Fairfax Financial Holdings Ltd.'s bid for Prime Restaurant seems to have caught the market by surprise, but the potential for a new suitor was always a possibility.
From the moment that Prime signed a deal to be acquired by Cara Operations Ltd., the clock started ticking on a 30-day 'go shop' period during which management set out to find a higher bid.
These provisions are becoming much more common in Canada. One of the higher profile deals that included one earlier this year was the joint buyout of TimberWest by British Columbia Investment Management Corp. and Public Sector Pension Investment Board.
'Go shops' typically crop up in negotiated takeovers that are struck between two parties who like each other. But because the target's board has a fiduciary responsibility to maximize value for its shareholders, the target's management typically hires bankers to go out and find another offer. If one emerges, the target usually has to pay a break fee, and in Prime's case, the company has to pay Cara $1-million if Fairfax's bid is successful.
While the new bid is troublesome for Cara, it's a good thing for shareholders because the new deal is worth $71-million, 20 per cent higher than Cara's $59-million bid. Cara now has five days to match, but doing so will be tricky. The restaurant chain owner financed its acquisition with a high yield bond issue that has already come to market, which makes expanding the size of the takeover purse much harder.
However, if Cara can put a higher bid together and Prime's board accepts it, the target will have to pay Fairfax $3.5-million.