Play for Second Cup leaves bitter aftertaste

“There’s no question they knew it was a very weak moment personally,” he says. “I wouldn’t do that to anyone…“But neither my father nor I were comfortable with that. I’d rather leave a few dollars on the table and do the right thing.”

The Financial Post
January 14, 2003

Play for Second Cup leaves bitter aftertaste
Deirdre McMurdy

Michael Bregman is leaning back in a swivel chair, chatting about a recent cruise with his family and sipping coffee from a ceramic mug. It is Thursday afternoon, and the fact that he is embroiled in one of the nastiest corporate spats of recent times – a hostile takeover of Second Cup by Cara Foods that could be resolved by a a vote in a few hours – doesn’t seem to rattle him in the least.

“I’ve had an absolutely horrible time in the past year. I’m calm because things will be resolved one way or the other,” the 48-year-old businessman says with a shrug. “I’ve been so upset, so disappointed, I’ve parked the emotion now.”

Not all of it, perhaps.

Mr. Bregman’s eyes mist over as he talks about the death in July of his father, Louis, with whom he had a very close relationship. And there is more than a hint of residual bitterness as he describes how Cara – which owns Harvey’s, Swiss Chalet and Kelsey’s restaurants across Canada and holds 39 of Second Cup – launched its hostile takeover play for Second Cup.

Mr. Bregman acquired the specialty coffee retailer in 1988 and took it public in 1993. His family hold a 24% stake of the company.

Within days of his father’s death, Cara made its move. “There’s no question they knew it was a very weak moment personally,” he says. “I wouldn’t do that to anyone. But you know, what goes around, comes around.”

His emotional state wasn’t the only thing that was fragile. Second Cup stock was trading close to an all-time low of $6 a share.

“The company had been hard hit by an unsuccessful foray into the U.S. market and by the subsequent departure of Mr. Bregman’s long-time associate, Alton McEwen, as chief executive officer.

Growth was stagnant in an intensely competitive sector and so were earnings.

Second Cup’s board had voted to pay out $100-million in cash as a special dividend to mollify shareholders. At that point, says Mr. Bregman, it went from a “small cap play to a micro cap.”

Still, things were starting to look up. Mr. McEwen returned to the company and Mr. Bregman insists that Second Cup was on the cusp of a turnaround. In a battered equity market, he notes, the company wasn’t on investors’ radar screens and the changes weren’t yet reflected in valuations. “There were good reasons why the stock was down to $6 a share,” he explains. “And Cara knew there were equally good reasons why that wasn’t goin to be the case for long.”

Immediately after Cara made its initial offer of $7 a share for just three million shares (Cara increased that to $7.50 last month for all the shares), Second Cup’s directors did two things. They hired TD Securities to value the assets and they retained RBC Dominion Securities to solicit alternate bids for the company.

TD’s analysis pegged the value of the company at $8.25 to $9.75 a share – well above the level of Cara’s offer. But however attractive the investment to another party, Mr. Bregman says no one stepped forward because Cara made it known it would not co-operate with any other potential buyer. That meant that just 62% of Second Cup was on the block and 38% was in hostile hands.

Although he describes Cara’s actions as “a total shock,” Mr. Bregman also admits that a five-year standstill agreement with respect to control was coming to an end. Furthermore, Cara had previously approached his family with offers to buy out their share block at a premium. “They told us we were naive not to take their bid and run. They said the shareholders would never stand up for us if the tables were turned,” he recalls. “But neither my father nor I were comfortable with that. I’d rather leave a few dollars on the table and do the right thing.”

(Cara failed in its takeover bid Friday, saying it had increased its holding to to just 43% but extended the bid to Jan. 21.)

Such altruism notwithstanding, Mr. Bregman is also shrewd enough not to burn a roster of A-list institutional investors, including Investors Group, the largest domestic mutual fund company, in a market as small as Canada’s. Investors Group…shares.

There were plenty of other issues over which Mr. Bregman and Cara had long been at odds.

The rift between the two parties over Second Cup’s direction became so acute that Mr. Bregman withdrew from an active role in the company over “philosophical differences” three years ago. He says that his vision was to use the retail franchise network as a platform for a much boarder consumer-products company, while Cara viewed it as essentially another division of its operations. “Instead of continually butting heads, I thought it was better just to leave the scene,” he says.

And he had other irons in the fire. In 1995, he teamed up with Heather Reisman, CEO of Chapters/Indigo Books and Music in a bid to bring U.S, book retailer, Borders, to Canada. In part because of aggressive lobbying by Larry Stevenson, then CEO of Chapters, Ottawa rejected the plan.

As Second Cup board meetings became increasingly tense, Mr. Bregman’s attention turned to the booming high-tech sector. In July, 1999, at the peak of the tech-investor frenzy, he launched XDL Intervest, a high-tech venture capital fund, in partnership with Dennis Bennie, a long-time friend. Mr. Bennie had sold his stake in Delrina Computers to Symantec for $560-million in 1995 and was looking to expand his base of capital and talent.

Soon, Mr. Bregman and Mr. Bennie had raised $155-million from such high-profile investors as John Cassaday, CEO of Corus Entertainment, and Roger Martin, dean at the Rotman School of Management at the University of Toronto. “It was the easiest time to raise money and the worst time to invest it,” he says. “We thought we were being disciplined. But bad investments were inevitable in that climate: if you could give a decent Power Point, people…

The backlash from that boom is yet another reason why 2001 was so unkind to Mr. Bregman.

Over the past year, he and Mr. Bennie have had to fold a number of their fledgling ventures, leaving them with a core of 10. They are not investing in new projects. Their original investors have pulled back capital.

The projected horizon for returns on investment has moved from about two years to five: “The market has gone to the other extreme in becoming indiscriminately negative on techs,” he says. But, he adds, “We’re not just market victims. We’re responsible and accountable too. We can’t just shake all of this off and say it was bad timing.”

As the grand vision for XDL has been scaled back, his focus has returned to Second Cup and the fight for control of the company. He says that the ill will between Cara and other shareholders ensures that whatever the outcome, they can no longer work together.

On Friday, Mr. Bregman asked for a special meeting with Gabriel Tsampieros and Bernard Syron, Cara’s chief executive and chairman, respectively, from the coffee chain’s board.

“There is no room for directors who don’t want to see this company thrive,” he says. “Are they serving the Cara board or Second Cup? They have to decide.”

Mr. Bregman says he has learned some lessons over the past year that the vows to heed in the future. They include placing more trust in his instinct than in his analysis. He says he will also retain control over business situations in which he is involved: “I’m going to be a lot less co-dependent on my partners.”

After a year of emotional injury and physical injury (a resulting of training mishaps), he’s now even talking of competing in another Iron Man triathlon. He also promises a slower personal pace to spend more time with his four teenagers.

And to savour that Second Cup.


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