Cinram International Income Fund, once best known for making and distributing DVDs, has found a private buyer who believes in its digital future.
After a comprehensive strategic review that explored multiple options, Toronto-based Cinram has agreed to be purchased by private holding firm Najafi Companies for an undisclosed amount.
Once a Canadian dividend king, Cinram ran into trouble when DVD sales dropped off in favour of streaming movies and downloading them for free. Once the company lost its major contract for distributing Warner Brothers movie in 2010, investors started to flee.
Compounding the problem, the company had a debilitating debt load, and as recently as two weeks ago, it appeared as though Cinram would be left to dwindle after the Toronto Stock Exchange delisted its shares.
Despite the worries, Cinram has worked hard to cut its debt from $600-million to about $230-million, and Najafi believes there is profit to be made under a digital strategy. Going forward, Cinram can perform such tasks as writing the java script that enables movies to be played on different digital playing devices and geographic locations, as well as preparing movies and music for distribution through places like iTunes and Netflix and creating digital menus for things like DVDs that let viewers watch director’s cuts.
Cinram also has sizable cash flows, earning $28.5-million before earnings interest, taxes depreciation and amortization in the fourth quarter of 2011, so Najafi isn’t buying a totally decripit firm. However, these earnings are falling fast. During the same period in 2010, Cinram’s EBTIDA was $49-million.
Cinram chief exeuctive officer Steve Brown credits getting a deal done to aggressively paying down debts in the past few years, obligations which he said left a “black cloud” hanging over the company.
Because debt has been such a concern, the deal he has helped to put together isn’t a straightforward private equity buyout. Those transactions typically employ a lot of debt to buy a public company, and that’s the last thing Cinram needs. Instead, the firm has entered proceedings under the Companies’ Creditors Arrangement Act in Ontario, and will file for Chapter 15 in Delware tomorrow, which will stipulate that the CCAA is the lead procedure.
Najafi has also struck a deal to buy only Cinram’s core assets, leaving behind things like properties that Cinram owns but leased to other firms. Any proceeds for a future sale of these will be left with the estate.
Mr. Brown wouldn’t offer any specifics on the potential for job cuts, but he did say that “we’ll be protecting as many of those employees around the world as possible” because they enable what he deemed a “world class performance,” – something previous shareholders would surely dispute.
No public details were released on how much debtholders will lose, if anything at all, under the CCAA filing, followed by a private purchase.
With the deal almost over, Mr. Brown is ready to get back to focusing on the digital transition and to convince the public that Cinram isn’t an old analog company any more. “We became agnostic to the format that customers’ content would be delivered” a few years back, he said, arguing that “we’ve really crossed the Rubicon of what people knew us for.”
“A lot of people have been thinking we’ve been a buggy whip company for some time,” he added. “Believe me, we’re a long way from that.”