Mega Brands to raise $75-million with convertible debt
2008-08-11 09:21 ET - News Release
Mr. Marc Bertrand reports
MEGA BRANDS TO ISSUE $75 MILLION OF CONVERTIBLE DEBENTURES
Mega Brands Inc. has entered into an agreement with Fairfax Financial Holdings Ltd.; Chiefswood Holdings Ltd.; the Owners Fund; and Victor J. Bertrand Sr., the founder and chairman of the board of directors of the corporation, to issue by way of private placement $75-million of senior unsecured convertible debentures maturing on Aug. 31, 2013, with Fairfax investing $64-million and Mr. Bertrand investing $7-million in the offering. The proceeds of the offering will be used as working capital and for general corporate purposes. The offering is expected to close on Aug. 19, 2008, and is subject to certain closing conditions, including the approval of the Toronto Stock Exchange and lender's approval for certain amendments to the corporation's senior secured credit facilities.
"We are pleased to have a new investor with a record of creating shareholder value and corporate growth and the continued support of Victor J. Bertrand Sr.," said Marc Bertrand, president and chief executive officer of the corporation. "This investment provides Mega Brands with additional liquidity to execute its business plan. In addition, we now have greater flexibility to complete the continuation of our value-enhancement plan."
"We greatly appreciate to have the opportunity to invest in a world-class company like Mega Brands, one of the world's leading toy brands," said Prem Watsa, Fairfax's chief executive officer. "Under the leadership and creative direction of the founding Bertrand family, the company has prospered for over 40 years and we look forward to the future."
"We are impressed with Mega Brands ability to grow its business and develop a worldwide brand," commented Robert Krembil of Chiefswood.
"With a strong presence in some of the world's leading retailers and a revitalized balance sheet with new shareholders, I am pleased to make this investment," added Irwin Rotenberg of Lissom Investment Management Inc., investment manager of the Owners Fund.
Description of the debentures
The debentures will bear interest at a rate of 8 per cent payable semi-annually in arrears and will be convertible at the option of the holder at any time prior to the maturity date based on a conversion price equal to approximately $3.19 per common share, subject to customary anti-dilution adjustments. The debentures will be convertible into 23,512,500 common shares, representing 39 per cent of the common shares of the corporation on an as converted basis.
Assuming full conversion of the debentures to be issued to it, Fairfax would hold 20,064,000 common shares or 35.4 per cent of the outstanding shares of the corporation and such a conversion may have a material effect on control. Following the closing of the offering, Fairfax will be entitled to nominate one person to the board.
Assuming full conversion of the debentures to be issued to him, Mr. Bertrand would hold an additional 2,194,500 common shares, which, with his current holding, will represent 11 per cent of the outstanding shares of the corporation. Mr. Bertrand currently holds 4,415,711 common shares representing approximately 12 per cent of the common shares of the corporation. Each of Chiefswood and Owner will obtain, upon full conversion of the debentures to be issued to them, 627,000 common shares, or approximately 1 per cent of the outstanding shares of the corporation.
In connection with the offering, Mr. Bertrand and Fairfax have entered into a standstill agreement pursuant to which Mr. Bertrand has agreed not to transfer any common shares of the corporation until Fairfax owns less than 12 per cent of the outstanding common shares on a fully diluted basis.
On maturity and under certain conditions, the corporation may elect to satisfy its obligation to repay the principal amount of the debentures by issuing common shares for a price per share equal to 95 per cent of the weighted average trading price of the common shares on the TSX for the 20 consecutive trading days ending five trading days preceding the maturity date.
In the event of a change of control involving cash consideration paid to the shareholders of the corporation, holders of debentures may be entitled to receive up to an additional 20.9685 common shares per $1,000 principal amount of debentures held upon conversion (or up to a total of 1,572,638 common shares), calculated based on the effective date of the change-of-control transaction and the consideration paid per share. If the price per common share is greater than $20 or less than $2.99, no additional shares will be issued. In addition, upon the occurrence of a change of control, the corporation shall be required to make an offer for the repayment of the debentures at a price equal to 110 per cent of the principal amount of the debentures plus accrued and unpaid interest. Holders of debentures may also cause the corporation to make an offer for the repayment of their debentures at a price equal to 110 per cent of the principal amount of the debentures plus accrued and unpaid interest in the event that the corporation is delisted from the TSX or upon the occurrence of certain fundamental changes, including a change of control.
A majority of directors of the corporation, free from any interest in the offering and unrelated to the parties involved in the offering, has recommended proceeding with the offering. Based on the recommendation of these directors, their belief that the corporation is in serious financial difficulty due to inadequate liquidity in this period of high demand for working capital before the holiday season and their belief that the offering will considerably improve the corporation's financial situation, the board believes that the offering is reasonable in the circumstances.
As the number of common shares issuable pursuant to the conversion of the convertible debentures to be issued exceeds the number of securities issuable under the rules of the TSX without shareholder approval and the fact that the conversion of the debenture may have a material effect on control, the corporation is applying to the TSX for an exemption from the requirement to seek shareholder approval, as required pursuant to Section 607(g) of the TSX company manual, in accordance with Section 604(e) of the TSX company manual on the basis of the corporation's financial hardship.
In addition, due to the participation of issuer insiders in the offering, the offering is a related-party transaction for the purposes of Multilateral Instrument 61-101 and the corporation is relying on exemptions from the formal valuation and minority approval requirements of Multilateral Instrument 61-101, including based on a determination of financial hardship. A material change report will be filed less than 21 days before the closing date of the offering. This shorter period is reasonable and necessary in the circumstances as the corporation wishes to complete the offering in a timely manner.
BMO Capital Markets acted as exclusive placement agent and financial adviser to Mega Brands in connection with the offering.
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