Foodtastic acquires Freshii at a fraction of its IPO value five years ago

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In the end, Freshii Inc. FRII-T went stale.

The Toronto-based healthy fast-food restaurant chain agreed Monday to be acquired by Foodtastic Inc. of Montreal for $2.30 a share in an all-cash deal worth $74.4-million. That price is more than double Freshii’s most recent stock market value, but 80 per cent below the $11.50 a share it debuted at when it went public in 2017.

Matthew Corrin, who founded Freshii in 2005, served as chief executive officer until earlier this year and continues to hold voting rights for about 69 per cent of the company’s shares, has agreed to support the transaction.

It is an inauspicious end to a Canadian franchise story that once boasted faster early growth than the McDonald’s or Subway chains, hitting 200 locations in less time than either of those two multibillion-dollar global brands. That promising start, according to John O’Connell, CEO of investment firm Davis Rea Ltd., turned out to be Freshii’s biggest problem.

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“There was a lot of overpromising and underdelivering,” Mr. O’Connell said, adding he has never held the company’s stock. “Freshii never should have been a public company, not ever.”

Even before Freshii officially went public, Stephen Takacsy, president of Lester Asset Management in Montreal, called the company “ridiculously overvalued” after attending a sales presentation before its initial public offering.

Freshii’s growth targets were also widely seen as overly ambitious. For example, the company’s growth plan as of mid-2017 was to have 840 stores open by the end of 2019, which would have required it to open a new location roughly every two days.

By the end of 2017, that goal had been revised down to 760 locations by the end of 2019. Freshii fell well short of that target, too, with its total store count peaking just shy of 450 as of mid-2019. There are 343 Freshii locations still operating today.

Despite closing stores and cutting staff to manage its costs better, Freshii has continued to struggle financially. Its losses have more than tripled from a $2.7-million net loss during the first nine months of 2021 to $8.5-million during the same period this year. The company’s cash reserves have also steadily depleted, from $37.1-million as of Sept. 25, 2021, to $22.4-million as of the same date in 2022.

Foodtastic, which owns the Second Cup and Milestones chains among its more than 1,200 Canadian locations, also recently announced plans to acquire Quesada Burritos & Tacos. Its Freshii acquisition, which is expected to close by early 2023, will give the company a foothold into the popular fresh and healthy category.

With so many recently-public Canadian companies now trading well below their initial public offering price, experts warn this deal could represent the beginning of a so-called “takeunder” trend.

While the Freshii story is unique, its public market performance fits an increasingly common pattern. Dozens of companies that went public on the Toronto Stock Exchange in recent years are now trading at well below their issue prices.

Media company BBTV Holdings Inc., for example, went public in October, 2020, for $16 a share and hasn’t traded above $1 since mid-August. Winnipeg-based agricultural software provider Farmers Edge Inc. went public in March, 2021, at $17 a share. Its shares closed at 25 cents on Monday.

Kristopher Miks, a partner in the Vancouver office of Norton Rose Fulbright Canada LLP who specializes in securities law and mergers and acquisitions, believes the current economic environment has made companies previously driven by organic growth pivot toward growth-by-acquisition strategies.

“Valuations have been fantastic these past few years for IPOs and now that we’ve seen them come down a bit it is making acquisitions more beneficial and targets are presenting more of an opportunity to acquirers with deep pockets to make a play for them,” Mr. Miks said. “I do think we will see more takeunder or takeover opportunities as valuations have come down from what we’ve seen over the past few years of IPOs.”

Karrin Powyrs-Lybbe, however, believes the Freshii story is more of an outlier than a trendsetter.

“I think it is a retail bricks-and-mortar story as opposed to the Canadian capital markets being on display,” said Ms. Powys-Lybbe, co-head of the M&A practice at Torys LLP. “There are lots of headwinds for some businesses, whether it is the pandemic or interest rates, but I don’t think we should expect every Canadian company that went public in the last five years to struggle. And I think there are plenty that will do just fine.”