Coast Wholesale Appliances Inc.
TSX : CWA

Coast Wholesale Appliances Inc.

April 24, 2014 08:00 ET

Coast Wholesale Appliances Inc. Responds to Revised Offer From CWAL Investments Ltd.

VANCOUVER, BRITISH COLUMBIA--(Marketwired - April 24, 2014) - Coast Wholesale Appliances Inc. (TSX:CWA) ("Coast") announced today that its board of directors (the "Board"), after careful consideration with the assistance of its financial and legal advisors, voted unanimously to reject the revised offer dated April 16, 2014 by CWAL Investments Ltd. ("CWAL") to acquire the outstanding common shares of Coast not beneficially owned by CWAL and its joint actors at a price of $4.65 per share (the "Revised Offer").

Coast has also filed on SEDAR (at www.sedar.com) today a Notice of Change to its Directors' Circular dated March 26, 2014 (the "Directors' Circular") recommending that shareholders of Coast REJECT the Revised Offer.

The Board urges shareholders to read the information contained in both CWAL's Notice of Extension and Variation dated April 16, 2014 and the Notice of Change to the Directors' Circular carefully before deciding to accept or reject the Revised Offer.

Key Reasons for Recommending the Rejection of the Revised Offer

The Board has thoroughly reviewed the Revised Offer in consultation with its financial and legal advisors and has determined that the Revised Offer continues to fail to provide adequate value for the common shares of Coast. Accordingly, the Board recommends that shareholders of Coast REJECT the Revised Offer and DO NOT TENDER their common shares, and that any Coast shareholders who have previously tendered their common shares into the Revised Offer WITHDRAW them immediately.

The reasons for the Board's recommendation to shareholders that they reject the Revised Offer are detailed in the Notice of Change to the Directors' Circular which is being mailed to shareholders of Coast. They include:

  • The Revised Offer Remains Materially Below the Valuation Range

    As previously announced on March 26, 2014, Coast's financial advisor, CIBC World Markets Inc. ("CIBC"), provided the Board with a formal valuation of Coast's common shares (the "Valuation"). Subject to the assumptions, limitations and qualifications noted in the Valuation, a copy of which is attached as Schedule B to the Directors' Circular, CIBC determined the fair market value of the common shares of Coast, as at March 25, 2014, to be between $5.25 and $5.75 per share. The Revised Offer is materially below the valuation range.

  • The Revised Offer Price Materially Undervalues Coast and Fails to Adequately Compensate Shareholders for Execution of Coast's Business Plan and Associated Cash Flow Generation

    Coast is a leading independent supplier of major household appliances and accessories to builders and developers of multi-family and single-family housing, and to retail customers and is executing on its current business plan to generate strong cash flow.

    Coast achieved strong sales momentum in 2013. For the fiscal year ended December 31, 2013, Coast achieved annual sales of $160.1 million, which were up by 10.3% from 2012. During the year, revenues increased across all of Coast's geographic markets except Manitoba, with particularly strong sales growth in the Greater Toronto Area and Alberta. Earnings before interest, income tax provision, and depreciation and amortization ("EBITDA") for the 12 months ended December 31, 2013 increased by $1.2 million, or 15.6%, over 2012 to $9.2 million. Excluding a one-time $0.2 million restructuring charge related to a planned store closure in the first quarter of 2014, adjusted EBITDA reached $9.4 million in 2013.

    Coast's annual dividend payout ratio for 2013 was 48.5%, a significant improvement from the 2012 dividend payout ratio of 70.8%. The dividend payout ratio is that ratio obtained by dividing the annual dividend by adjusted funds from Coast's operations (being "AFFO" as defined the Directors' Circular). Strong free cash flow generation is expected to support continued monthly cash dividends to shareholders of Coast.

  • Certain Significant Shareholders Consider the Revised Offer Inadequate

    The Special Committee and CIBC have each had various communications with a number of Coast's significant shareholders. To date, certain significant shareholders contacted by Coast and CIBC, other than CWAL and its joint actors, have confirmed to Coast or CIBC that they consider the Revised Offer to be inadequate as it undervalues the common shares of Coast.
  • Coast's Directors and Officers Do Not Intend to Tender Their Shares to the Revised Offer on or Before the Expiry Time of the Revised Offer

    Each of the directors and officers of Coast have indicated that they do not intend to tender their common shares to the Revised Offer on or before the expiry time of the Revised Offer. Should the Minimum Tender Condition (as defined below) be satisfied, each of the directors and officers of Coast may reconsider, at that point, whether or not to tender to the Revised Offer.

The Revised Offer has a Minimum Tender Condition which is Irrevocable

As previously disclosed in its news release dated April 14, 2014, Coast reached an agreement with CWAL with respect to Coast's shareholder rights plan (the "Rights Plan") as it relates to CWAL's original offer and the Revised Offer.

Under the agreement reached, the condition under the Revised Offer that at least a majority of the total number of common shares outstanding, excluding shares beneficially owned by CWAL and its joint actors, has been validly deposited under the Revised Offer (the "Minimum Tender Condition") is irrevocable. If the Minimum Tender Condition is satisfied, CWAL will make a public announcement of the satisfaction of the Minimum Tender Condition and extend the expiry date of the Revised Offer for at least 10 additional business days following such announcement. Coast agreed to conditionally waive the application of the Rights Plan upon being advised by CWAL that the Minimum Tender Condition has been satisfied.

Coast's agreement with CWAL eliminates the inherently coercive nature of CWAL's original offer dated March 12, 2014 which previously permitted CWAL to waive the Minimum Tender Condition at its sole discretion.

Other Factors for Shareholders to Consider

  • Inability to Obtain Fair Market Value

    Shareholders of Coast are cautioned that they might not be able to obtain a fair market value for their common shares as a result of the lack of liquidity in the trading of the common shares on the Toronto Stock Exchange and the significant control CWAL and its joint actors have in terms of their approximately 39.6% equity interest in Coast. The rules of Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions mandates that CIBC not apply any discount to the Valuation to account for, among other things, their relative illiquidity, the effect of the Revised Offer or the fact that they do not form part of a controlling interest.

    The Board has had an opportunity to discuss the Valuation with CIBC. The Board concluded that the value range contained in the Valuation is largely determined by the realization of the estimated future financial results of Coast. The Board believes that the estimated future financial results of Coast supporting the valuation range of $5.25 to $5.75 per share may be achieved, but acknowledges that the business risks inherent in Coast's operations may result in actual financial results being materially less than have been estimated or the estimated results may take longer to realize. Key risks include maintenance of profitability and management of changes in Coast's business. Please see other factors discussed in Coast's annual information form dated March 27, 2014 under "Risk Factors".

  • Strategic Alternatives Review Process

    Coast is continuing to pursue and evaluate alternative strategic transactions in order to identify other options that may be in the best interests of Coast and its shareholders and which could result in a transaction that is superior to the Revised Offer.

    While the Board continues to believe that Coast and its assets are attractive to other parties, the significant shareholdings of CWAL and its joint actors and CWAL's stated position that it will not sell its common shares under an alternative transaction have had a chilling effect on third parties' willingness to allocate the time and resources to consider making a proposal for an alternative transaction to the Revised Offer before the time of expiry of the Revised Offer. Although a financially superior offer may be made before the expiry of the Revised Offer, it is unlikely a value enhancing transaction will emerge and the Revised Offer is currently the only offer to purchase all of the outstanding common shares of Coast that is open for acceptance by Coast's shareholders as at the date hereof.

    That being said, if successful in its take-over bid, CWAL may be able to opportunistically realize significantly more value than what is being offered to shareholders in connection with the Revised Offer. CWAL would be in a position to benefit from Coast's cash flow generation and could potentially re-sell Coast to a third party at a higher valuation by offering 100% of the common shares of Coast or a control position.

  • Liquidity Event

    The fact that the Revised Offer consideration is payable in cash presents shareholders of Coast with an opportunity to immediately realize proceeds for their common shares, despite the limited liquidity of the common shares of Coast. Shareholders who are attracted by the certainty of an opportunity to sell their common shares for cash at this time at a premium to the stock price before the public announcement of the CWAL's original offer on March 4, 2014 may prefer to accept the Revised Offer. On the other hand, based on the Valuation, the Revised Offer is inadequate and shareholders who sell their common shares by accepting the Revised Offer will forego any opportunity to realize future increases in the value of their common shares.

  • Possible Decline in Market Value

    If the Revised Offer is not completed and an alternative offer with superior financial terms does not emerge, the trading price of the common shares of Coast may decline to historical levels.

Cancellation of Special Meeting

As a result of Coast's agreement with CWAL as described earlier in this news release, Coast has cancelled the special meeting of shareholders previously scheduled for May 21, 2014 to consider the ratification of the Rights Plan.

About Coast

Coast is a leading independent supplier of major household appliances and accessories to builders and developers of multi-family and single-family housing, and to retail customers. Founded in 1978, Coast operates stores across the four western provinces and in the Greater Toronto Area of Ontario, as well as a network of warehouse distribution centres strategically situated to serve these locations.

Forward-Looking Statements and Information

Certain statements herein may contain forward-looking statements and forward-looking information within the meaning of applicable securities laws. Such forward-looking statements and forward-looking information include, but are not limited to: statements concerning the Revised Offer; the pursuit and evaluation of alternative strategic transactions; the likelihood that a financially superior offer will be made before the expiry of the Revised Offer; the intention of directors and officers of Coast to not tender to the Revised Offer on or before the expiry time of the Revised Offer; Coast executing on its current business plan to generate strong cash flow; and CWAL's ability to realize significantly more value than it is offering through the Revised Offer by re-selling Coast to a third party at a higher valuation. Such statements and information include statements regarding the expectation and beliefs of management and appear in a number of places and often can be identified by the use of words such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate" or "believes" or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved.

Although the forward-looking statements contained herein are based upon what management believes to be reasonable assumptions, Coast cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements reflect management's current beliefs and are based on information currently available to Coast. They speak only as of the date hereof, and reflect current assumptions regarding future events and operating performance. These assumptions include, without limitation: slow economic growth in Coast's current market areas; continued fluctuations in exchange rates; continued low interest rates through 2014; continuing cautious credit markets in which Coast's major builder customers obtain financing for their current and future building activities; weak consumer confidence due to the slow economic recovery; and no significant change to the total housing starts in 2014 compared to those recorded in 2013.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors which could cause actual results of Coast to differ materially from the conclusion, forecast or projection stated in such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to: actions taken by CWAL; actions taken by directors, officers and shareholders of Coast in respect of the Revised Offer; the possible effect of the Revised Offer on Coast's business; sensitivity to general economic conditions; changes in consumer confidence in the economy; maintenance of profitability and management of changes in Coast's business; competition; increases to interest rates; reliance on suppliers and their ability to supply product for sale on a timely basis; changes in consumer preferences; changes in the mix of product sales; fluctuations in fuel and commodity pricing; usage of extended warranty programs and the costs to deliver these services; changes to planning and supply chain processes; lack of long term supplier agreements; reliance on key personnel; foreign exchange rates as they relate to imported products and Coast's suppliers' costs; and other factors referenced in Coast's continuous disclosure filings which are available on SEDAR at www.sedar.com.

These forward-looking statements are made as of the date hereof and Coast assumes no obligation to update or revise them to reflect new events or circumstances, other than as required by law.

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