Latest News
Diversified Royalty Acquires Mikes Steakhouse Casual Trademarks
Wednesday 22 May 2019

22 May 2019 - Canada-based multi-royalty corporation Diversified Royalty Corp. (TSX: DIV) has entered into an agreement with Canada-based restaurant operator Mikes Restaurants Corp. and certain of its affiliates to add a fourth royalty stream for DIV's portfolio, the company said.

Specifically, on May 16, 2019 DIV and its wholly-owned subsidiary MRM Royalties Ltd. Partnership entered into an acquisition agreement with Mikes to acquire the trademarks and certain other intellectual property rights utilised by Mikes in its restaurant business for a purchase price of approximately CDN 43.2m (USD 32.17m).

Founded in 1960, Mikes operates 42 casual steakhouse restaurants, primarily in smaller western Canadian communities (British Columbia 15 locations, Alberta 15 locations, Saskatchewan seven locations, Manitoba 3 locations, Ontario 2 locations).

Over 90% of Mikes locations are franchised and all future growth is currently expected to result from opening additional franchised locations.

The purchase price of CDN 43.2m will be satisfied by a cash payment of CDN 37.1m, using DIV's cash on hand, the issuance of limited partnership units of MRM LP to Mikes having an agreed value of CDN 1.15m, as a retained interest, and a deferred amount of CDN 4.95m, payable by MRM LP to Mikes at least 12 months following closing subject to certain conditions being met.

Immediately following the closing of the acquisition, DIV will license the Mikes Marks back to Mikes for 99 years, in exchange for an initial royalty payment of CDN 3.9m per annum.

The royalty will be based on 4.35% of sales of the 38 Mikes locations in the royalty pool.

The royalty has been structured to grow at a fixed rate of 2% per annum for the first four years and thereafter will fluctuate based on the same-store-sales growth of the Mikes locations in the Royalty Pool. The pro forma royalty coverage is estimated to be 126%.

As a result of the acquisition, DIV's payout ratio will improve to 110% while available cash is CDN 45m. In addition, DIV will increase its tax pools by approximately CDN 42m.

This depreciable tax basis adds to DIV's already existing tax pools of approximately ~CDN 150m and can be depreciated over time to reduce DIV's cash taxes.

Mikes has grown systems sales at a cumulative annual growth rate of 13.1% over the past eight years, generated CDN 88.5m of system sales in 2018 and is forecasting over CDN 100m in system sales in 2019. Mikes' SSSG was 2.2% in 2017, 0.0% in 2018 and 1.6% in 1Q19.

DIV is a multi-royalty corporation, engaged in the business of acquiring top-line royalties from multi-location businesses and franchisors in North America. DIV's objective is to acquire predictable, growing royalty streams from a diverse group of multi-location businesses and franchisors.

DIV currently owns the Sutton, Lube and Air Miles trademarks in Canada. Sutton is among the leading residential real estate brokerage franchisor businesses in Canada with over 200 offices across Canada.
Date Published: 22/05/2019
Target: Trademarks and certain other intellectual property rights utilised by Mikes in its restaurant business
Country: Canada
Deal Size: 32.17m (USD)
Sector: Hotels/Restaurants/Casinos/Catering
Type: Corporate acquisition
Financing: Cash
Status: Agreed
Vendor: Mikes Restaurants Corp. and certain of its affiliates
Buyer: Diversified Royalty Corp