NEW YORK, Oct. 2, 2013 /PRNewswire/ -- Engine Capital
LP (together with its affiliates, "Engine"), a large shareholder of
Vitran Corporation Inc. (Nasdaq: VTNC) (TSX: VTN), with ownership
of more than 3.5% of the shares outstanding, today announced that
it has delivered a letter to the Company's Board of Directors.
The full text of Engine's letter follows:
October 2, 2013
Members of the Board of Directors
c/o Richard D. McGraw, Chairman of
the Board
Vitran Corporation Inc.
185 The West Mall, Suite 701
Toronto, Ontario
M9C 5L5, Canada
Dear Board Members:
Engine Capital LP, together with its affiliates ("Engine"), has
become a large shareholder of Vitran Corporation Inc. ("Vitran" or
the "Company") following the announcement of the sale of the
Company's U.S. LTL business on September
23, 2013. Engine currently owns more than 3.5% of the
Company's outstanding shares. We invested in Vitran because
of the strength of its Canadian business, its strong free cash flow
generation, and its low valuation. We also think that consolidation
in the Canadian LTL market is inevitable and that it would not make
sense for Vitran to remain a standalone public company. We were
therefore not surprised to read about the recent unsolicited
acquisition proposal from TransForce Inc. ("TransForce") to buy
Vitran for $4.50 per share.
We are writing to you for two reasons: (1) to highlight our
strong belief that the $4.50 per
share proposal from TransForce significantly undervalues the
Company, and (2) to recommend that the Board of Directors of the
Company (the "Board") immediately initiate a broad sale process to
maximize shareholder value and ensure that shareholders receive
full and fair value for their investment. We think that
numerous parties would be interested in the Company, and we are
confident that a buyer interested in purchasing the Company at a
significant premium could be found. In that regard, we note
the 13D filing yesterday by Clarke Inc. ("Clarke") disclosing its
recent accumulation of approximately 10% of the Company's
outstanding shares. That two strategic parties have now
emerged in the past week alone should make it clear to the Board
that there is substantial interest in the Company and that a
significant opportunity exists to explore a sale of the Company to
the highest bidder.
It is our view that the investment community in general, and the
TransForce bid in particular, significantly undervalue the Company
because neither appear to assign any value to the Company's
significant real estate assets. Most analysts assume that
after the sale of its U.S. LTL business, Vitran has a net debt
position of $25 million, based upon
their assumption that Vitran has $22
million of cash and $47
million of mortgage debt. We believe that these assumptions
fail to take into account the significant real estate assets the
Company has against these mortgages. In other words, analysts are
penalizing the Company's valuation because of its mortgage debt
without giving it credit for its corresponding real estate assets.
To illustrate, assume that the Company executes a sale and
leaseback transaction and sells its real estate for $85 million, which we think is a reasonable
estimate of the Company's real estate assets. It could repay the
$47 million of mortgage debt and be
left with an additional $38 million
of cash, in addition to the $22
million of cash the Company currently has on hand. In other
words, while most analysts think that Vitran has a net debt
position of $25 million, Engine
considers Vitran as having a de-facto net cash position of
$60 million. Obviously, the Company's
EBITDA would be reduced by additional rent. Assuming a cap
rate of 7%, we arrive at an additional rent amount of approximately
$6 million. The Company's EBITDA
would therefore be reduced from approximately $14 million to $8 million in light of the
additional $6 million of rent.
TransForce's proposal of $4.50 per
share values the equity value of Vitran at around $75 million and its enterprise value at around
$15 million, after taking into
account the $60 million of cash post
sale and leaseback. This proposal therefore values the Company at
around 2 times EBITDA, not taking into account any potential
revenue and cost synergies (beyond corporate overhead). Clearly,
this proposal significantly undervalues Vitran. Putting a
reasonable multiple on this EBITDA, it is not difficult to envision
a sale of the Company north of $6.50
per share. This sale and leaseback exercise is not theoretical.
According to Cormark Securities, which covers TransForce, it is
likely that TransForce will shut down many of Vitran's terminals
and sell the real estate. They also note that a TransForce-Vitran
merger could result in strong synergies given a strong
coast-to-coast overlap between their LTL operations in Canada and improved pricing and margins as a
result of a more rationalized Canadian LTL market. These elements
would further reduce the multiple offered by TransForce.
As mentioned earlier, we are convinced that consolidation has to
take place in this space and it makes little sense for Vitran to
remain a small standalone public company at this stage. We
therefore think that the best course of action is for the Board to
immediately initiate a competitive process. Based on our
discussions with different market participants, we think that
numerous parties, both strategic and financial, would be interested
in this asset. The competitive dynamic of a broad auction is
the best way to maximize shareholder value.
Once the sale of the U.S. LTL business is completed, we would
expect Vitran to announce the initiation of such a sale process.
Engine Capital has significant board and M&A experience, and we
are available to discuss our thoughts further with you at your
convenience.
Very truly yours,
Arnaud Ajdler
Managing Partner
Engine Capital
ABOUT ENGINE CAPITAL
Engine Capital is a value-oriented special situations fund that
invests both actively and passively in company undergoing
change.
Contact: Arnaud Ajdler
Contact #: 212 321 0048
SOURCE Engine Capital LP
