Alliance Grain Traders Income Fund
TSX VENTURE : AGT.UN

June 17, 2009 08:07 ET

Alliance Grain Traders Income Fund Announces Transformational Acquisition and Conversion to a Dividend Paying Common Share Corporation

Conference Call at 11:00 a.m. EDT Wednesday, June 17, 2009

TORONTO, ONTARIO--(Marketwire - June 17, 2009) - Alliance Grain Traders Income Fund (TSX VENTURE:AGT.UN) ("Alliance Grain" or the "Fund") is pleased to announce that it has entered into an exclusive, non-binding letter of intent with the Arbel Group to combine the businesses, creating a leading processor and trader of pulses and specialty crops.

Overview of the Arbel Group

The Arbel Group has a 50-year operating history and has grown to become a leading processor of lentils and grains and the largest exporter of pulses in Turkey. Turkey provides an attractive base for the Arbel Group's operations with a population of over 70 million people and a GDP that has grown over 20% per year from 2002 to 2008. Turkey provides a gateway to North Africa, the Middle East and Europe, regions that have high per capita consumption of pulses. From its hub in Turkey, the Arbel Group currently exports to 52 countries in Asia, Africa, Europe and the Americas.

The Arbel Group operates state-of-the-art processing and production facilities in Mersin, Turkey. In 2002, the Arbel Group expanded its operations to include the production of pasta and has quickly grown to become the fourth largest pasta producer in the country. Turkey is the second largest exporter of pasta in the world after Italy and the Arbel Group is the top exporter of pasta in Turkey. For the fiscal year ended December 31, 2008, the Arbel Group had consolidated results in Turkish Lira, that when converted at the year end foreign exchange rate of 1.5123 per USD, would equal revenue of US$196.8 million, gross profit of US$33.7 million and EBITDA of US$25.1 million.

Background to the Transaction

Alliance Grain and the Arbel Group benefit from existing sourcing and selling relationships and a shared customer base. The principals of the Arbel Group, together with the management team of Alliance Grain, established Saskcan Pulse, a predecessor company to Alliance Grain. The Arbel Group provided capital, equipment, people and best operating practices to ensure the successful start of Saskcan Pulse. The principals of the Arbel Group currently own approximately 31% of the voting securities of the Fund on a fully diluted basis. This transaction will solidify the strong existing business relationships while providing a platform for new and attractive growth opportunities.

Transaction Rationale

The acquisition of the Arbel Group will significantly increase Alliance Grain's share of the international lentil market, further diversify its product offerings, product sources and customer base, and will nearly double the size of its current operations. Alliance Grain and the Arbel Group expect to see substantial benefits through combining proprietary processes, sourcing and selling relationships, and the customer bases of the two companies.

Through the transaction, Alliance Grain will have a stronger ability to service international customers as Arbel provides a global sourcing point for entry into North Africa, the Middle East and Western Europe. Alliance Grain will increase its warehousing, inventory and distribution points, thereby reducing transportation and timing issues associated with having products shipped from Australia and North America to these regions. By optimizing its distribution networks, management believes that higher margins will be achievable for the combined business.

The proposed transaction is expected to be immediately accretive to the Fund's earnings per unit.

"The combination with Arbel will provide significant opportunities to drive synergies and increase margins through continuous operational improvements, enhancement of existing relationships and achievement of freight, inventory and processing efficiencies" said Murad Al-Katib, Chairman, President and CEO of Alliance Grain. "Having a well-established presence in Turkey will enable Alliance to effectively service global markets by providing direct access to Western Europe, Africa and the Middle East. Pulse crops are experiencing strong fundamentals through increased consumption and planting trends and this transaction provides an excellent opportunity to capitalize on these trends."

"Together with Alliance Grain's current management team, we co-founded Saskcan Pulse in 2001. We provided substantial resources in those early days and as a key shareholder, we worked closely with the management team in building Alliance Grain's platform of operations", said Huseyin Arslan, CEO of the Arbel Group. "We believe that the next phase of growth for Alliance Grain can be achieved through a combination with the Arbel Group and we are excited to continue to play a role in the synergies and long-term growth opportunities as a key ongoing shareholder."

Summary of Terms

Under the terms of the letter of intent, the Fund proposes to acquire all of the issued and outstanding shares of the companies of the Arbel Group for a purchase price of CDN$104 million (US$93 million). The shareholders of Arbel will receive a mix of cash and Fund units at the election of Alliance Grain, such that the ownership of the Arbel Group shareholders at closing will be between a minimum of 31% and a maximum of 50% of the outstanding voting securities of the Fund immediately following the transaction. Alliance Grain is confident that it has sufficient resources on hand and access to debt capital to cover the cash requirements of the transaction and to fund the balance of the purchase price by issuing units of the Fund, and if necessary, a subordinated note, to shareholders of the Arbel Group. Units issued to the Arbel Group shareholders will be valued at the 20-day weighted average trading price ending June 16, 2009. The Arbel Group shareholders will place into escrow all of the units of the Fund which they receive pursuant to the proposed acquisition for a period of two years, with the right to release and sell 25% in each six month period.

As of March 31, 2009, the Arbel Group had cash of US$10.1 million, net working capital of US$42.7 million, operating debt of US$43.1 million and term debt of US$15.9 million.

The combined company would continue to be headquartered in Regina, Saskatchewan. The proposed acquisition is expected to close on or about the end of August, 2009.

Conditions of the Transaction

The shareholders of the Arbel Group include Huseyin Arslan, who is a trustee of the Fund and a significant unitholder of the Fund, and other members of his family. The proposed acquisition will be a "related party transaction" under the policies of the TSXV and the rules of the relevant securities regulators (Multilateral Instrument 61-101). Accordingly, a special committee of the board of trustees of the Fund was established to consider the proposed transaction, and an independent valuator was retained to prepare a formal valuation of the shares of the Arbel Group and to prepare a fairness opinion in respect of the proposed transaction. The Fund will seek the approval of the proposed transaction by its unitholders (other than unitholders who are also shareholders of the Arbel group or their affiliates) as per Multilateral Instrument 61-101, at a special meeting to be called later this year.

Completion of the proposed transaction will be subject to a number of conditions, including the completion of due diligence by Alliance Grain of the Arbel Group, negotiation and execution of definitive acquisition agreements, the delivery of the valuation report by the independent valuator, and other customary conditions and regulatory approvals.

Alliance Grain and the Arbel Group have agreed to work exclusively on a transaction until September 30, 2009 and Arbel agrees not to solicit any expressions of interest for the Arbel entities for this period. However, if the Arbel Group agrees to pursue an alternative transaction prior to signing of definitive transaction agreements with Alliance Grain, a break fee of US$3 million will be payable by the Arbel Group to Alliance Grain.

Management Team

The senior management team at Alliance Grain will continue to lead the combined business, with Mr. Murad Al-Katib acting as President and Chief Executive Officer. Mr. Huseyin Arslan will continue to act as a trustee of the Fund and will become the Executive Chairman of Alliance Grain. All other officers of Alliance Grain will continue in their existing positions. The Fund intends to operate Arbel Group with the existing Arbel Group management team. Conditional on closing, certain key officers of the Arbel Group will enter into satisfactory employment agreements for a period of 5 years plus a 5 year renewal option with confidentiality and non-compete agreements that survive for a period of 2 years if these individuals leave Alliance Grain.

Conversion to a Dividend Paying Corporation

In conjunction with the proposed transaction, Alliance Grain intends to reorganize its income trust structure into a growth oriented, dividend paying public corporation. Upon completion of the reorganization, Alliance Grain anticipates that it will pay a quarterly dividend which will be determined by the Board of Directors.

Subsequent to the Federal government's October 31st, 2006 announcement on tax policy relating to income trusts, the Fund has continuously reviewed its strategic objectives and all options available to it in respect thereof to ensure that its capital structure remains efficient and that unitholder value is being maximized. As a result of this analysis, the Fund believes that conversion to a corporation would be beneficial for the following reasons:

- as a "special investment flow-through trust", the Fund is subject to the Normal Growth Guidelines and, as a result, has restricted growth capacity that could limit the Fund's ability to act upon opportunities for growth and expansion.

- the new taxation rules on "special investment flow-through trusts" will remove the favourable tax treatment which the Fund has enjoyed beginning January 1, 2011, so that there will no longer be any tax advantage from using the income trust form;

- the decline in investor interest in the income trust sector has affected the trading price of the units, which increasingly limits the Fund's ability to efficiently raise capital; and

- the Fund's restrictions on non-resident ownership restrict the Fund from attracting foreign investors.

The Fund is developing the method and structure of the conversion with its advisers, details of which will be announced when they are settled. It is expected that the Fund will be converted into a corporation such that unitholders of the Fund will receive one common share of the successor corporation for each unit of the Fund held by them on the date of conversion. The Fund also intends to seek unitholder approval for the conversion. The proposed conversion is not conditional on the completion of the proposed acquisition or vice-versa.

Graduation to Toronto Stock Exchange

Alliance Grain intends to apply to graduate from the TSX Venture Exchange ("TSXV") to the Toronto Stock Exchange ("TSX"), to improve its profile and liquidity. Such graduation will be subject to the Fund meeting the listing and other requirements of the TSX. The conversion to a corporation and graduation to the TSX will be subject to unitholder approval.



Transaction at a Glance

Operating Metrics
The Arbel
Alliance Grain Group Pro Forma
Pulses & Specialty Crop
Processing Capacity (MT) 700,000 360,000 1,060,000
Pasta Capacity (MT) 0 140,000 140,000
Semolina Capacity (MT) 0 175,000 175,000

Pro Forma Revenue by Product
Lentils 57.5%
Split Peas 11.5%
Pasta 7.6%
Rice 7.1%
Whole Peas 2.9%
Chickpeas 2.8%
Beans 1.5%
Vegetable Oil 0.9%
Other 8.2%
--------------
Total 100.0%


Pro Forma Geographic Breakdown - Processing
Turkey 49.6%
Canada 39.3%
Australia 5.5%
United States 5.5%
--------------
Total 100.0%


Analyst Conference Call

Alliance Grain will host an Analyst Conference Call with Murad Al-Katib, Huseyin Arslan and Lori Ireland at 11:00 a.m. EDT on Wednesday, June 17, 2009. For local and international locations, please call 416-340-2217 and toll free in North America please call 1-866-696-5910, Passcode 2676061. A playback of this call will be available after 1:30 p.m. EDT Wednesday, June 17, 2009 and until 11:59 pm EDT Wednesday, June 24, 2009 by calling 416-695-5800 or 1-800-408-3053, Passcode 2266401. The presentation will be posted on Alliance Grain's website, www.alliancegraintraders.com.

About the Fund

The Fund is an income trust which derives its income from the operations of its operating subsidiary, Alliance Pulse Processors Inc. ("Alliance"). Alliance, on its own and through its subsidiaries, is engaged in the business of sourcing and processing (cleaning, splitting, sorting and bagging) specialty crops, primarily for export markets. Alliance and its subsidiaries in Canada, U.S. and Australia handle the full range of pulses and specialty crops including lentils, peas, chickpeas, beans and canary seed through six processing plants.

Cautionary Statements

Certain statements in this press release are forward-looking statements. The reader is cautioned that assumptions used in the preparation of such information, although considered reasonable by the Fund at the time of preparation, may prove to be incorrect. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund (including its operating subsidiaries) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such risks and uncertainties include, among others, the actual results of harvests, fluctuations in the price of lentils and other crops, failure of plant, equipment or processes to operate as anticipated, accidents or labour disputes, risks relating to the integration of acquisitions or to international operations, as well as those factors referred to in the section entitled "Risk Factors" in the Annual Information Form of the Fund dated May 28, 2009 which is available on SEDAR at www.sedar.com, and which should be reviewed in conjunction with this document. Although the Fund has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.

EBITDA (Earnings Before Interest, Income Taxes, Depreciation and Amortization) is a financial measure used by many investors to compare companies on the basis of operating results, asset value and the ability to incur and service debt. EBITDA is not a recognized earnings measures under Canadian Generally Accepted Accounting Principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. It is not intended to represent cash flow or results of operations in accordance with GAAP. Therefore, EBITDA may not be comparable to similar measures presented by other issuers. Investors are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as an indicator of the Fund's performance or to cash flows from operating, investing and financing activities of liquidity and cash flows. For convenience purposes, certain results for the Arbel Group have been translated at period end exchange rates from Turkish Lira to U.S. Dollars by using 2006, 2007 and 2008 year end exchange rates of 1.4056, 1.1647 and 1.5123, respectively. The financial information presented for the Arbel Group and used in the calculation of the pro forma financial results set out herein is based upon the audited annual consolidated financial statements of the Arbel Group for the year ended December 31, 2008. These financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS") and have not been reconciled to Canadian generally accepted accounting principles ("Canadian GAAP"). IFRS and Canadian GAAP are not the same and it is possible that the amounts reported for the Arbel Group would be different when reconciled to Canadian GAAP. Accordingly, readers should not place undue reliance on the financial information for the Arbel Group presented herein.

The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • Alliance Pulse Processors
    Murad Al-Katib
    Chairman of the Board of Trustees, President and CEO
    (306) 525-4490
    Email: trade@saskcan.com