If you were going to launch the next big thing in Canadian business, you would assemble the cast of characters who founded Acasta Enterprises Inc. nearly three years ago.
The company was started by a proven investor, Tony Melman, formerly of Onex Corp., along with an A-list collection of current and former CEOs – Air Canada's Calin Rovinescu, Royal Bank's Gord Nixon, Bank of Nova Scotia's Rick Waugh, Geoff Beattie of Woodbridge Co. Ltd., the late Hunter Harrison from Canadian Pacific Railway, and a former federal Liberal cabinet minister, Belinda Stronach, of Magna International fame. On the strength of their reputations, Acasta raised $403-million in an initial public offering in the summer of 2015.
Mr. Melman, the company's CEO, used the founders' formidable network to put that cash to work, buying three businesses for a total of $1.1-billion in November, 2016, adding a healthy dollop of debt to help pay for the acquisitions. Acasta tried to execute a proven private-equity game plan – that is, building businesses mostly with borrowed money, an approach that has turned small fortunes into large ones and transformed millionaires into billionaires. As several of the company's CEO backers said recently in off-the-record conversations, with founders like these, what could possibly go wrong?
Just about everything.
Acasta is a disaster. The company missed scheduled loan payments earlier this month and is in restructuring talks with lenders. An aircraft leasing business acquired 16 months ago is now being sold for approximately 60 per cent of its original US$270-million purchase price. Mr. Melman departed in early March. Other backers, including Ms. Stronach, are checking out. Investors who paid $10 for Acasta shares in the IPO now own stock that trades at $2.30.
The investments of Acasta's founders are all underwater: Their paper losses run from $1-million to $15-million, according to one source. The financial pain is tolerable; the reputational damage is more painful. No one associated with the launch of the company now wants to talk publicly. Privately, the executives who backed Acasta say they are embarrassed by what played out.
What went wrong? Acasta, with its all-star corporate cast, made financial mistakes that a first-year business school student would know to avoid. The company overpaid on acquisitions, according to insiders, took on too much debt, and set what turned out to be unrealistic expectations on sales growth. There's a lesson here in how even the most experienced of investors can lose money following a financial fad.
Let's go back to the beginning. Acasta is what is known as a special purpose acquisition company, or a SPAC. These are shell companies that raise money through initial public offerings for the purpose of buying other firms and expanding the business. The concept is relatively common in U.S. markets and was brought to Canada in 2015, after the introduction of new market regulations. SPACs were Bay Street's flavour of the month once the rules changed. A total of seven SPACs went public, raising approximately $1.5-billion.
Once a SPAC raises money, the management team has two years to invest it. Miss that deadline, and the SPAC must return every dime to investors. If no acquisition is made, the founders eat the significant costs incurred to pay lawyers and bankers for IPO expenses. Acasta was the largest SPAC raised in Canada, and Mr. Melman and the backers faced considerable pressure to put that pile of cash to work. Acasta bought three businesses with very little in common in the fall of 2016: a private-label shampoo and soap maker, a company that churns out laundry and dishwasher detergent, and Stellwagen Finance Co. Ltd., an aircraft leasing firm based in Ireland.
Signs of trouble appeared a year later, in November of 2017, when Acasta reported a quarterly loss of $9.7-million, due in part to what the company described as "compressed margins" in its consumer products business. Among the reasons for the red ink: The cost of new product launches at the shampoo maker, a run-of-the-mill expense for a consumer products company. More ominously, Acasta said it would delay a planned investor briefing to talk about its finances "until such time as the company has determined the most optimal path forward given the strategic alternatives being evaluated."
It soon became apparent that the executive team at Stellwagen wanted out of Acasta. Expanding an aircraft leasing business requires significant capital. Sources at Acasta and its financial and legal advisers said the new owner struggled to come up with additional cash for its Irish offspring, which frustrated Stellwagen executives.
In January, that frustration spilled into the open: A private company controlled by Stellwagen CEO Douglas Brennan put out a press release demanding changes to Acasta's board of directors. Two weeks later, Acasta announced plans to sell Stellwagen back to its management team, and revealed Acasta was struggling to pay back its debts, which totalled $794-million as of Sept. 31, 2017.
Mr. Melman left in early March: Mr. Beattie, former CEO of Woodbridge, is picking up the pieces as chairman of the board, with former Acasta chief financial officer Ian Kidson stepping up as interim CEO. (Woodbridge is the holding company of the Thomson family, and it owns The Globe and Mail.)
The sale of Stellwagen, expected to close at the end of March, effectively breaks up the gang that founded Acasta. A number of long-time backers plan to flip their Acasta holdings for shares in Stellwagen. Ms. Stronach plans to swap a million Acasta shares, a third of her holding, for a stake in the aircraft leasing firm. Pollster Martin Goldfarb, who sold the detergent-making business to Acasta in 2016 for cash and stock, will also trade one million Acasta shares for Stellwagen stock.
The sale of Stellwagen will generate US$35-million in cash, enough to temporarily satisfy Acasta's lenders. But the SPAC's long-term future remains in doubt, with a strategic review under way to "maximize shareholder value and reduce Acasta's indebtedness."
Acasta's founders had distinguished resumés. That did not help their company avoid a pitfall common to SPACs – the pressure to buy a business under a tight deadline. And even a roster full of former CEOs could not make a winner out of a company that took on too much debt, and ran afoul of lenders. What can go wrong in a leveraged buyout? Just about anything.