Prem Watsa's insurance conglomerate Fairfax Financial Holdings Ltd. is trying to take a small bite out of Canada's food-services business by bidding for Prime Restaurants Inc.
Prime has 154 restaurants and pubs, including the East Side Mario's, Casey's and Fionn MacCool's chains. It was the target of a $59-million takeover offer from rival Cara Operations Ltd. in October. But Fairfax has now trumped that with a $71-million bid.
Prime's board said the Fairfax offer is a "superior proposal" to the Cara offer, and now backs the new bid.
Cara owns the Milestones, Montana's, Kelsey's, Swiss Chalet and Harvey's chains. But it had wanted to get a foothold in Italian restaurants and the pub market, both areas where it was absent. Under its original agreement with Prime, it has five days to match or beat the Fairfax offer, and the company said Monday it is working with its financial and legal advisers to figure out what to do.
While Fairfax primarily invests in insurance and other financial services, the bid for Prime marks one of several forays into other sectors where it feels the target company has solid prospects.
Just last summer, Fairfax bought William Ashley China, a family-owned retailer of gifts, china, glass and flatware. It owns a stake in International Forest Products Ltd., and is a major shareholder in the Brick Ltd., the brash Edmonton-based retailer of furniture and appliances.
"Much like with our recent investment in William Ashley, we are looking to invest in good, long-term businesses with strong brands and strong management," Mr. Watsa said Monday, while praising Prime chief executive officer John Rothschild and president Nicholas Perpick for "their decades of experience at Prime."
Analyst Jeff Fenwick at Cormark Securities Inc. said the Prime investment will be a very small portion of Fairfax's huge $23-billion portfolio of holdings, but it reflects the company's attempt to be "value investors along the lines of Warren Buffett."
They are particularly interested in companies that are undervalued, have good franchises and strong management teams, and Prime appears to fit that scenario, he said. "They've had quite a number of Canadian firms that they've invested in over time, and made a pretty good money off that," he said. "They look at everything. They keep it interesting."
Mr. Rothschild said in an interview that he and the other Prime managers are gratified that Fairfax has asked them to stay on and run the operation. "Not only do we believe in this company, we love the company," he said.
Mr. Rothschild and two other senior managers have agreed to re-invest a portion of the proceeds they'll get from selling their shares to Fairfax, back into Prime.
Mr. Rothschild said Prime is having a very good year, and concern over the state of the world's financial markets is not keeping people out of restaurants and bars. "I'm mindful of the Canadian economy, but our business is good," he said. Almost all of the company's restaurants and bars are in Canada, with just five in the United States.
Prime's shares, which jumped sharply when Cara made its offer in mid-October, rose another 10 per cent Monday to $7.65. The Fairfax offer is for $7.50 per share, plus as much as 25 cents a share more in the form of a special dividend, depending on how much of a break fee has to be paid to Cara. Cara's earlier offer was for $7 a share plus a 25-cent special dividend.
Cara had to pay a substantial bonus to its existing bondholders to get their permission to issue the new debt needed for the proposed acquisition of Prime.