BURLINGTON, ON , Jan. 6, 2021 /CNW/ - SIR Corp. ("SIR") today provided an update on recent developments affecting SIR and the SIR Royalty Income Fund (TSX: SRV.UN) (the "Fund").
Potential Transaction
SIR announces that it recently made a non-binding proposal to the Fund with respect to a potential going private transaction of the Fund pursuant to which SIR would acquire all of the assets of the Fund at an effective price of $3.55 per Fund unit, payable in cash, and the Fund would wind up (the "Potential Transaction"). In addition, SIR proposes to assume certain ordinary course liabilities of the Fund. The trustees of the Fund have not approved the terms of any such transaction.
SIR has advised the Fund's trustees that it is considering requisitioning a meeting of securityholders of the Fund if the Fund's trustees do not wish to call a meeting to enable the Fund's securityholders to consider SIR's proposal. SIR does not consider this proposal to be hostile but, recognizing the difficult position facing both SIR and the Fund, believes that the Fund's unitholders should have the opportunity to consider its proposal.
Given the impact of the COVID-19 pandemic and the uncertainty facing unitholders of the Fund, SIR approached the Fund in late December 2020 to discuss the Potential Transaction. The $3.55 cash proposal follows several months of SIR unsuccessfully seeking to come to terms with the Fund's independent trustees on the terms of an all-stock transaction. The parties could not come to terms on the issue of relative values. SIR has received indicative financing terms to fund the Potential Transaction and is currently working with potential funding partners to finalize terms. There can be no assurances that such funding or the Potential Transaction will materialize on terms satisfactory to SIR.
If the Potential Transaction were to materialize, the price of $3.55 per Fund unit represents a premium of 37% to the three-month volume weighted average price of the Fund units. While $3.55 represents a slight discount to the closing market price of $3.70 on January 5, 2021 , the latter price represented a significant spike in recent trading prices for reasons unknown to SIR. If it were to proceed, the Potential Transaction would require an accompanying independent valuation of the Fund units.
SIR believes that $3.55 per Fund unit would represent a full and fair value for the Fund units given the current business environment, and that the completion of the Potential Transaction would give Fund unitholders an immediate liquidity option while removing the constraints and demands on SIR imposed by the current royalty structure.
If the Potential Transaction is not completed, SIR believes that the timing of any resumption of monthly distributions is uncertain. Any such distributions would have to be both fiscally prudent and permitted by SIR's senior lender and other applicable creditors, and are unlikely to occur in the medium term. In addition, the Fund would need to reassess appropriate distribution levels and in SIR's view it is not reasonable to expect that the Fund would be able to resume distributions consistent with the most recent distribution declared in March 2020.
Business Update
In addition to the above, SIR announced the following business developments:
- Effective January 8, 2021 , SIR will permanently close its Canyon Creek location in the Square One Shopping Centre in Mississauga, Ontario and its Canyon Creek location in Scarborough, Ontario , as a result of the negative impact of the COVID-19 pandemic.
- As previously disclosed on December 21, 2020 , SIR and its lenders have entered into amended credit agreements providing extensions to existing waivers, and SIR, the Fund and the SIR Royalty Limited Partnership (the "Partnership") have extended their existing waiver and deferral agreements, in each case until March 31, 2021 . There can be no assurance that SIR will receive additional waivers or remain in compliance in the future.
- SIR has previously advised the Fund that its ability to meet its obligations for the next 12 to 18 months is dependent on its ability to obtain increased and extended financing through further amendments to its credit agreement and/or other sources. There can be no assurance that such funding will be available.
- On December 21, 2020 , the Province of Ontario implemented a province-wide lockdown, which permits only take-out and delivery at all of SIR's Ontario -based restaurants. Notwithstanding the province-wide lockdown, even if and when re-opening is permitted, there will remain a risk of continuing restrictions on in-restaurant dining.
- SIR continues to work with its lenders to secure financing support, and with its suppliers to secure extended credit terms, including negotiations with its landlords over the terms of its leases, as it manages through this uncertain period.
- While the Canada Emergency Wage Subsidy ("CEWS") program continues to provide SIR with material assistance, SIR's ability to access the Canada Emergency Rent Subsidy ("CERS") is very limited.
- Given that the Fund and the Partnership have been accruing but not receiving royalties (and interest on the SIR Loan) since March 2020 , both the dollar value and aging of the receivables from SIR have been growing. Given uncertainty around repayment due to extensive and extended restaurant restrictions and the recently extended deferral agreement with SIR's senior lender, an increased allowance for doubtful accounts on these SIR receivables at year end would be reasonable to expect. Also, as a result of royalties being accrued in the Partnership and interest on the SIR Loan being accrued in the Fund, a SIFT tax liability has been created at the Fund level. As payment of these amounts has been deferred, SIR estimates that the Fund will be liable to pay tax on income it has not received and does not have an immediate expectation of receiving. This situation would be expected to continue as long as these interest and royalty payments continue to be deferred. SIR estimates the current magnitude of this tax liability as at December 31, 2020 to be on the order of $400,000 to $700,000 , assuming that the Fund makes a significant provision for doubtful accounts as at the year end.
- In SIR's view, there is no assurance that the Fund will not have a going concern note in its financial statements for the year ended December 31, 2020 . SIR currently has a similar note in its own financial statements.
About SIR Corp.
SIR Corp. ("SIR") is a privately held Canadian corporation that owns a portfolio of restaurants in Canada . SIR's Concept brands include: Jack Astor's Bar and Grill®, Scaddabush Italian Kitchen & Bar® and Canyon Creek®. SIR also operates one-of-a-kind "Signature" brands including Reds® Wine Tavern, Reds® Midtown Tavern, Reds® Square One and The Loose Moose®. All trademarks related to the Concept and Signature brands noted above are used by SIR under a License and Royalty Agreement with SIR Royalty Limited Partnership. SIR also owns two Duke's Refresher® & Bar locations in downtown Toronto , and one seasonal Signature restaurant, Abbey's Bakehouse®, which are currently not in consideration to be part of the Royalty Pool. For more information on SIR Corp. or the SIR Royalty Income Fund, please visit www.sircorp.com .
About SIR Royalty Income Fund
The Fund is a trust governed by the laws of the province of Ontario that indirectly has interests in the trademarks used by SIR.
Caution concerning forward-looking statements
Certain statements contained in this report, or incorporated herein by reference, including the information set forth as to the future financial or operating performance of the Fund or SIR, that are not current or historical factual statements may constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning the objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of the Fund, the SIR Holdings Trust (the "Trust"), the Partnership, SIR, the SIR Restaurants or industry results, are forward-looking statements. The words "may", "will", "should", "would", "expect", "believe", "plan", "anticipate", "intend", "estimate" and other similar terminology and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Fund, the Trust, the Partnership, SIR, the SIR Restaurants or industry results, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. These statements reflect Management's current expectations, estimates and projections regarding future events and operating performance and speak only as of the date of this document. Readers should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Risks related to forward-looking statements include, among other things, challenges presented by a number of factors, including: the impact of the COVID-19 pandemic; market conditions at the time of this filing; competition; changes in demographic trends; weather; changing consumer preferences and discretionary spending patterns; changes in consumer confidence; changes in national and local business and economic conditions; pandemics or other material outbreaks of disease or safety issues affecting humans or animals or food products; changes in tariffs and international trade; changes in foreign exchange; changes in availability of credit; legal proceedings and challenges to intellectual property rights; dependence of the Fund on the financial condition of SIR; legislation and governmental regulation, including the cost and/or availability of labour as it relates to changes in minimum wage rates or other changes to labour legislation and forced closures or other limitations on the operation of restaurants and bars; changes to existing government support for business in response to the impact of the COVID-19 pandemic, laws affecting the sale and use of alcohol (including availability and enforcement); changes in cannabis laws; accounting policies and practices; and the results of operations and financial condition of SIR. The foregoing list of factors is not exhaustive. Many of these issues can affect the Fund's or SIR's actual results and could cause their actual results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, the Fund or SIR. There can be no assurance that SIR will remain compliant in the future with all of its financial covenants under the Credit Agreement and imposed by the lender. There can be no assurance that the Potential Transaction will proceed or be completed, and if it does not there can be no assurance that Fund distributions will resume or as to the level or timing thereof. Given these uncertainties, readers are cautioned that forward-looking statements are not guarantees of future performance and should not place undue reliance on them. Forward-looking statements are based on Management's current plans, estimates, projections, beliefs and opinions, and the Fund and SIR do not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change, except as expressly required by applicable securities laws.
All of the forward-looking statements made herein are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Fund or SIR.
SOURCE SIR Royalty Income Fund
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