The Globe and Mail

The investor-friendly “go shop” clause is becoming standard fare in private equity takeovers of income trusts.
Spinrite Income Fund, a company that has extremely unfriendly to unitholders, is the latest trust to strike a deal with a buyer and win a few extra weeks to try and wring a better bid from another suitor.
Yarn-maker Spinrite signed off Tuesday on a $34.8-million offer to be reacquired by New York-based Sentinel Capital Partners, the same private equity fund that spun out the trust back in 2005.
Sentinel’s $2.25-a-unit offer is being made to unitholders who have seen the value of their units drop from an IPO price of $10 two years ago to lows of 76 cents last November.
BMO Nesbitt Burns is advising Spinrite on the sale, and is still out trying to drum up superior offers. Other buyers will be pitched on Spinrite through to Oct. 19. If a better bid comes before that date, the break fee owed to Sentinel is just $1.5-million. The fee rises to $2.4-million after that time.
Last month, BMO Nesbitt Burns also extracted “go shop” provision out of private equity funds that offered to buy Golf Town Income Fund for $240-million.
National Bank Financial advised Spinrite that the Sentinel offer is fair from a financial point of view. TD Securities is working with Sentinel on this re-acquisition.
The investment banks that took Spinrite public, to disastrous consequences, are nowhere to be seen as the former parent steps back in. Scotia Capital and CIBC World Markets led the company’s $203-million IPO in Jan. 2005.
Sentinel got its timing just right, as the deal capitalized on both a fad for knitting and enormous demand for trusts. Spinrite’s results slipped when the knitting craze cooled and distributions were cut, and units took another knock when the government put the boots to the trust strcuture in Oct. 2006.
The whole concept of packaging a small yarn maker as an income-spinning trust, targeted at the retail investing crowd, draws the wrath of investor advocate Diane Urquhart, a former financial services analyst and executive at both BMO Nesbitt Burns and Scotia Capital.
“In my opinion, the Spinrite Income Fund IPO was sold at a grossly inflated price to the investing public, based on an excessive distribution per unit that no reasonable person could have said was sustainable,” said Ms. Urquhart in a research note Thursday. “The distribution did not exceed the net income of Spinrite at the time, but the net income was the highest it had ever been and more than four times its historical average at the time of the IPO.”
By Ms. Urquhart’s calculations, 24 per cent of the 244 business trusts listed on the Toronto Stock Exchange, including Spinrite, either cut or halted distributions after going public.