Strongco to sell US subsidiary, cut staff and defer exec pay
Strongco has announced that it intends to pursue the sale of 100 per cent of the shares of Chadwick-BaRoss for approximately US$12.75 million to ISH Capital, a minority shareholder. The transaction would be effected by way of ISH Capital’s purchase from Strongco of all of the outstanding shares of Strongco’s wholly-owned U.S. subsidiary, Strongco USA, which owns 100 per cent of the shares of Chadwick-BaRoss. In addition to the proposed sale of Chadwick-BaRoss, the reduction in staffing and general expense control measures, the company has adopted a salary deferral program for its senior leadership team and directors to further improve cash flow.
Over the past several years, Strongco has made significant investments in the business through building new branches and investing heavily in a new ERP system, with the anticipation of higher growth in sales and service revenues; however, due to the ongoing challenging economic conditions in many of the regions in which the company operates, this growth has not been realized. These investments, combined with lower revenues and margins, have put significant strain on the company’s earnings and cash flow. Cash flow from operations was negative in 2014 & 2015 and several times over the past two years the company has breached financial covenants under its lending agreements with its bank and equipment finance companies. To compensate for the reduced cash flow, current bank operating lines have been fully utilized and trade accounts payable have been extended.
While revenues have been more stable in the first half of 2016, gross margins were down noticeably. Actions taken to reduce expenses and interest, and improve operational effectiveness, are beginning to impact on cash flow in a positive way; however the current financial situation is no longer sustainable and the company cannot wait to realize the results of these actions or for markets to recover. Given the company’s current financial position, Management and the board have determined that an injection of additional new cash is essential and the sale of Strongco’s U.S. subsidiary, Chadwick-BaRoss, is potentially the best means to provide additional financial resources in the shorter term until market conditions improve. The company obtained waivers from its bank and certain of its equipment finance companies in Canada in respect of a breach as at June 30, 2016, of its interest coverage ratio contained in its lending arrangements, and the company covenanted to complete the sale of Chadwick-BaRoss. The sale of Chadwick-BaRoss at a fair price would allow Strongco to generate liquidity, reduce finance expenses and improve its reputation with both suppliers and customers.
Strongco understands that ISH Capital, together with its affiliates, hold in excess of 20 per cent of the outstanding common shares of Strongco. Accordingly, ISH Capital is a “related party” and the transaction is a “related party transaction” within the meaning of Multilateral Instrument 61-101 (“MI 61-101”). MI 61-101 requires the company, in the absence of an exemption, to obtain a formal valuation for, and minority approval of, the transaction. The independent directors of Strongco’s board have determined that an exemption is available from the formal valuation and minority shareholder approval requirements due to financial hardship.
“I remain optimistic that the goal of getting our Canadian operations back on stable footings for the future is within reach,” commented Robert Beutel, executive chairman of Strongco. “The disposition of Chadwick-BaRoss would provide us the funds to assist our recovery. With the advantage of hindsight our previous expansion was poorly timed, but we are refocusing to create the most value for our customers, employees and our shareholders.”
The proposed closing date for the transaction is on or about Sept. 9, 2016, or such other date as may be mutually agreed to by the parties. The transaction remains subject to, among other matters, finalizing and executing a definitive purchase and sale agreement, satisfactory completion by ISH Capital of its due diligence investigations, obtaining certain third party approvals and final approval of the independent directors of Strongco’s Board. The purchase price also remains subject to satisfactory completion by ISH Capital of its due diligence investigations. The proceeds from the completion of the transaction would be used by Strongco to reduce its indebtedness under its credit facility, pay trade payables and fund its operations.
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