DBRS Places Cara Operations Ratings Under Review with Developing Implications Following Bid for Prime Restaurants Inc.

DBRS has today placed the Issuer Rating and Senior Secured Second-Lien Notes rating of B for Cara Operations Limited (Cara or the Company) Under Review with Developing Implications following the announcement of its bid to acquire Prime Restaurants Inc. (Prime).

Cara announced that it has entered into a definitive agreement with Prime to acquire all outstanding shares of Prime at a price of $58.9 million in aggregate, excluding net debt of Prime, if any, to be repaid by Cara concurrent with the closing of the acquisition. In addition, Prime will use cash on hand to pay a special dividend to its shareholders ($2.2 million) and settle all of its restricted share units ($3.2 million), which will be funded by way of a loan to Prime by Cara. The offer is subject to the approval of Cara’s existing bondholders. Cara intends on financing the proposed acquisition and transaction-related costs with a $75 million issue of senior secured second-lien notes (the Notes). The Notes would rank pari passu with Cara’s existing $200 million senior secured second-lien notes. The transaction is expected to close on or around January 4, 2012.

Prime is the fourth largest full-service restaurant operator in Canada, with 157 restaurants under the brands of East Side Mario’s and Casey’s Grill & Bar, as well as Prime Pubs (under the operating banners of Fionn MacCool’s, D’Arcy McGee’s and Bier Markt). Largely concentrated in Ontario, Prime mainly operates under a franchising strategy and has steadily grown its number of restaurants since its origination in 1997. The acquisition is expected to benefit Cara by adding approximately $49 million and $7 million in revenue and EBITDA, respectively, as well as allowing the Company to diversify into the pub business. In addition, Cara is expecting to generate immediate cost synergies of approximately $7 million, largely from the operating structural rationalization and public company costs.

In terms of Cara’s financial profile, the acquisition of Prime is not expected to result in a material increase in the Company’s leverage. At year-end 2010 (i.e., pre-acquisition), Cara’s lease-adjusted debt-to-EBITDAR was approximately 5.9 times (x). Pro forma the Prime acquisition (i.e., post-acquisition), DBRS estimates that the combined entity’s lease-adjusted debt-to-EBITDAR will be effectively unchanged, provided immediate cost synergies are realized successfully.

In its review, DBRS will focus on (1) the business risk profile of the combined entity, including the risks associated with the integration and achievement of potential synergies; (2) the final acquisition price and Cara’s financial risk profile on a pro forma basis (including a review of the concession of lenders); and (3) the Company’s longer-term business strategy and financial management intentions.

If the transaction unfolds according to plan and conforms to our original assumptions, DBRS expects the impact on the Company’s credit ratings to be neutral. DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status by the closing of the transaction.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.