Second Cup takeover appears doomed

Cara Operations' takeover bid for the Second Cup coffee shop chain appears doomed after a major stockholder said today that owners of half the shares want a sweeter offer.

The Toronto Star
January 9, 2002

Second Cup takeover appears doomed
Many shareholders want to hold out for a better offer, source says
Canadian Press

Cara Operations' takeover bid for the Second Cup coffee shop chain appears doomed after a major stockholder said today that owners of half the shares want a sweeter offer.

The $42-million bid by Cara (TSE: CAO) , which owns Harvey's, Swiss Chalet and Kelsey's restaurants - as well as 39 per cent of Second Cup (TSE: SKL) - expires Thursday at 5 p.m. ET.

"I am fully confident that Cara's $7.50 (a share) offer will not succeed," said Michael Bregman, whose family owns 24 per cent of Second Cup's shares.

Bregman said shareholders controlling 50 per cent of the stock have told him they won't tender to the bid.

Investors Group, which holds 17.4 per cent of the shares, is among those rejecting Cara's offer, he said.

Earlier Wednesday, Cara won a victory by having the Ontario securities regulator kill Second Cup's "poison-pill" defence - which would have meant issuing new shares to make a takeover prohibitively expensive.

The Ontario Securities Commission ruled "it is in the public interest" to scrap the shareholder rights plan.

"The decision … of the OSC does not change anything," Bregman said. "The Cara offer will not be successful unless and until Cara decides to pay a fair and reasonable price for Second Cup."

In Wednesday trading, investors seemed to expect either a rival bid or a higher offer from Cara. Shortly after the ruling, Second Cup shares rose 17 cents to $8 - that's 50 cents above Cara's offer.

But no other bids have come through. Bregman continues to examine a possible bid, and rumours suggested others were sniffing at the coffee brewer.

The securities ruling followed hearings on the issue this week and means Second Cup's poison pill is no longer in place.

Cara (TSE:CAO) wants to take full management control of the coffee shop chain, which has about 400 outlets across Canada.

Gabe Tsampalieros, Cara's chief executive, welcomed the securities commission's ruling.

"Second Cup shareholders are now free to decide if they wish to tender their Second Cup common shares to our offer," he said in a release.

Cara, with 28,000 employees and more than $1.6 billion in sales at its restaurants and food operations, had said it would withdraw its offer for Second Cup if the poison pill was allowed to stand.

In an interview, Tsampalieros said Cara launched its initial bid last August to ensure Second Cup had one main shareholder working with it to reach its goals. The first bid was $7 apiece for three million shares, boosting its holding to about 70 per cent.

"If that's where we wind up, as opposed to 100 per cent, so be it," Tsampalieros said.

Second Cup has said the latest offer is still well below the $8.25 to $9.75 a share the company is worth based on a review by brokerage TD Securities.

Robert Haft, chairman of the special Second Cup committee examining the bid, said the ruling doesn't change the fact Cara's offer is below the valuation "and should be rejected by shareholders."

Bregman said he thinks Cara won't even be able to boost its holding to 50 per cent since shareholders can get more money for their shares on the open market.

Without any other bids on the table, though, a few shareholders may decide to tender their shares, said Bill Chisholm, an analyst with Dundee Securities.

During the OSC hearing Tuesday, Second Cup said two groups are interested in the company.

Rumours in the market Wednesday suggested Counsel Corp., an investment firm with holdings in information technology and health companies, and a former Cara board member, Paul Phelan, were considering bids.

Bregman, who made a proposal but not a formal offer to Second Cup's board to buy three million shares at $8.25, said he is reviewing "a number alternatives."

Any group wanting to make a bid for Second Cup faces several issues, Chisholm said. That includes the fact the group would have to deal with Cara as a major shareholder.

"If you own 60 per cent and Cara owns 40 per cent - you'd better be friendly," he said.

Tsampalieros also suggested Cara isn't looking at selling its shares if another offer comes in.

"This has been a long and arduous journey for us," he said. "We're buyers and not sellers at this point."


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