February 11, 2007

National Post: TorQuest Set to Take Associated Private

Not seen as catalyst for other trust takeovers.

A cynic would say we are approaching the top of the market given that the average retail investor is being offered a chance to invest in funds that give them exposure to private equity.

With no turnaround for Associated Brands Income Fund in sight on the public markets, buyout firm TorQuest Partners is now in talks to take the troubled trust private. If the deal is successful, it will be the first private-equity led takeover of an income fund since the federal government’s announcement on Halloween that it would start taxing trusts in 2011.

However, while speculation has been rampant lately about cash-rich private-equity firms eyeing business trusts as takeover targets, investment bankers said the purchase of Associated Brands took place under unique circumstances and is unlikely to be the catalyst for a flood of similar deals. TorQuest is already the private-label food and household products firm’s largest investor, and Associated Brands has run into numerous problems that made it vulnerable to a takeover long ago, one investment banker said.

There has certainly been an acceleration of interest from financial buyers in income trusts since Oct. 31. But this [Associated Brands] was one of the broken ones, and I think this deal would have happened regardless of the government’s announcement,” he said.

In a statement yesterday, Associated Brands said it is negotiating a deal with TorQuest to go private for about 80¢ per share. That’s a 32% premium to its closing price of 62¢ per unit on March 5, and would be paid in cash to unitholders.

TorQuest holds exchangeable debentures at various exercise prices, along with 892,912 Associated Brands fund units, according to the income trust’s news release. Associated Brands’ outstanding float is 12.29 million units, and its market capitalization is $10.54-million, according to data from Bloomberg.

TorQuest, which typically makes deals with an equity investment in the $15-million to $100-million range, invested in Associated Brands in November, 2005, through its $180-million TorQuest Partners Value Fund.

TorQuest has invested in Associated Brands as it anticipates a turnaround in the Fund’s results,” according to a statement on the private equity firm’s web site. TorQuest believes that the Fund’s difficulties over the last twelve months are not indicative of a fundamental flaw in its business, but rather reflect a confluence of events while the core of its business has significant potential.”

However, Associated Brands’ unit price has continued to slide, falling from $12.30 in 2003 to as low as 48¢ late last year. In January of last year the income trust’s market value plunged almost 40% after it breached financial covenants and suspended distributions, with one research analyst knocking his target price on its units to just a nickel in May, 2006.

Daniel Sonshine, principal at TorQuest, said his firm is unable to comment on the proposed deal or the fund’s plans for Associated Brands at this time.

Associated Brands’ chief executive Rob Douglas was not immediately available for comment.

Source: National Post, lmcleod@​nationalpost.​com