaction, unitholders of the Fund (excluding A&W Food Services and its affiliates) have the option to receive:
- Cash of $37.00 per unit: This represents a 30% premium to the Fund's closing trading price on the TSX as of 19 July 19 2024.
- One common share in A&W Food Services NewCo: This option allows unitholders to participate directly in the future growth and performance of the new entity.
