Diversified Royalty Corp. (TSX: DIV and DIV.DB) (the
“
Corporation” or “
DIV”) is
pleased to announce it has entered into an agreement with Oxford
Learning Centres, Inc. (“
Oxford”) to add a sixth
royalty stream to DIV's portfolio.
Highlights:
- Acquisition of Oxford trademarks
and certain other intellectual property rights for $44.0
million.
- Annual revenue from Oxford of ~$4.3
million, representing ~10.0% of DIV’s pro-forma revenue.
- Annual dividend on DIV’s common
shares to be increased 2.2% from 23 cents per share to 23.5 cents
per share, effective March 1, 2020 subject to closing of the
transaction.
Acquisition Overview
DIV and its wholly-owned subsidiary OX Royalties
Limited Partnership (“OX Royalties LP”) entered
into an acquisition agreement dated February 5, 2020 (the
“Acquisition Agreement”) with Oxford to acquire
the trademarks and certain other intellectual property rights
utilized by Oxford in its pre-school, elementary and secondary
school and post-secondary supplemental education business (the
“Oxford Rights”) for a purchase price (the
“Purchase Price”) of $44.0 million (the
“Acquisition”), excluding a retained interest to
be provided to Oxford through the issuance of limited partnership
units of OX Royalties LP (collectively, the “Oxford
Retained Interest”). The cash Purchase Price of $44.0
million will be funded with $37.0 million drawn from DIV’s existing
undrawn acquisition facility (the “Acquisition
Facility”) and DIV’s cash on hand following DIV’s drawdown
of the remaining $7.0 million of available capacity under its
existing credit facility secured in connection with DIV’s
acquisition of the Nurse Next Door trademarks and royalty (the
“Nurse Next Door Credit
Facility”).
Immediately following the closing of the
Acquisition, DIV will license the Oxford Rights back to Oxford for
99 years, in exchange for a royalty payment equal to 7.67% of the
gross sales of 146 franchised and corporate Oxford Learning Centres
in Canada and the U.S. (the “Royalty” and together
with the Acquisition, the “Transaction”). The
aggregate Royalty in the first year following closing of the
Acquisition is estimated to be $4.3 million, based on the run-rate
system sales for the trailing twelve months ended December 31, 2019
of the Oxford Learning Centres in the Royalty Pool (defined below)
and assuming 0% same store sales growth (“SSSG”) for such
locations. The Royalty will fluctuate based on the same store sales
growth of the Oxford Learning Centres in the Royalty Pool (defined
below) during the term of the license. From 2011 to 2019, Oxford
averaged 4.0% SSSG and over the past three years averaged 5.8% SSSG
on a combined basis in its Canada and U.S. locations.
The Acquisition will increase DIV’s tax pools by
$44 million to $281 million, which can be depreciated over time to
reduce DIV’s cash taxes.
Founded in 1984, Oxford is one of Canada’s
leading franchise tutoring services, achieving best in class
learning outcomes through the application of its proprietary
cognitive learning methodology, which improves educational outcomes
by focusing on teaching students ‘how to think’ rather than ‘what
to think’. This unique teaching style is complemented by Oxford’s
library of over 1,700 proprietary booklets, which are constantly
being refined, expanded and updated. Oxford operates 155 locations
globally, with 123 locations in Canada (2 corporate owned and 121
franchise locations), 27 in the U.S. (2 corporate owned and 25
franchise locations) and 5 internationally (all franchise
locations) generating annual system sales of approximately $56
million. Oxford has opened 22 net new franchise locations since
2015, grown system sales by 7.4% per year since 2015 and expects to
open approximately 11 new locations in 2020. The tutoring industry
in Canada is valued by market research firms at over $1 billion
annually and expected by such firms to continue growing due to
various factors including, the rise in competition among students
to gain admission to universities and colleges, deficiencies in
public education systems and increased disposable income by
parents. Oxford’s business model has been proven over the past 36
years with mature stores generating $350,000 to $400,000 of annual
revenues while providing an attractive return on capital over time
for the franchisee. From 2011 to 2019, Oxford averaged 4.0% SSSG
and over the past three years averaged 5.8% SSSG. Oxford is led by
an experienced management team with a focus on building culture,
brand and success. Oxford won the Canadian Franchise Association
Franchisees’ Choice Award in 2018 and 2019.
Sean Morrison, President and Chief Executive
Officer of DIV, stated, “The Oxford transaction adds a sixth
royalty stream to DIV’s portfolio, representing approximately 10%
of DIV’s pro-forma revenue and is another step in our strategy of
purchasing royalties from a diverse group of proven multi-location
businesses and franchisors. Oxford is one of the leading North
American supplemental education providers, with a 36-year operating
history, proven franchisee economics, steady and growing cash
flows, history of same-store-sales growth and an experienced
leadership team. These attributes make Oxford a perfect fit for
DIV’s portfolio.”
Mr. Morrison continued, “The Oxford transaction
is accretive, allowing DIV to both increase its annual dividend to
23.5 cents per share while further reducing the pro forma payout
ratio to approximately 95%. The Oxford transaction, together with
the Mr. Mikes and Nurse Next Door royalty acquisitions that closed
in 2019, will represent the third royalty acquisition completed in
the past nine months and exemplifies DIV’s business model – to
acquire high quality trademarks and royalty streams on an accretive
basis, resulting in greater royalty portfolio diversification and
dividend increases.”
Nick Whitehead, Founder of Oxford, stated, “We
are very pleased to have entered in a trademark sale and license
and royalty agreement with DIV. DIV’s unique royalty structure
allows for a monetization while ensuring continued alignment with
our franchisees. Furthermore, as part of this transaction, up to
30% of the equity in Oxford will be made available to management,
while the founders will retain control of the business.”
Lawrence Haber, Chair of the Board of DIV,
stated, “The Oxford transaction is an excellent addition to DIV’s
portfolio. Combined with Mr. Lube, Air Miles, Sutton Group Realty,
Mr. Mikes and Nurse Next Door, Oxford proves that DIV is able to
execute on its strategy to acquire trademarks and royalties from a
diverse group of high-quality businesses and brands.”
Further Details of the Acquisition and
Royalty
The Acquisition will be completed by DIV through
its newly formed wholly-owned subsidiary OX Royalties LP. The cash
Purchase Price of $44.0 million will be funded with $37.0 million
drawn from DIV’s Acquisition Facility and DIV’s cash on hand
following DIV’s drawdown of the remaining $7.0 million of available
capacity under the existing Nurse Next Credit Facility. In addition
to the cash portion of the Purchase Price, OX Royalties LP will
issue the Retained Interest to Oxford at closing, with the Retained
Interest having an agreed value of approximately $33,000.
Under the terms of the license and royalty
agreement that will be entered into upon closing of the
Transaction, which will govern the Royalty (the “Licence
and Royalty Agreement”), Oxford will pay OX Royalties LP a
royalty (the “Royalty”) equal to 7.67% of the
gross sales (the “Royalty Rate”) from Oxford’s 146
franchise and corporate locations in Canada and the United States
(the “Royalty Pool”). So long as certain royalty
coverage tests are met, Oxford will be able to include eligible new
Oxford locations in the Royalty Pool commencing on May 1, 2021. In
consideration for the addition of net new Oxford locations into the
Royalty Pool, Oxford will be entitled, subject to TSX approval, to
exchange certain of the limited partnership units of OX Royalties
LP comprising the Retained Interest for common shares of DIV (or
cash, at DIV’s election) based on a formula that is accretive to
DIV shareholders.
Oxford will also, subject to meeting certain
performance criteria, be provided opportunities to increase the
Royalty Rate in six, 0.25% increments during the life of the
Royalty. In consideration for each incremental Royalty Rate
increase, Oxford will be entitled, subject to TSX approval, to
exchange certain of the limited partnership units of OX Royalties
LP comprising the Retained Interest for common shares of DIV (or
cash, at DIV’s election) based on a formula that is accretive to
DIV shareholders.
In addition to the Royalty payable to OX
Royalties LP, Oxford will pay DIV a management fee of $40,000 per
year for strategic advice and other services. The management fee
will increase by $5,000 every 5 years over the term of the License
and Royalty Agreement.
The Transaction is expected to close in February
2020 and is subject to customary closing conditions.
The foregoing is a summary of certain key
commercial terms of the Acquisition Agreement, the Licence and
Royalty Agreement and certain related agreements to be entered into
in connection therewith (collectively, the “Transaction
Agreements”). These summaries do not purport to be
complete and are subject to, and qualified in their entirety by
reference to, the full terms of the Transaction Agreements, copies
of which will be filed under DIV’s profile on SEDAR and will be
available at www.sedar.com in due course. For further details with
respect to the Acquisition Facility and the Nurse Next Door Credit
Facility, see DIV’s previously issued news releases dated December
5, 2019 and November 1, 2019, respectively, copies of which are
available on SEDAR at www.sedar.com.
Dividend Increase
Subject to completion of the Transaction, DIV’s
board of directors has approved an increase in DIV’s annual
dividend from 23 cents per share to 23.5 cents per share effective
March 1, 2020. DIV estimates its pro forma payout ratio will reduce
to approximately 95%.
Oxford Credit Facility
Following closing, DIV, through OX Royalties LP,
expects to refinance approximately $11 million of the $37 million
drawn on the Acquisition Facility with new bank debt having a term
of approximately 5 years, non-amortizing and having a floating
interest rate based on Bankers’ Acceptance Rate plus a spread based
on prevailing market rates (the “Oxford Credit
Facility”). The Oxford Credit Facility is expected to be
secured by the Oxford Rights and the royalties payable by Oxford
under the Licence and Royalty Agreement, and to have covenants
customary for this type of a credit facility. The Oxford Credit
Facility is also expected to be guaranteed by DIV on a limited
recourse basis through the pledge by DIV of its interest in OX
Royalties LP.
Investor Conference Call
Management of DIV will host a live conference
call at 6:00 am Pacific Time (9:00 am Eastern Time) on Thursday,
February 6, 2020. To participate by telephone across Canada, toll
free at 1 (877) 291-4570 (conference ID 5776197). The management
presentation for the conference call will be available on DIV’s
website www.diversifiedroyaltycorp.com prior to the call. An
archived telephone recording of the call will be available until
February 19, 2020 by calling 1 (800) 585-8367 or 1 (416) 621-4642
(conference ID 5776197).
About Diversified Royalty Corp.
DIV is a multi-royalty corporation, engaged in
the business of acquiring top-line royalties from well-managed
multi-location businesses and franchisors in North America. DIV’s
objective is to acquire predictable, growing royalty streams from a
diverse group of multi-location businesses and franchisors.
DIV currently owns the Mr. Lube, AIR MILES®,
Sutton, Mr. Mikes and Nurse Next Door trademarks. Mr. Lube is the
leading quick lube service business in Canada with 185 locations
across Canada and over $235 million of annual system sales. AIR
MILES® is Canada’s largest coalition loyalty program with over 200
leading brand-name sponsors; approximately two-thirds of Canadian
households actively participate in the AIR MILES® Program. Sutton
is among the leading residential real estate brokerage franchisor
businesses in Canada with over 200 offices across Canada. Mr. Mikes
operates 45 casual steakhouse restaurants primarily in western
Canadian communities with over $85 million of annual system sales.
Nurse Next Door is one of North America’s fastest growing home care
providers and operates over 180 locations across Canada, the United
States and Australia with over $100 million of annual system
sales.
DIV expects to increase cash flow per share by
making accretive royalty purchases and through the growth of
purchased royalties. DIV expects to pay a predictable and stable
dividend to shareholders and increase the dividend as cash flow per
share increases allow.
Forward Looking Statements
Certain statements contained in this news
release may constitute “forward-looking information" or “financial
outlook” within the meaning of applicable securities laws that
involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements to
be materially different from any future results, performance or
achievements expressed or implied by such forward-looking
information or financial outlook. The use of any of the words
“anticipate”, “continue”, “estimate”, “expect”, “intend”, “may”,
“will”, ”project”, “should”, “believe”, “confident”, “plan” and
“intends” and similar expressions are intended to identify
forward-looking information, although not all forward-looking
information contains these identifying words. Specifically,
forward-looking information or financial outlook in this news
release includes, but are not limited to, statements made in
relation to: the completion of the Acquisition and the Transaction,
the terms thereof and the expected timing therefor of February
2020; certain of the expected terms of the Licence and Royalty
Agreement; the details of the Royalty, including the estimated
annual amount thereof; the possibility of future increases in the
Royalty payments made by Oxford to DIV and the issuance of common
shares by DIV in connection therewith, subject to the approval of
the TSX; statements related to the expected tax implications of the
Acquisition on DIV; the means by which DIV intends to finance the
Acquisition; the expectation that DIV will refinance a portion of
funds drawn on the Acquisition Facility through the Oxford Credit
Facility post closing, and the excepted terms of the Oxford
Facility; DIV’s business plans and strategies following the
completion of the Transaction, including continuing to execute on
its business plan of acquiring high quality trademarks and royalty
streams on an accretive basis, resulting in greater diversification
and dividend increases; the expectation that the Transaction will
be accretive; Oxford’s business plans and strategies following
completion of the Transaction, including the expectation that
Oxford will open approximately 11 new locations in 2020; the
expected increase in Oxford management’s ownership interest in
Oxford; the expectation of market research firms that the tutoring
industry in Canada will continue to grow and the reasons for such
expected growth; the expected financial impact of the Transaction
on DIV, including on its pro forma payout ratio; the statement that
DIV will increase its annual dividend to $0.235 per share, subject
to completion of the Transaction and the timing therefor; DIV’s
corporate objectives; and DIV’s expectation that it will pay a
predictable and stable dividend to shareholders and increase the
dividend as cash flow per share increases allow. These statements
involve known and unknown risks, uncertainties and other factors
that may cause actual results or events, performance, or
achievements of DIV to differ materially from those anticipated or
implied in such forward-looking statements. DIV believes that the
expectations reflected in these forward-looking statements are
reasonable but no assurance can be given that these expectations
will prove to be correct. In particular there can be no assurance
that: the Acquisition or the Transaction will close on the terms or
in accordance with the timing currently expected, or at all; DIV
will realize the expected benefits of the Transaction, or that it
will be accretive; there will be any future increases in the
Royalty payments made by Oxford to DIV; DIV or OX Royalties LP will
be able to obtain the Oxford Credit Facility on the terms currently
expected, or at all; the actual tax implications of the Acquisition
on DIV will be consistent with the expected tax implications; the
Transaction, if completed, will be successful; Oxford will meet its
business objectives, including its objectives with respect to the
future growth; Oxford will make the required royalty payments
required under the Licence and Royalty Agreement and otherwise
comply with its obligations under the Transaction Agreements;
Oxford will not be adversely affected by the other risks facing its
business; or DIV will be able to achieve any of its corporate
objectives or make monthly dividend payments to the holders of its
common shares. Given these uncertainties, readers are cautioned
that forward-looking information and financial outlook included in
this news release are not guarantees of future performance, and
such forward-looking information and financial outlook should not
be unduly relied upon. More information about the risks and
uncertainties affecting DIV’s business and the businesses of its
royalty partners can be found in the “Risk Factors” section of its
Annual Information Form dated March 11, 2019 and the “Risk Factors”
section of its management’s discussion and analysis for the three
and nine months ended September 30, 2019 that are available under
DIV’s profile on SEDAR at www.sedar.com.
In formulating the forward-looking statements
contained herein, management has assumed that, among other things,
all necessary consents and approvals for the Acquisition and the
Transaction will be obtained and the Transaction will be completed
in accordance with the timing currently expected and on the
currently contemplated terms, all conditions to the draws on the
Acquisition Facility and the Nurse Next Door Credit Facility will
be satisfied, DIV and OX Royalties LP will be successful in
obtaining the Oxford Credit Facility in accordance with the timing
currently expected and on the currently contemplated terms, Oxford
will be successful in meeting its stated corporate objectives,
including its growth targets, DIV will realize the expected
benefits of the Transaction, the Oxford business will not suffer
any material adverse effect, and the business and economic
conditions affecting DIV and Oxford will continue substantially in
the ordinary course, including without limitation with respect to
general industry conditions, general levels of economic activity
and regulations. These assumptions, although considered reasonable
by management at the time of preparation, may prove to be
incorrect.
To the extent any forward-looking information or
statements in this presentation constitute a “financial outlook”
within the meaning of applicable securities laws, such information
is being provided to assist investors in understanding the
potential financial impact of the Transaction, the Oxford Credit
Facility and the dividend increase on DIV.
All of the forward-looking information and
financial outlook disclosed in this news release is qualified by
these cautionary statements and other cautionary statements or
factors contained herein, and there can be no assurance that the
actual results or developments contemplated thereby will be
realized or, even if substantially realized, that they will have
the expected consequences to, or effects on, DIV contemplated by
such forward-looking information and financial outlook contained
herein. The forward-looking information and financial outlook
included in this news release is made as of the date of this news
release and DIV assumes no obligation to publicly update or revise
such information to reflect new events or circumstances, except as
may be required by applicable law.
Non-IFRS Measures
This news release makes reference to certain
non-IFRS financial measures. These non-IFRS financial measures are
not recognized measures under IFRS, do not have a standardized
meaning prescribed by IFRS and are therefore unlikely to be
comparable to similar measures presented by other issuers, and
should not be construed as an alternative to other financial
measures determined in accordance with IFRS. Rather, these
financial measures are provided as additional information to
complement IFRS financial measures by providing further
understanding of DIV’s and Oxford’s financial performance from
management’s perspective and the expected financial impact of the
Transaction on DIV. Accordingly, non-IFRS financial measures should
never be considered in isolation nor as a substitute to using net
income as a measure of profitability or as an alternative to the
IFRS consolidated statements of income or other IFRS financial
measures. Management presents the non-IFRS measures, “pro-forma
payout ratio” (which is derived in part on the non-IFRS measures
payout ratio and distributable cash), “pro-forma revenue”,
“run-rate system sales” and “SSSG” in this news release.
“Pro-forma payout ratio” for DIV is calculated
as (i) DIV’s annualized current monthly dividend, adjusted to give
effect to the increase in the annual dividend expected to occur
following completion of the Transaction, divided by (ii) DIV’s
annualized Q3 2019 distributable cash, adjusted to give effect to:
the Transaction; the Nurse Next Door trademarks acquisition and
licence and royalty agreement; the Nurse Next Door Credit Facility;
the Acquisition Facility; CEO incentive compensation that will
cease in 8 months, 50% of the CEO incentive compensation being
settled in RSUs, incremental salaries and professional fees,
non-recurring director fees, the reversal of interest income earned
on excess cash and current taxes. Pro-forma payout ratio is not a
recognized measure under IFRS; however, management of the
Corporation believes that it provides supplemental information
regarding the extent to which the Corporation distributes cash as
dividends, when compared to its cash flow capacity. Pro-forma
payout ratio as used in this news release may not be comparable to
similar measures used by other issuers.
“Pro-forma revenue” is calculated as DIV’s
annualized Q3 2019 revenues, adjusted to give effect to the
Transaction and the Nurse Next Door trademarks acquisition and
licence and royalty agreement. Pro-forma revenue is not a
recognized measure under IFRS; however, management of the
Corporation believes it provides supplemental information regarding
the extent to which DIV shareholders have an interest in the
consolidated revenues earned by DIV. Pro-forma revenue as used in
this news release may not be comparable to similar measures used by
other issuers.
“Run-rate system sales” for Oxford means the
system sales for the Oxford Learning Centres to be included in the
Royalty Pool for a given period, including annualized amounts for
any locations not open for the entire period.
“Same store sales growth” or “SSSG” for Oxford
means the percentage increase in store sales over the prior
comparable period for locations that were open in both the current
and applicable prior periods, excluding stores that were
permanently closed. Same store sales growth is a non-IFRS financial
measure and does not have a standardized meaning prescribed by
IFRS. However, DIV believes that SSSG is a useful measure as it
provides investors with an indication of the change in
year-over-year sales of Oxford locations. DIV’s method of
calculating same store sales growth may differ from those of other
issuers or companies and, accordingly, same store sales growth may
not be comparable to similar measures used by other issuers or
companies.
DIV and its auditor are currently reviewing the
application of certain IFRS standards to the contractual
relationships between DIV’s indirect subsidiary NND Royalties
Limited Partnership (“NND Royalties LP”) and Nurse Next Door and
the impact thereof on DIV’s financial reporting. The outcome of
this review will determine how DIV reports the royalties NND
Royalties LP receives from Nurse Next Door in DIV’s consolidated
financial statements, which may or may not be as revenue. Given
such review is ongoing, for purposes of simplicity, in this news
release DIV has included the annualized royalties received by NND
Royalties LP from Nurse Next Door in its revenues for purposes of
calculating certain of the Non-IFRS measures presented herein, as
DIV does for its other royalty partners.
For further details with respect to the
calculation of certain of these non-IFRS measures, see Appendix A
to the Corporation’s investor presentation titled “Diversified
Royalty Corp. – Oxford Trademark Acquisition and Royalty – Investor
Presentation” dated February 6, 2020, a copy of which is available
on the Corporation’s website at www.diversifiedroyaltycorp.com and
under the Corporation’s profile on SEDAR at www.sedar.com. For
further details with respect to how DIV calculates distributable
cash and payout ratio, see “Description of Non-IFRS and Additional
IFRS Measures” in the DIV’s management’s discussion and analysis
for the three and nine months ended September 30, 2019, a copy of
which is available on SEDAR at www.sedar.com.
Third Party Information
This news release includes market information,
industry data and forecasts obtained from independent industry
publications, market research and analyst reports, surveys and
other publicly available sources. Although DIV believes these
sources to be generally reliable, such information cannot be
verified with complete certainty. Accordingly, the accuracy and
completeness of this information is not guaranteed. DIV has not
independently verified any of the information from third party
sources referred to in this news release nor ascertained the
underlying assumptions relied upon by such sources.
THE TORONTO STOCK EXCHANGE HAS NOT
REVIEWED AND DOES NOT ACCEPT RESPONSIBILITY FOR THE ADEQUACY OR THE
ACCURACY OF THIS RELEASE.
Additional Information
Additional information relating to the
Corporation and other public filings, is available on SEDAR at
www.sedar.com.
Contact:Sean Morrison, President and Chief
Executive Officer Diversified Royalty Corp.(604) 235-3146
Greg Gutmanis, Chief Financial Officer and VP
AcquisitionsDiversified Royalty Corp.(604) 235-3146
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