Morneau Sobeco Income Fund

Morneau Sobeco Income Fund

May 12, 2008 15:26 ET

Morneau Sobeco Income Fund Announces Acquisition of Shepell-fgi and Concurrent $153 Million Equity Offering

- Transaction brings together leaders in both pensions & benefits and employee health & productivity services - Acquisition expected to be immediately accretive to Morneau Sobeco's Distributable Cash per Unit - Cash Distributions to Unitholders to increase by 7%

TORONTO, ONTARIO--(Marketwire - May 12, 2008) -


Morneau Sobeco Income Fund (TSX: MSI.UN) (the "Fund") announced today that it has entered into a definitive agreement to acquire substantially all the assets of Shepell-fgi from Clairvest Group Inc. and its partners for total consideration of $321.9 million to be paid over two years. The transaction is subject to regulatory approval and other customary conditions and is expected to close on or about June 2, 2008.

Shepell-fgi is Canada's largest provider of employee health and productivity services. For close to 30 years, Shepell-fgi and its predecessors have been providing support to Canadian employers and their employees. The company provides Employee Assistance Programs ("EAP"), employee health management services, and workplace training and education services.

Together, Morneau Sobeco and Shepell-fgi create a dynamic organization with enhanced growth opportunities. Morneau Sobeco and Shepell-fgi will offer clients a more complete range of solutions to meet emerging human resources needs in the coming years by leveraging and maintaining the established expertise of both firms. For the twelve-month period ended March 31, 2008, the companies had combined revenue of $289.2 million, pro forma Adjusted EBITDA of $60.2 million, and pro forma Adjusted Distributable Cash of $46.7 million.

According to William Morneau, Chairman and Chief Executive Officer of Morneau Sobeco, "Employers face increasing challenges in managing the health and productivity of their workforce. Shepell-fgi's recognized leadership in workplace health and productivity solutions will complement our firm's leadership in pensions and benefits, allowing us to serve a broader spectrum of organizations' human resource management needs."

Rod Phillips, President and CEO of Shepell-fgi added: "We are convinced that the issues facing employers today and tomorrow call for a focus on improving health and productivity. Our business will thrive by having the right people, the right offerings, the right technology, and the right approach. I am excited by the opportunities presented by a combination with an industry leader like Morneau Sobeco."

Following closing, Morneau Sobeco and Shepell-fgi will maintain their existing leadership teams and brand identities, and will continue using their current client service models. Morneau Sobeco and Shepell-fgi will continue to serve their clients independently.

Acquisition Highlights

Under the agreement, Morneau Sobeco will pay total consideration of $321.9 million over two years, as follows:

- $242.4 million payable on closing, subject to typical adjustments

- $79.5 million in non-interest bearing vendor take-back notes:

- $75.0 million due on July 2, 2009, payable at Morneau
Sobeco's option, all in cash or up to half in Fund Units
- $4.5 million due on July 2, 2010, payable at Morneau Sobeco's
option, all in cash or Fund Units

The acquisition is expected to be immediately accretive to Morneau Sobeco's Distributable Cash per Unit. On a pro forma basis, Adjusted Distributable Cash per Unit for the 12 months ended March 31, 2008 would have increased from $1.025 to $1.153 per Unit, or 12.5%, excluding any synergies (16.1% with synergies) arising from the combination of the Morneau Sobeco and Shepell-fgi businesses and excluding any effect of the issuance of Units on the vendor take-back notes. Taking into account all components of the consideration to be paid and financed, discounted to today, on a pro forma basis, Adjusted Distributable Cash per Unit for the 12 months ended March 31, 2008 would have increased from $1.025 to $1.034 per Unit, or 0.9%, excluding any synergies arising from the combination of Morneau Sobeco and Shepell-fgi (4.3% with synergies).

Morneau Sobeco intends to increase its annual cash distribution by 7% to $0.9445 per fully diluted Unit from $0.8827 per Unit, commencing on the first distribution date following the first full month of operations of the combined business. On a pro forma basis, including the increase in annual cash distribution, for the 12 months ended March 31, 2008, the Fund's Adjusted Distributable Payout Ratio would have been 81.9%, excluding any synergies (79.4% with synergies).

In addition, Morneau Sobeco is acquiring assets which will provide approximately $220 million in eligible tax deductions. Management believes the net present value of these tax deductions to be approximately $25 million and that they will result in substantial tax savings of approximately $15 million in 2011, with additional benefits beyond. As a result of the tax savings, the Fund is favourably positioned post 2010, when the tax treatment of income funds changes.

Management believes that the impact of the deferred payments and substantial value of the eligible future tax deductions result in a present value purchase price of approximately $288.7 million.

In the last twelve-month period ended March 31, 2008, Shepell-fgi had revenues of $139.1 million and Adjusted EBITDA of $27.8 million. The combined business is expected to benefit from cost savings of approximately $1.5 million on an annualized basis. Adjusted EBITDA of Shepell-fgi for the period ended March 31, 2008 would have been $29.3 million if the expected $1.5 million in annual cost savings had been implemented at the beginning of the period.

Shepell-fgi and its predecessors have grown combined revenue from $81.3 million in 2002 to $136.0 million in 2007, an average annual growth rate of 10.8%. In 2007, revenues grew 11.7% to $136.0 million from $121.7 million in 2006.

Acquisition Financing

To finance this purchase, Morneau Sobeco has received a commitment letter for a new $200 million four-year credit facility arranged by National Bank Financial Inc. and underwritten by National Bank of Canada. The Toronto Dominion Bank is the syndication agent.

This new credit facility replaces Morneau Sobeco's existing $50 million credit facility, and includes a $140 million term loan, a $20 million revolving credit facility, and a $40 million delayed draw term loan. $137 million of the term loan will be drawn and has been hedged for four years at a rate of 5.65%.

In addition, the Fund also announced today that it has entered into an agreement with a syndicate of underwriters led by National Bank Financial Inc., BMO Capital Markets and TD Securities for a public offering, on a bought deal basis, of 12,750,000 Subscription Receipts at a price of $12.00 per Subscription Receipt for gross proceeds of $153 million. The offering is expected to close on or about June 2, 2008 subject to the usual conditions. Management and Trustees of the Fund own approximately 20% of the units presently outstanding, and will be acquiring additional subscription receipts under the offering with an approximate value of $5 million.

On completion of the acquisition and related financings, Morneau Sobeco will continue to have a healthy balance sheet with pro forma funded debt of approximately 2.3 times EBITDA for the twelve-month period ended March 31, 2008, providing the Fund with sufficient flexibility to continue its growth strategy. The acquisition will substantially increase Morneau Sobeco's market capitalization and enhance its liquidity and financial resources.

The offering of the Subscription Receipts is being made in all provinces and territories of Canada by means of a short-form prospectus. This press release is not an offering of securities for sales in the United States. The Subscription Receipts have not been registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or applicable exemption from the registration requirements.

The Fund also announced today the release of its financial results for the period ended March 31, 2008. This acquisition and Morneau Sobeco Income Fund's 2008 first quarter results will be discussed during a conference call with Bill Morneau, Chairman & CEO, and Rod Phillips, President and CEO of Shepell-fgi, this afternoon, Monday, May 12, 2008 at 3:45 p.m. EDT. The conference call is open to all those wishing to attend, with a Question & Answer period to follow the presentation. In order to participate in the live conference call, please call 416-340-2217 if in the Toronto area, or 1-866-696-5910 throughout the rest of Canada. The access code is 3261281#. A replay of the call will be available via the Morneau Sobeco Web site at

The Annual Meeting of Unitholders will be held on Wednesday May 14, 2008 at 4:00 p.m. EDT at The Toronto Board of Trade (1 First Canadian Place, Adelaide Street Entrance, East Dining Room, 4th Floor, Toronto, Ontario).

About Morneau Sobeco

Morneau Sobeco is the largest Canadian-owned pension and benefits consulting and outsourcing firm, providing services to organizations across Canada and in the United States. With over 1,200 employees in offices in 12 cities across North America, Morneau Sobeco has focused on the integrated design and delivery of pension and benefit plans for over 40 years. Units of Morneau Sobeco Income Fund trade on the Toronto Stock Exchange under the symbol MSI.UN. Further information about Morneau Sobeco can be obtained on the firm's web site at

About Shepell-fgi

Shepell-fgi is Canada's leading provider of health and productivity solutions, including prevention-focused Employee Assistance Programs, Employee Health Management and Workplace Training and Education. In business for 28 years, the company has 1,150 employees and services over eight million employees and their families across Canada, the United States and internationally. Shepell-fgi has its head office in Toronto and has regional offices in Halifax, Montreal, Ottawa, Winnipeg, Calgary, Edmonton and Vancouver, as well as U.S. offices in San Francisco, Minneapolis, and suburban New York City. Further information about Shepell-fgi can be obtained on the firm's web site at

Forward-Looking Statements

This news release contains "forward-looking statements" within the meaning of applicable securities laws, such as statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Use of words such as "may", "will", "expect", "believe", or other words of similar effect may indicate a "forward-looking" statement. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties, including those described in our publicly filed documents (which are available on SEDAR at Those risks and uncertainties include income tax matters, ability to maintain profitability and manage growth, reliance on information systems and technology, reputational risk, dependence on key clients, reliance on key professionals and general economic conditions. Additional risks and uncertainties will also arise in connection with the acquisition and Shepell-fgi's business, including without limitation: increased leverage and restrictive covenants; potential undisclosed liabilities associated with the acquisition and the Fund's limited indemnification from the vendor of Shepell-fgi; the integration of the combined business; Shepell-fgi's agreements with its customers; relationships with channel partners; competition; dependence on key customers; relationships with service providers; reliance on key personnel; regulatory risks; timing of revenue collection; fixed price contracts; currency fluctuations; confidentiality of client information; risks of future legal proceedings; and certain tax risks associated with the acquisition. Many of these risks and uncertainties can affect our actual results and could cause our actual results to differ materially from those expressed or implied in any forward-looking statement made by us or on our behalf. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements in this news release are qualified by these cautionary statements. These statements are made as of the date of this news release and, except as required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Additionally, we undertake no obligation to comment on analyses, expectations or statements made by third parties in respect of the Fund, its financial or operating results or its securities.

Non-GAAP Financial Measures

To assist investors in assessing the Fund's financial performance, this news release also makes reference to certain non-GAAP measures such as EBITDA, Adjusted EBITDA, Adjusted Distributable Cash, and Adjusted Distributable Cash Payout Ratio. Morneau Sobeco believes that EBITDA and Adjusted EBITDA are useful measures in evaluating performance of the Fund. They are used to monitor compliance with debt covenants and to make decisions related to distributions to Unitholders rather than net income due to the significant amount of amortization expense related to the firm's intangible assets. Morneau Sobeco also believes that Adjusted Distributable Cash, and Adjusted Distributable Cash Payout Ratio are useful supplemental measures of performance as they are generally used by Canadian open-ended business income funds as indicators of financial performance.

EBITDA is defined as net income before interest, taxes, depreciation, amortization and non-controlling interest. Adjusted EBITDA is defined as EBITDA less non-recurring expenses. Adjusted Distributable Cash is defined as cash from operating activities excluding changes in non-cash operating working capital, less maintenance capital expenditures and non-recurring expenses. Adjusted Distributable Payout Ratio is defined as declared distributions divided by Adjusted Distributable Cash.

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