Augustus Advisors, LLC (“Augustus”) today has released a letter to the
shareholders of Enercare Inc. (TSX:ECI) (“Enercare” or the “Company”)
outlining the interest of its affiliate, TPG Special Situations
Partners, LLC, in purchasing the Company on behalf of certain of its
affiliated investment funds (collectively, “TSSP”) and publicly
requesting that Enercare’s management and Board cooperate with TSSP to
enable TSSP to move forward to formulate an offer to purchase Enercare
at a significant premium to the current stock price for the benefit of
all shareholders.
Augustus is the investment manager of the Octavian Special Master Fund,
L.P. (“Octavian”). Octavian is the owner of the 6,823,965 common shares
of Enercare, representing 11.67 percent of the common shares. As
Octavian’s investment manager, Augustus currently controls the largest
single block of the Company’s stock.
In the letter (full text included in this press release), Augustus
states, “We believe that as the owner of Enercare, we can improve the
value of the business. As a result, we have discussed with Enercare’s
management and the Board of Directors (the ‘Board’) TSSP’s interest in
acquiring Enercare at a significant premium to the current stock price
in a transaction that would maximize value to Enercare’s current
shareholders.”
The letter states that management has resisted taking the steps
necessary to move forward with an offer to shareholders. TSSP first
approached Enercare’s management nearly a year ago, and made its
interest in the Company and its intentions clear at that time. “We
wanted to work with management and the Board to propose a highly
attractive acquisition transaction that would maximize value to
shareholders.” In four subsequent discussions, TSSP expressed its
interest in a collaboration for shareholder value, culminating in a
formal Letter of Indication (“LOI”), sent to the Board on May 28, 2014,
again expressing interest in purchasing the Company at an attractive
price – $13.50-15.00/share, or a premium of
20-33 percent of the stock price at that time – and again stating the
desire to collaborate with the Board and management to develop a
transaction structure approved by Enercare and supported by the Board.
As noted in the letter, “To date, disappointingly, the Company’s Board
has not been receptive to pursuing a transaction with TSSP.” TSSP asked
in the LOI for access to non-public information, for a four-week due
diligence period and offered to enter into a confidentiality agreement.
The intent was to complete diligence regarding Enercare and to firm-up
financing sources so that TSSP could make a binding offer for Enercare.
The Augustus letter tells shareholders, “Enercare has more value in the
hands of a private owner. This is reflected in the premium we are
willing to pay to acquire the business. We believe, as a shareholder of
Enercare, that it is in your best interest that you have the opportunity
to evaluate an offer from TSSP. We believe it is wrong for the Board to
withhold their cooperation. Without their cooperation, we cannot
complete the diligence necessary to make a binding offer to you. Without
the Board’s cooperation, this offer will never see the light of day and
you will not have the opportunity to gain a very attractive return on
your Enercare investment.”
Augustus is electing to cease to file reports under Part 4 of National
Instrument 62-103 – The Early Warning System and Related Take-Over
Bid and Insider Reporting Issues. TSSP is seeking the cooperation of
the Company’s Board to obtain access to the Company’s information so
that it may complete its diligence and confirm its financing and then
proceed with an offer to acquire the common shares of Enercare not owned
by Octavian. However, if the Board does not agree to move forward with
TSSP, it is unlikely that Octavian will remain a long term holder of a
passive ownership position in the Company.
Augustus may be considered to be acting jointly and in concert with TSSP
and Octavian. The issuance of this news release is not an admission that
any party named herein owns or controls any of the securities described
in this news release or is a joint actor with any other entity named in
this news release.
Augustus Advisors, LLC
301 Commerce Street, Suite 3300
Forth
Worth, TX 76102
USA
The full text of the letter to Enercare shareholders follows:
AUGUSTUS ADVISORS, LLC
301 Commerce Street, Suite 3300
Fort
Worth, TX 76102
USA
July 17, 2014
Dear Fellow Shareholder:
Augustus Advisors, LLC (“Augustus”) is the investment manager of the
Octavian Special Master Fund, L.P. (“Octavian”). Octavian is the owner
of the 6,823,965 common shares of Enercare Inc. (“Enercare” or the
“Company”), representing 11.67 percent of the common shares. As
Octavian’s investment manager, we are responsible for making investment
decisions regarding these shares of Enercare and we control the largest
single block of the Company’s stock.
Our affiliate, TPG Special Situations Partners, LLC, is interested in
purchasing the Company on behalf of certain of its affiliated investment
funds (collectively, “TSSP”). We believe that as the owner of Enercare,
we can improve the value of the business. As a result, we have discussed
with Enercare’s management and the Board of Directors (the “Board”)
TSSP’s interest in acquiring Enercare at a significant premium to the
current stock price in a transaction that would maximize value to
Enercare’s current shareholders. However, to date, management and the
Board have not authorized the steps necessary for TSSP to move forward
with an offer to Enercare’s shareholders.
In August of last year, we met with Enercare’s management in Toronto and
made our intentions clear: we wanted to work with management and the
Board to propose a highly attractive acquisition transaction that would
maximize value to shareholders. In October, we met with Enercare’s CEO,
John MacDonald, and the chairman of the Board, Jim Pantelidis, in New
York and re-iterated our interest in collaborating toward an acquisition
transaction that would deliver significant value to Enercare’s
shareholders. We further discussed our interest and intentions with Mr.
Pantelidis on January 22, March 10, and on May 27, 2014. To date,
disappointingly, the Company’s Board has not been receptive to pursuing
a transaction with TSSP.
On May 28, 2014, TSSP sent a Letter of Indication (“LOI”) to the Board,
again expressing interest in purchasing the Company at an attractive
price – $13.50-15.00/share, or a premium of 20-33 percent of the stock
price at that time – and again stating the desire to collaborate with
the Board and management to develop a transaction structure approved by
Enercare and supported by the Board. To that end, TSSP asked in the LOI
for access to non-public information, for a four-week due diligence
period and offered to enter into a confidentiality agreement. The intent
was to complete diligence regarding Enercare and to firm-up financing
sources so that TSSP could make a binding offer for Enercare. The Board,
however, has still elected not to engage with us.
Enercare has more value in the hands of a private owner. This is
reflected in the premium we are willing to pay to acquire the business.
We believe, as a shareholder of Enercare, that it is in your best
interest that you have the opportunity to evaluate an offer from TSSP.
We believe it is wrong for the Board to withhold their cooperation.
Without their cooperation, we cannot complete the diligence necessary to
make a binding offer to you. Without the Board’s cooperation, this offer
will never see the light of day and you will not have the opportunity to
gain a very attractive return on your Enercare investment.
Many companies, like Enercare, reach a point in their development where
private owners can step in and achieve progress that a public company
cannot. Here are a few critical examples of what a private owner can do
for Enercare:
1) Time allocation: By its own account,
senior management spends 40 percent of its time on investor relations.
This is more than three times the global average for senior management
teams1 and strikes us as remarkably high.
Enercare is no longer simply managing a financial receivable from Direct
Energy. The sub-metering business, for instance, has a complex
operational footprint, greater headcount, and greater operating costs
than Enercare’s legacy business. Management should be spending more time
managing the business, not managing investors. As owners, we would
insist on that.
2) Capital allocation: As a public company,
Enercare is expected to maintain a recurring dividend, which we
recognize is a positive attribute of the stock to its current
shareholders. However, as a private company, Enercare would have more
flexibility to redirect capital and reinvest in the business at high
rates of return.
According to management, the unlevered return of originating a new
subscriber in all of its business segments is in excess of 17 percent.
To the extent Enercare is able to reinvest in its business by
originating additional sub-metering and rental subscribers at these
attractive unlevered unit economic returns, this would be a meaningfully
more accretive use of capital than returning it to shareholders at an
approximately 6 percent yield. The business has not had net subscriber
growth in the past 6 years, but has grown revenue through price
increases and change in mix. This strategy only works for so long, and
as owners we would bring to bear their operational expertise to
organically grow net subscriber counts in new and existing markets.
Additionally, the Company’s current origination strategy relies largely
on delegating water heater subscriber origination to Direct Energy,
whose commitment and ability to grow subscriber counts shouldn’t be
relied on, evidenced by a long history of subscriber declines.
3) Corporate finance: The Company is
determined to maintain its investment grade credit rating and is focused
on reducing the amount of debt in its capital structure; however,
maintaining a prudent amount of leverage would enhance the
Company’s value. Following the conversion of the Consumers’ Waterheater
Income Fund effective January 1, 2011, increased cash tax payments have
been the primary contributor to an over 25 percent decline in unlevered
free cash flow from 2010 to 2013. This is equivalent to over $25 million
of increased annual drag, which we expect to become even more pronounced
over time.
As owners of Enercare, we would have the flexibility to optimize the
Company’s capital structure to reduce tax drag and enhance equity
returns. In fact, based on specific discussions with their financiers,
we believe the Company’s existing senior debt could be replaced with
capital raised in the securitization markets, and achieve a lower
overall cost-of-capital.
4) Sub-metering: While the Company
highlights growth in sub-metering revenues, the vast majority of this
revenue does not have margins associated with it. As a result, this
business is not currently generating cash flow and may not generate
meaningful amounts of cash flow for some time. While there is an
installed base of 140,000 units as of the Company’s first quarter
disclosure, many of those units will not become paying customers for
years to come. Additionally, origination volumes have not increased
despite more sub-metering headcount and SG&A.
As owners of this business, we could take a long view of the
sub-metering opportunity, and would bring significant capital markets
and operational expertise to bear to more rapidly originate new
customers even if it did not generate cash flows in the short term.
Enercare does not have that flexibility today given its desire to
generate profitability in the short-term and the limitation on its
resources due to its dividend policy. Over time, we think we could
increase the value of Enercare by growing this business.
5) Public company costs: Based on our
analysis and public filings, we believe the Company spends somewhere
between $2 million to $4 million each year on public company costs. At
an approximately 6.5 percent capitalization rate (roughly where the
stock is trading today), this alone is worth between approximately $30
million to $60 million of value.
We believe we can offer an attractive price to Enercare’s shareholders
that cannot be obtained by preserving the status quo. However, before
proceeding with an offer, we need the cooperation of the Board to obtain
access to the Company’s information to complete diligence and confirm
financing. By refusing to engage with TSSP, the Board is denying you the
ability to consider for yourselves what we believe will be an attractive
opportunity to sell your shares of Enercare.
We hope that the Board can be persuaded that engaging with TSSP is in
the best interests of Enercare and its shareholders. However, if the
Board does not agree to move forward with TSSP, we are unlikely to be
long term holders of a passive ownership position in the Company.
We thank you for your consideration.
Sincerely,
Augustus Advisors, LLC
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