A&W plans income trust offering

A&W Food Services of Canada Inc., operator of 585 fast-food outlets across the country, plans to go public next month by selling up to $100-million of units in an income trust. The offering reflects the fact that trusts have been on fire for the past year, as income-hungry investors scarf down products that offer richer yields than the low interest rates paid by government bonds and GICs.

The Globe and Mail
January 9, 2002

A&W plans income trust offering
Andrew Willis

So that's a Teenburger, a large root beer, and would you like some shares with that?

A&W Food Services of Canada Inc., operator of 585 fast-food outlets across the country, plans to go public next month by selling up to $100-million of units in an income trust. The offering reflects the fact that trusts have been on fire for the past year, as income-hungry investors scarf down products that offer richer yields than the low interest rates paid by government bonds and GICs.

A&W's trust offering has roots in a 1995 management-led buyout of the chain's Canadian operations, then owned by Unilever PLC. At the time, the executives were backed by four institutional investors. In March, 2001, the managers borrowed money to buy out their backers. Proceeds from the new offering will be used to retire those loans.

"The trust combines a great balance of eliminating our debt, while allowing management to control the direction of the business," said Jeff Mooney, A&W's chairman and chief executive officer. "The trust will offer a strong combination of stable revenue and growth."

A&W's story over the past six years is one of steady, but not spectacular, growth, which investment bankers said made the company more suited to a cash-generating income trust than a traditional, growth-oriented stock offering.

When Mr. Mooney and his colleagues purchased Vancouver-based A&W in 1995, the chain had 470 outlets and annual sales of about $300-million. Six years later, there are 585 outlets, with most of the growth coming in shopping malls; A&W sold $433-million of burgers and root beer last year.

RBC Dominion Securities Inc. will lead the offering, which is called the A&W Revenue Royalties Income Fund, and the deal is expected to close next month. The investment dealer hopes to raise $50-million to $100-million for A&W. Units in the A&W fund will be sold for $10 each.

In return for their cash, A&W will pay investors a royalty equal to 3 per cent of its annual sales, which would have meant $13-million in cash flow for the trust last year. So if A&W sold $100-million of units, investors would have earned $1.30 a unit, or 13 per cent. Under the terms of the deal, A&W Food Services will also end up with 25 per cent of the trust units.

A&W's revenue comes from up-front and annual franchise fees at its outlets. Opening a store means paying a $50,000 fee, then cutting head office a monthly cheque equal to about 2.5 per cent of sales. A&W also takes a slice of the price that franchisees pay for equipment and supplies.

If more A&W restaurants open — the chain has added about 20 outlets each year since 1995 — or Canadians start eating more Teen-burgers and onion rings, then the royalty will grow.

Canadians ate more than $11-billion of fast food in 2000, a 5-per-cent increase from the previous year, and industry experts see this as a sustainable growth rate.

The A&W chain ranks as the No. 7 player in the fast-food sector, with a steady 5-per-cent market share. Mr. Mooney said the chain has enjoyed stronger growth than rival burger chains.

McDonald's Restaurants of Canada Ltd. is the country's dominant chain, with 1,167 restaurants and $2.1-billion in sales that command 28 per cent of the market. Cara Operations Ltd., owners of Harvey's and Swiss Chalet, and Tricon Global Restaurants Inc., parent to KFC, Pizza Hut and Taco
Bell, are the only other competitors in the sector with double-digit share.

Subway Franchise Systems of Canada Ltd., Wendy's Restaurants of Canada Inc. and Burger King Restaurants of Canada Inc. boast slightly larger sales than A&W.

Fast food in Canada
Market shares in fiscal year*

1. McDonalds 28.4%
2. Cara Operations** 21.7
3. Tricon Global*** 21.7
4. Subway 6.5
5. Burger King 5.8
6. Wendy's 5.5
7. A&W 5.2
8. Dairy Queen 4.3
9. St-Hubert 3.1
10. Pizza Pizza 2.1

-*Fiscal year-end varies by chain
-Harvey's, Swiss Chalet and Cara's other properties
-
*KFC, Pizza Hut and Taco Bell


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