What if they make it thru? What can Fowler do?Even prior to Covid, they were already in trouble in terms of competition (Chuck's, etc), delivery (Sir is one of the few where alcohol sales were included in the royalty sales agreement, so delivery hurt that), higher min wage, and some struggling brands (Canyon).
Then Covid hits, making the situation worse. At the Sir Corp level, free cash flow (including payment to the Fund) had been worsening from -$1.2mm in 2018, to -$7.9mm in 2019 and YTD, -$14.9mm. Historically, SIR has been reasonably well run, and was free cash generative prior to 2018. They have long tenured banking relationships, hence the willingness of creditors to waive covenants (but really, what else are they going to do right now).
Normally with this backdrop, i wouldn't give it a second glance, but at $1.43 per share, what are we paying for?
The market cap of the fund is $11.7 million, an almost laughable figure, considering just the value of the SIR Loan (AIF lays this out - use of IPO proceeds a long time ago) and associated interest (not currently being paid, but being accrued). It is clear that Covid is going to cause massive consolidation among the eat-in dining space, a process already started. If Fowler can make it thru the next couple of quarters, he potentially benefits from the consolidation.
Take a look at the Jack's locations. Dundas and Yonge, Square One, Front and York, etc. in many, the Scaddabush is nearby. If things can open back up, they will gain traffic just based on location and reduced supply of competitors. there are some poor locales too, but for the most part, he is pretty good at choosing good locations.
The SIR Loan of $40,000,000 bears interest at 7.5% per annum, is due October 12, 2044 and is collateralized by a general security agreement covering substantially all of the assets of SIR and its subsidiaries in Canada. It is currently marked down to $23.5 million or so, but i believe SIR still mandated to pay $3 million per annum to the FUND, so $750k per quarter.
Does Fowler have any flexibility assuming this COVID passes in six months and he is still solvent? SIR has never FRANCHISED any of its locations, under the assumption that they wanted to maintain quality standards for consumers. I think that gets thrown out the window post COVID, and with the longevity and brand awareness of Jack Astors, could this be an additional source of liquidity? YES. There aren't that many restaurants under the corporate umbrella. Surely, with SPACs and private equity sitting on bundles of available liquidity, would these third parties step into the restaurant space post COVID to pick among the bones? Like they did post 2008/2009 financial crisis in real estate? Could Fowler partner with a third party VC and convert the buisness into a franchising model where third party capital and Fowler's brands are used to pick up closed locations of other restaurants that didn't make it?
I don't know the answer but at a $10mm market cap for SIR ROYALTY, it may go to Zero but if they make it thru, even a $30mm market cap in a couple of years is interesting. And if they can convert to a franchising model and rightsize restaurant square footage, it may be a lot higher than that...now is the time to be noodling eventualities because there is NADA interest in any of these companies...
Good luck.