PDM Royalties Income Fund
TSX : PDM.UN

October 17, 2006 15:37 ET

Mikes Restaurants Inc. to Acquire the Assets of Baton Rouge Restaurants and PDM Royalties Income Fund to Acquire Additional Royalty Stream

MONCTON, NEW BRUNSWICK--(CCNMatthews - Oct. 17, 2006) -

NOT FOR DISTRIBUTION IN THE UNITED STATES OR THROUGH U.S. NEWSWIRE SERVICES

PDM Royalties Income Fund (the "Fund") (TSX:PDM.UN) announced today that Mikes Restaurants Inc. ("Mikes"), a wholly-owned subsidiary of Pizza Delight Corporation Ltd. ("PDC"), has entered into a formal agreement with 3066316 Nova Scotia Company and Baton Rouge Restaurants Company (collectively "Baton Rouge") and the shareholders of Baton Rouge, pursuant to which it will acquire all of the assets of Baton Rouge for approximately $44.0 million in cash ("Asset Purchase").

In connection with the Asset Purchase, the Fund, through its administrator PDM Royalties Limited Partnership (the "Partnership"), has entered into a letter of intent with Mikes to acquire the Canadian trademarks and other intellectual property associated with Baton Rouge for $37.95 million and to license the trademarks and other intellectual property associated with Baton Rouge to Mikes in consideration for a royalty equal to 6% of system sales generated by Baton Rouge restaurants (the "Transaction"). As the number of Baton Rouge restaurants in the royalty pool is adjusted, PDC's interest in the Fund will also be adjusted pursuant to a predetermined formula. The Transaction between the Fund and PDC will be considered a related party transaction under OSC Rule 61-501 ("61-501") and Quebec Policy 27 ("Q-27"). Accordingly, a special meeting of unitholders is expected to be held in early December to approve the Transaction.

Bernard Imbeault, President and CEO of PDC stated, "The addition of the Baton Rouge brand of restaurants to our portfolio is a very natural fit that will enable us to continue to expand within Canada, offering an attractive complement of restaurant concepts." The acquisition is expected to be immediately accretive to PDM's distributable cash per Unit and will continue to lower the Fund's payout ratio, which has consistently been below 100% since the Fund's inception. The Transaction also provides numerous other benefits that are expected to enhance the value of the Fund and its assets over time. These benefits include geographic and operational diversification by adding a significant additional presence in Ontario and Quebec, as well as providing a highly complementary business model to PDC's existing portfolio of restaurants. This creates a similar growth platform in a segment with which PDC management already has significant experience. Management believes that the transaction will be subject to limited integration risk, while enhancing growth strategies at each of the Pizza Delight, Mikes, Scores and Baton Rouge brands.

The Fund expects to fund the acquisition of Baton Rouge trademarks and other intellectual property through a combination of convertible debentures and senior debt. A subsidiary of the Fund has entered into a term sheet with a financial institution to provide a five year, non-amortizing $10 million credit facility bearing interest at a rate of approximately 6.7% per annum. The debt financing is subject to a number of conditions, including preparation of satisfactory formal documentation and completion of satisfactory due diligence by the financial institution. In addition, the Fund has entered into an agreement with National Bank Financial Inc., and a syndicate of underwriters, pursuant to which the underwriters have agreed to purchase $31.4 million principal amount of extendible convertible debentures of the Fund on a bought deal basis. The extendible convertible debentures will be payable semi-annually in arrears at a coupon rate of 7.50%, conversion price of $11.70 and will have an initial maturity date of January 31, 2007 and final maturity date of December 31, 2011. The gross proceeds to the Fund are expected to be approximately $41.4 million. Completion of the extendible convertible debenture offering is subject to requisite regulatory approvals, including approval of the Toronto Stock Exchange.

The Board of Trustees of the Fund (the "Trustees") has retained National Bank Financial Inc. as the Financial Advisor to the Fund. In addition, the Trustees have retained RSM Richter Inc. to prepare the formal valuation as to the fair market value of the Transaction consideration including the Canadian trademarks and other intellectual property associated with Baton Rouge, in accordance with 61-501 and Q-27. The Trustees have engaged Canaccord Capital Corporation to provide a fairness opinion as to the Transaction consideration, from a financial point of view, to the Fund.

The Transaction between the Fund and Mikes is conditional on completion and receipt of the necessary equity and debt financing to fund the Transaction, the Fund's satisfaction with its due diligence investigation of Baton Rouge, completion of the acquisition of Baton Rouge by Mikes on terms and conditions satisfactory to the Fund, receipt of a formal valuation under 61-501 and Q-27 by the Fund, approval of the Transaction by a majority of the minority unitholders of the Fund in accordance with 61-501 and Q-27, receipt of a satisfactory fairness opinion in respect of the Transaction, the Fund's approval of the acquisition of Baton Rouge by Mikes, approval of the Transaction and related matters by the Trustees, approval of the Transaction and related matters by the Fund, and other regulatory approvals.

The securities referenced by this news release have not been registered under the United States Securities Act of 1933, as amended, and may not be offered or sold in the United States without registration or an applicable exemption from registration requirements. This news release does not constitute an offer to sell or the solicitation of an offer to buy securities of the Fund in any jurisdiction in which such offer, solicitation or sale would be unlawful.

About Baton Rouge

Baton Rouge is a high quality restaurant chain that specializes in rib entrees but also offers a wide variety of other offerings including steak, seafood, chicken and pasta. Baton Rouge operates in the casual dining segment with 16 full service restaurants located in Ontario and Quebec, with sites ranging from 7,000 to 9,000 square feet and seating on average 230 customers. Four new restaurants are currently under construction and are anticipated to open between October 2006 and July 2007. System sales for the year ended May 31, 2006 were approximately $75 million with same store sales growth in this period of approximately 7%. Management does not expect any reductions in staff as a result of this transaction and all key management at Baton Rouge are expected to join PDC. As a result of strong same store sales growth and the impact of the new restaurants expected to open after closing of the acquisition, Mikes has committed to the Fund that annual minimum aggregate royalties payable to the Fund in respect of the Baton Rouge restaurants will be $4.8 million until system sales from the Baton Rouge royalty pool reach $80 million.

For additional information on Baton Rouge visit: www.batonrougerestaurants.com.

About the Fund

The Fund is a limited purpose open-ended trust established under the laws of Ontario. The Fund will make monthly distributions of its available cash to holders of units. The Fund indirectly owns the trade marks and intellectual property for the Pizza Delight and Mikes Restaurants brands and has licensed them to PDC in consideration for a royalty equal to 4% of system sales generated by Pizza Delight and Mikes Restaurants. The Fund also indirectly owns the trade marks and intellectual property for Scores Rotisserie and Ribs brand and has licensed it to Mikes in consideration for a royalty equal to 6% of system sales generated by Scores Rotisseries and Ribs restaurants.

About PDC

PDC is a privately owned corporation, headquartered in Moncton, New Brunswick. It operates franchised and corporate restaurants under the brand names Pizza Delight®, Mikes® Restaurants and Scores® Rotisserie and Ribs. Pizza Delight® operates primarily in Atlantic Canada, where it dominates the family/mid-scale segment. Mikes® Restaurants operates primarily in Quebec in the casual dining segment and the take-out and delivery segments. Scores® Rotisserie and Ribs operates primarily in Quebec in the casual dining segment.

For additional information on our three brands visit: www.pizzadelight.com, www.mikes.ca or www.scores.ca

Contact Information

  • PDM Royalties Income Fund
    William Lane, CMA
    Chief Financial Officer
    (506) 853-0990
    Email: blane@pizzadelight.ca