NEW YORK, Feb. 19, 2014 /CNW Telbec/ - Adam Wyden of ADW Capital Partners, L.P. ("ADW Capital"), a New York City based hedge fund, transmitted yesterday a letter to the board of directors and management of Imvescor Restaurant Group Inc. (the "Company") (TSX: IRG) seeking a review of the current dividend policy for the Company. ADW Capital along with its affiliates hold approximately 4% of the Company on a non-diluted basis.
Found below is the full text of Mr. Wyden's letter to the Company:
February 18, 2014
Imvescor Restaurant Group Inc.
c/o Denis Richard, President and Chief Executive Officer
774 Main Street, Suite 400
Dear Board and Management of Imvescor Restaurant Group, Inc.,
ADW Capital Partners L.P. and its affiliates currently own approximately 4.0% of the outstanding common stock of Imvescor Restaurant Group Inc. ("Imvescor" or the "Company") and additional shares upon conversion of warrants, making us one of the Company's largest shareholders. We would like to commend the board and management on the beginning of a successful turnaround of the Company. We are also excited about the return of Denis Richard as CEO. However, now that the Company has proven its ability to generate consistent free cash flow, we believe it is time for Imvescor to reinstate its dividend to reward patient shareholders and to ensure financial discipline. We have come to this conclusion for several reasons:
The Company has strong recurring cash flow TODAY:
While the market responded poorly to Imvescor's Q4 2013 earnings release on January 24, we were impressed by the recurring cash flows Imvescor generated. Though Imvescor reported Adjusted EBITDA of $14.6 million for 2013, we believe recurring EBITDA was actually much higher. Legal fees of $1.8 million and lease exit costs of $1.4 million added up to $3.2 million in 2013, almost twice the average for the past three years of $1.7 million and much higher than 2012's $1.1 million. If we accept the $1.7 million figure as the recurring level of costs, recurring 2013 EBITDA for the Company was closer to $16.1 million. In all likelihood as operations normalize, we believe this number should approximate $500k to $800k (almost $2.5 million in savings from current levels). Adding in the $2 million of incremental EBITDA that can be expected from the recent Commensal acquisition and additional retail sales, and Imvescor should generate at LEAST $18.1 million in EBITDA going forward. If we are to reverse the recent stock based compensation (which is non-cash) the number is closer to $19 million.
At $18.1 million in EBITDA, Imvescor is left with around $12 million in levered free cash flow. We believe over time Imvescor should pay out about 85 percent of its free cash flow to shareholders, implying approximately $10.5 million in annual dividends. At 53 million diluted shares outstanding, the suggested dividend would be around 20 cents per share.
Peers appear to be valued on dividend yield:
Imvescor's four closest public comps each pay significant dividends and investors have rewarded them for it. A&W Revenue Royalties Income Fund (AW.UN), Boston Pizza Royalties Income Fund (BPF.UN), Keg Royalties Income Fund (KEG.UN), and Pizza Pizza Royalty Corp. (PZA) each trade at dividend yields of 5.0%-6.0%. If Imvescor were to pay an annual dividend of 20 cents per share, such a dividend yield should produce a valuation range of $3.00 to $4.00 per share, substantially higher than Imvescor's current stock price of $1.90.
The Company is underlevered and mispriced:
Imvescor is well-capitalized considering the Company's reliable franchise revenues and low capital expenditures. While we are open to opportunistic/transformational acquisitions like that of Commensal at attractive multiples (2x - 3x Pro Forma EBITDA), we believe Imvescor should not set aside cash for M&A. Rather, if the Company's cash cannot cover an acquisition, the Company should take on additional debt given the attractiveness of the transaction relative to its market value. We believe that taking on debt will command discipline out of the Company's management team and only allow them to pursue deals that are truly accretive (low multiple - 2x - 3x).
On a side note, we believe re-instating a dividend will give the market confidence in the Company's ability to generate consistent and recurring free cash flow and reward it with a substantially higher multiple as the peer group indicates. We believe this will provide a currency for future accretive M&A, open the Company up to higher multiple deals (when stock price reflects full fair value), and offer an alternative to using leverage.
We believe the Company has significant avenues for internal growth going forward that are not substantially capital intensive: a return to unit growth at Baton Rouge, a successful rollout of the Scores Express concept, the introduction of additional SKU's in the retail segment, and most importantly, the massive revenue opportunity from in-sourcing the franchise system supply-chain with Commensal.
Currently the Company has approximately $400 million of system-wide sales. The Commensal acquisition provides the opportunity for our franchisees to purchase their food products directly from the Company. We believe this ensures quality control for the Company and offers the opportunity for our franchisees' to lower their cost of goods. For illustration purposes, if the Company was able to replace a third-party as the primary supplier of $50 million of the franchisees' food costs at a 15 percent EBITDA margin that would lead to $7.5 million of incremental EBITDA (far in excess of the Company's projections).
It is noteworthy that the Company's G&A expenses approach the same levels of MTY Food Group - a company with twice the revenues. We expect the Company over time to identify cost savings and grow into its cost base through the organic growth initiatives outlined above. If this is not possible, we believe it is in the best interest of shareholders to pursue efforts to successfully monetize some or all of the Company's assets to a larger strategic player who can better leverage their own cost structure.
We have worked constructively and successfully with small companies in the US and Canada over the last several years. We urge the board to take our recommendations seriously, and we look forward to hearing your response.
Adam D. Wyden
Managing Member of ADW Capital Partners, L.P.
Cautionary Statement Regarding Forward-Looking Statements
The information herein contains "forward-looking statements." Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as "may," "will," "expects," "believes," "anticipates," "plans," "estimates," "projects," "targets," "forecasts," "seeks," "could" or the negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe our objectives, plans or goals are forward-looking. Our forward-looking statements are based on our current intent, belief, expectations, estimates and projections regarding the Company and projections regarding the industry in which it operates. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to differ materially. Accordingly, you should not rely upon forward-looking statements as a prediction of actual results and actual results may vary materially from what is expressed in or indicated by the forward-looking statements. ADW Capital Partners does not assume any obligation to update any forward-looking statements contained in this press release, except as required by applicable law.
SOURCE: ADW Capital Partners, L.P.
For further information:
Adam D. Wyden, tel.: 646-684-4086