Since Cara, the parent company of restaurant chains such as Swiss Chalet and Harvey’s, restructured in late 2013, an massive undertaking that included buying Prime Restaurants and making Fairfax its major shareholder, the organization has been upended. New managers were brought in to offer fresh ideas, and the early results of their efforts have been encouraging. Existing store sales jumped 2.6 per cent in 2014.
The chief executive officer recruited to turn Cara Operations Ltd. around is roughly $60-million richer because of the company's initial public offering, at least on paper.
Bill Gregson, a respected retail industry veteran, was hired by Fairfax Financial Holdings Ltd. in 2013 to start fixing the troubled restaurant company, which owns chains such as Harvey's, East Side Mario's and Swiss Chalet. On top of his annual salary and bonus, the CEO's compensation package included stock options with an exercise price of only one penny.
Now that the company has gone public in a $200-million deal and priced its shares at $23 apiece, these options are worth $24.7-million. The stock is expected to start trading Friday under the ticker 'CAO.' Mr. Gregson was also given a second tranche of options with an exercise price of $8.51. These are now worth $35.1-million. Put the two together and you get $59.8-million.
Mr. Gregson can't cash in on the windfall just yet. The earliest he can begin exercising the options, and pocketing any profit, is Oct. 31. That's when half of each tranche vests. The remainder vest on the same date next year.
Mr. Gregson and Fairfax have a history together. Before he became Cara's CEO, Mr. Gregson was a key figure in the turnaround of ailing retailer The Brick Ltd., where he served as chief executive from 2009 to 2012. Fairfax was a prominent investor in that successful restructuring and the Brick was ultimately sold for $700-million to rival Leon's Furniture Ltd.
Hoping to recreate that magic, Fairfax and Mr. Gregson teamed up on a turnaround at Cara and also brought along chief financial officer Ken Grondin, who had the same role under Mr. Gregson at The Brick. Mr. Grondin's option package is worth $3.9-million following the IPO.
It appears Fairfax is setting a precedent of paying its turnaround specialists top dollars. In 2013, the firm recruited John Chen to run BlackBerry Ltd., another Fairfax investment. Mr. Chen's pay package included $90-million worth of shares at the time of his hire.
Fairfax could not be reached for comment.
Heavy investor demand for Cara's IPO is one of the reasons Mr. Gregson's options are now worth so much money. One banker involved with the transaction described the demand as "epic," and the final order book amounted to roughly $4-billion, meaning it was more than 20 times over-subscribed. However, investors have a history of padding their orders for suddenly-hot stocks and asking for more shares than they really want.
Still, such support allowed Cara to boost the price of its shares to $23 each, which made the stock options more valuable.
Whether such investor demand persists will depend on the company's performance. Although Mr. Gregson and his team have demonstrated a solid turnaround so far, they haven't been at work for very long.
Since restructuring in late 2013, an undertaking that included buying Prime Restaurants and making Fairfax its major shareholder, Cara has been transformed. Same store sales jumped 2.6 per cent in 2014, in part because the company now markets its brands extensively, relying less on third party consultants in favour of spending heavily on its own advertising.
The new management team has also cut costs dramatically, slashing 15 per cent of its head office staff and closing unprofitable restaurants.
However, Cara initially planned on going public within three to five years, which would have given investors more time to assess the turnaround. That timeline was accelerated because the market appetite for retail stocks has increased, in part because investors are rotating money out of resources and need to find alternative investments.
Tim Kiladze