Strongco Income Fund

Strongco Income Fund

March 17, 2008 19:45 ET

Strongco Moving Forward with Champion Acquisition and Positions for Further Growth

Measures Restructure Distributions And Advance Growth Strategy

MISSISSAUGA, ONTARIO--(Marketwire - March 17, 2008) - Strongco Income Fund (TSX:SQP.UN) -


- Current bank credit facility expanded by 50% to $30 million

- $12 million term facility for real estate acquisition and construction

- Monthly distributions changed to $0.05 per unit cash & $0.05 per unit equity (combined $1.20 per unit on an annualized basis)

- Champion acquisition to add approximately $40 million to annualized revenues

- Post-acquisition synergies to improve EBITDA to $1 million

Strongco Income Fund (TSX:SQP.UN) today announced financial initiatives aimed at strengthening its financial capacity in advance of the planned $30 million acquisition of the Champion Road Machinery division of Volvo Group Canada Ltd.

The trustees of the Fund approved the expansion of Strongco's current bank credit facility by $10 million to $30 million. Also approved was a new term acquisition and construction facility totalling approximately $12 million.

"The increase in bank credit availability will enlarge Strongco's financial capacity to complete the Champion acquisition while meeting current obligations," said Robin MacLean, President and CEO of Strongco Limited Partnership, the Fund's operating subsidiary. "Champion represents a one-time strategic opportunity that will tremendously benefit the Fund over the long term."

Concurrently, trustees changed the structure of distributions to unitholders. Strongco's current monthly cash distribution of $0.10 per unit ($1.20 per unit on an annualized basis) will be restructured into distributions consisting of $0.05 per unit in cash and an "in-kind" distribution of $0.05 per unit in equity, to be settled with additional units issued to unitholders, subject to regulatory approval. In-kind units will be issued at a deemed price equal to the volume-weighted average price of all units traded on the Toronto Stock Exchange on the 10 trading days preceding the applicable record date.

"Our current distribution policy does not allow us to grow the Fund without aggressively increasing our leverage," said Mr. MacLean. "In addition, as our manufacturers expand their product offerings, the Fund must be in a position to support those products in the marketplace through additional inventory and services. This change in our distribution policy allows Strongco to expand and perform strategic acquisitions, while maintaining the integrity of our balance sheet. We are excited about the opportunities before us and our improved ability to respond as a result of these changes."

During 2007 the Fund's distributions to unitholders exceeded distributable cash generated by operations. As a result, the Fund ended fiscal 2007 with a payout ratio of 105%. If the Fund had been paying distributions at the newly revised rate, the ratio would have been less than 100%. "That is a much more sustainable level and it brings distributions into line with the Fund's current pace of distributable cash generation," said Mr. MacLean. "It also more equitably balances distributions against our need for growth capital."

Further incentives to revise the distribution policy include:

- Given the inherently higher level of leverage, additional debt financing would be costly and potentially imprudent.

- The Fund can continue utilizing tax advantages of the income trust structure and to retain some of its cash flow for expansion.

- Manufacturers whose products are distributed by Strongco have taken steps to expand their offerings that correspond to increased growth for the Fund.

The Fund today announced a distribution for March 2008 consisting of $0.05 per unit payable in cash and $0.05 per unit payable in units. The distribution will be payable on April 21, 2008 to unitholders of record at the close of business on March 31, 2008.

Investors are advised that distributions are always subject to approval from the board of trustees and may be increased, decreased or converted partially or entirely to cash and/or units by the board at any time.

The bank credit facilities, provided by HSBC Canada, offer a lower cost alternative to an equity offering of newly issued units. Strongco's current bank facility has been drawn down by less than half of its $20 million capacity. "The expansion to $30 million will assist with the integration of Champion by providing working capital required to finance higher inventories and accounts receivable following the acquisition," said Mr. MacLean. "In addition, it strengthens the Fund's ability to execute growth initiatives in the future."

The term facility was arranged to partly finance the Champion deal and to finance the acquisition and construction of real estate in Edmonton as a separate consideration. "Historically, Strongco has leased facilities as the most cost-effective option," said Mr. MacLean. "However, sales growth in Alberta has been so rapid, we need to expand our customer service capacity by quickly building facilities that are purpose-built to meet our needs."

Of the total $30 million cost of the Champion acquisition, approximately $6 million will be paid in cash and the balance by assumption of certain liabilities relating to the business. The transaction, announced February 22, 2008, is expected to be completed by the end of March 2008.

The deal will see Strongco acquire assets of the business, which is a holdover from Volvo Canada's acquisition of the Champion Motor Grader Company in 1997. The Champion graders were subsequently rebranded and integrated into the Volvo product lineup. The business currently operates as a Volvo division, consisting of five retail outlets in Ontario that provide full service sales, rentals, parts and service for the Volvo Motor Grader, Volvo Compact and smaller lines.

"The purchase of Volvo Construction Equipment's Champion business by Strongco is an excellent example of the interest shown by our dealers in making long-term commitments to invest in and develop their business, consistent with our long-term goals," said Dennis R. Slagle, President and CEO of Volvo Construction Equipment North America of Asheville, North Carolina. "Champion has been a major asset for Volvo Construction Equipment for many years, and the utilization of that company's talent and expertise will give us all a new strength in the marketplace."

Strongco sells industrial equipment, including Volvo, through retail outlets in most provinces across Canada. Strongco has 10 branches in Ontario, which is the only province where Volvo equipment is sold through both Strongco and Champion outlets. Overlap currently occurs in three markets - Brampton, Carleton Place and Thunder Bay. The current transaction aims to remove that overlap, consolidating Strongco's sales and service operations for Volvo products across Ontario.

"Strongco has been interested for some time in the Volvo stores and in particular the grader and compact lines as valuable additions to our offerings in Ontario," said Mr. MacLean. "In addition to immediately expanding our volume of business, we will be able to take advantage of efficiencies in a number of areas, particularly leveraging of infrastructure and commonality of components. The transaction represents a unique opportunity to build long-term value and we are very excited about it."

On the basis of 2007 performance, the acquisition is projected to add approximately $40.0 million, or 10%, to Strongco annualized revenues. EBITDA of the acquisition on a trailing basis was approximately $2.0 million a year. Strongco's analysis indicates synergies can be gained from rationalization and integration that would increase that figure in the order of 50%. Such an increase indicates Champion is expected to be an accretive acquisition.

Tax Treatment of "In-Kind" Distributions

The following information is based on the Fund's understanding of the Income Tax Act (Canada) and is provided as general information only. This information is not exhaustive of all possible income tax considerations under the Income Tax Act (Canada) or other applicable legislation and is not intended to be legal or tax advice to any particular holder of Fund units. Unitholders or potential unitholders should consult their own legal, business and/or tax advisors as to the tax implications of holding Fund units in their particular circumstances.

In general, an "in-kind" distribution of Fund units to Canadian resident will be treated as income for income tax purposes ( and is subject to Canadian income tax). Each Fund unit received will have a cost base to the unitholder of an amount equal to the fair market value of the Fund unit at the time of the distribution. If a unitholder holds his or her Fund units in an RRSP, RRIF, DPSP, or RESP, no amount is required to be reported by the unitholder as income. An "in-kind" distribution to a U.S. resident is subject to Canadian withholding tax of 15%. Taxable U.S. resident unitholders may be able to claim a foreign tax credit for the Canadian withholding tax. Non-resident unitholders should consult their own legal, business, and/or tax advisors as to the tax implications of holding Fund units in their particular circumstances.


EBITDA is a supplemental earnings measure that does not have any standardized meaning prescribed by Canadian GAAP and may not be comparable to EBITDA calculated by other funds or entities. EBITDA is a useful supplemental measure as it provides an indication of the financial results generated by the Fund's principal business activities prior to consideration of how these activities are financed or how the results are taxed in various jurisdictions and before non-cash amortization expense. EBITDA is defined as earnings before interest, taxes, depreciation and amortization.

Conference Call Details

Strongco will hold a conference call on Tuesday, March 18, 2008 at 2:00 pm ET to discuss the content of this news release. Analysts and investors can participate by dialing 416-644-3422 or toll free 1-800-731-5774. An archived audio recording will be available until midnight on April 1, 2008. To access it, dial 416-640-1917 or 1-877-289-8525 followed by passcode 21266712#.

About Strongco

Strongco Limited Partnership is one of the largest multi-line industrial equipment distribution providers in Canada. Over 700 employees provide retail service at 24 branches located from Nova Scotia to Alberta. Strongco sells, rents and services mobile industrial equipment to sectors that include construction, road building, mining, forestry, utilities and municipalities. Strongco represents several leading equipment manufacturers including Volvo, Case, Manitowoc, Cedarapids and more.

Strongco Income Fund is listed on the Toronto Stock Exchange under the symbol SQP.UN.

Forward-Looking Statements

All statements contained in this press release that do no directly and exclusively relate to historical facts constitute forward-looking statements as of the date of this press release. These forward-looking statements include statements concerning or presuming the completion of the acquisition of the Champion business by Strongco, including the expected closing date, additions to annualized revenues and improvements to EBITDA, statements concerning distribution policy, distribution amounts and expanded product offerings by manufacturers. There can be no assurance that the plans, intentions or expectations upon which these forward-looking statements are based will occur. By their nature forward-looking statements require assumptions and are subject to inherent risks and uncertainties, including those discussed herein. There is significant risk that forward-looking statements will not prove to be accurate. You are cautioned not to place undue reliance on forward-looking statements made herein because a number of factors could cause actual future results, conditions, actions or events to differ materially from the plans, intentions or expectations expressed in the forward-looking statements. The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: the results of the due diligence review of the Champion business being undertaken by Strongco; negotiation and execution of a purchase agreement which is satisfactory to Strongco; completion of financing by Strongco on terms which are satisfactory to Strongco; and various risks relating to the Champion business acquisition, including risks relating to integration and realization of expected synergies, reliance on key personnel of the Champion business, and potential undisclosed liabilities associated with the Champion business; and general business and economic cycles, competition, interest rates, foreign exchange and credit availability. You are cautioned that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to the Fund, investors should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The Fund undertakes no obligation to publicly update or revise any forward-looking statements except as required by applicable securities law. Risks related to the Fund have been summarized in the Fund's latest Annual Information Form, Management's Discussion and Analysis included in the Annual Report and quarterly financial reports available on or the Fund's web site at

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