Cara wins battle for Second Cup

Cara Operations Ltd. has finally won the battle for Second Cup Ltd., but it took five months and a dollar more a share than the original offer.

"We accepted the new offer [of $8 a share]" said Michael Bregman, who held out for a higher price. "It is fair to shareholders. It is a fair deal for everybody."

Second Cup "will do well under Cara," he added. "It is a good acquisition for them."

Mr. Bregman signed away the coffee chain his family built on Sunday after hours of negotiation with Cara president Gabe Tsampalieros. Mr. Bregman -- who also ran the mmmuffins, Michel's Baguette and Muffin Break chains -- will pocket $18-million for his stake in Second Cup.

But he said he isn't planning to start any restaurant chains in the foreseeable future. He will concentrate his energies on his high-technology venture capital company, XDL Intervest Capital Corp.

To swing the deal, Mr. Tsampalieros had to raise his offer twice, from $7 to $7.50 and then to $8 a share. Cara also had to extend the offer to 100 per cent of the shares outstanding from the original 71 per cent. And it had to toss out a so-called "subsequent acquisition transaction," which Mr. Bregman said would have created a set of orphan shares with little value.

Toronto-based Cara, already the single biggest shareholder with 43 per cent, will end up paying $42.4-million -- $5.3-million more than planned -- to increase its stake to 100 per cent.

Mr. Tsampalieros appeared happy with the deal in an interview yesterday. He said the Bregman family agreed to tender their shares after Cara amended the offer. "It was a quid pro quo," he said.

Cara's share price fell 12 cents on the Toronto Stock Exchange yesterday to close at $6.90, while Second Cup rose 7 cents to end at $7.97.

With the deal all but done, Mr. Tsampalieros plans to use Cara's expertise to build Second Cup the same way he expanded Cara's other restaurant acquisitions -- Swiss Chalet, Harvey's, Kelsey's and Montana's -- and its hospital, airline catering and food distribution businesses.

"Summit [a food service company]has grown tenfold since we bought it in 1991," Mr. Tsampalieros said in an interview yesterday. "Kelsey's and Montana's have doubled in 30 months. Our focus is to build value using our central expertise."

Mr. Tsampalieros said he supports the current management at Toronto-based Second Cup, and is not planning any major changes. He plans to take the company private in the near future, and consumers may find it easier to find Second Cup coffee at other outlets in the restaurant chain.

Second Cup's earnings have improved in recent months after the coffee chain re-emphasized customer service. It reported yesterday that its sales rose 6.2 per cent to $43.7-million in the quarter ended Dec. 15, 2001, from the same period the year before, while profit rose 10.7 per cent to $1.3-million, excluding the cost of the Cara bid.

Cara's acquisition will not close for several more weeks. As part of the agreement with Mr. Bregman, Cara agreed to extend the current offer until 9 p.m. on Feb. 5.

Cara is currently holds 4.05 million shares in Second Cup or 43 per cent of the shares outstanding. Mr. Bregman said he has agreed to tender his 2.25 million shares -- 24.7 per cent of the shares outstanding. The other major holdout was Investors Group Trust Co. Ltd. of Winnipeg, which holds 17 per cent of the shares outstanding. It has also agreed to tender its shares.

"We are pleased with $8 a share," said Paul Hancock, a partner in the trust company. "We believe it is a fair offer."

The remaining 15 per cent of the shares outstanding are widely held. The smaller shareholders are expected to accept the recommendation of the Second Cup special committee and accept the offer.

The offer is retroactive. Mr. Tsampalieros said he will pay $8 a share to all shareholders who accepted Cara's previous $7.50-a-share offer. They include SegaFreda, an Italian coffee maker that had 250,000 shares.

Under the winning offer, Cara will end up paying $42.4-million to take over a company that it seemed indifferent about only a few months ago. Mr. Bregman had wanted to sell his stake for several years, but Cara had shown little interest in increasing its stake beyond 43 per cent.

That left two major players in the company, and neither with control.

Cara couldn't make up its mind whether to sell its stake or buy out Mr. Bregman. It decided to go ahead with a offer last August.

There have been reports for years that the two shareholders wanted to take Second Cup in different directions, but Mr. Tsampalieros and Mr. Bregman both said yesterday that any reports of a dispute were exaggerated.