Diversified a success for shareholders

Shareholders of the former BENEV Capital, a cashed-up shell with lots of tax losses, might wonder how their interest would have panned out had a different outcome emerged three years back. And they also might especially wonder given that the share price of the successor company, Diversified Royalty Corp. that has seven buy recommendations, hit an all-time high this week.

In mid-2014, BENEV Capital, which emerged from the ashes of Bennett Environmental, was under siege from Difference Capital, a publicly listed merchant bank whose mission was to make strategic investments in growth companies. Difference, a firm set up by Michael Wekerle, a legendary trader from GMP Capital, bought enough shares (28 per cent) to give it the control block in BENEV.

At the time, Difference Capital said it acquired the shares “for investment and potentially strategic purposes.” The sense, then, was that Difference might try and complete a transaction with BENEV that would somehow give it access to that company’s extensive cash balances. In time, three of its nominees were made directors.

But a couple of weeks after the board (without the involvement of the Difference trio) approved a $103-million acquisition of a “top line” royalty interest in Franworks Franchise Corp., Difference, which wanted to convert BENEV to an early stage merchant bank, sold its shares through a $22-million transaction.

Out of that fracas, came Vancouver-based Diversified Royalty Corp. At the time, Diversified also completed a private placement at $1.66 a share and a public financing at $2.40 a share. The shares, largely held by institutions, closed Wednesday at $3.15.

It’s been a good story for shareholders, given the share price appreciation and the regular monthly dividend, said Sean Morrison, chief executive at Diversified, a company with three employees.

“We generate about $27 million of revenue, about $24 million of EBITDA and pay out about $23 million in dividends,” said Morrison. In an earlier career, Morrison pitched the idea of a top-line royalty structure to companies including A&W, The Keg and Colliers International. (A&W, Pizza Pizza, The Keg and Boston Pizza, all food-based, are now public companies offering royalty streams to investors.)

Diversified has been busy. In June, 2015, for instance, it spent $30.6 million to acquire Canadian and U.S. trademarks and certain other intellectual property rights held by Sutton Group Realty Services and received an initial annual royalty of $3.5 million. The next month it spent $138.8 million “to acquire the trademarks and certain other intellectual property rights utilized by Mr. Lube in its business,” and received an initial annual royalty of $12.4 million. Last August it spent $53.75 million to acquire the Canadian “trademarks” and certain related “property rights” of Air Miles and receive an initial royalty of one per cent of gross billings.

And it’s not finished: when it announced the Air Miles transaction, it said its objective was to use its remaining $33 million of cash on hand combined with debt financing “to fund its next trademark and royalty acquisition from a high-quality business by the end of 2017.”

Naturally, Morrison wouldn’t name the next target. But in trying to buy a target Morrison is competing with a private equity firm. “But they don’t have to sell. A royalty option is a spectacular outcome for the owner of a multi-location business, if they believe in the growth of their business,” he said.

It has made one sale: in September, 2016, it disposed of its “trademarks and rights related to the Franworks restaurants businesses” to Cara Operations, part of a plan to reduce exposure to Alberta.