n independent committee of the Board of Directors of ARC was formed. CIBC World Markets was retained to provide financial advice to this independent committee and Blake Cassels & Graydon were retained to provide legal advice. The committee identified certain fundamental principles that had to be met prior to the transaction proceeding. First, the transaction had to be accretive on a per unit basis for distributions, cash flow and net asset value. Secondly, continuity of the management team and staff needed to be ensured to the greatest extent possible. It is important to note that, unlike the structure of external managers for other trusts, ARML shares were widely held by 73 shareholders made up of management and staff. This group, as a team, was responsible for the success of the Trust. For the internalization to proceed, it needed approval from both ARC’s unitholders and ARML’s shareholders. The committee needed to consider a broad range of criteria to find an agreement that would be satisfactory to both ARC’s unitholders and ARML shareholders. Some of these criteria included: • Historical and expected future performance of the management team; • Broad based ownership of ARML among the Trust’s existing staff; • The Trust’s own acquisition criteria needed to be met as in the acquisition of any asset; • The transaction needed to be accretive to net asset value, cash flow and distributions on a per unit basis; • No additional G&A costs could result for the Trust which would not otherwise have been incurred; and • The capital structure of the Trust could not be impaired by the transaction.
motivated to continue with the Trust and ensure that the units maintain the highest value possible. This is in complete alignment with unitholder interests. The securities held in escrow for all senior shareholders of ARML are subject to certain forfeiture provisions. Thirty per cent of the securities held in escrow will be forfeited if the individual leaves in the first year after closing. The number of units subject to forfeiture will decline evenly over a five year period. The terms of the transaction acknowledged the strong past and expected future performance of the management team. Accordingly, the structure of the transaction needed to protect management continuity. We believe the innovative terms included in the agreement will ensure the existing management team will remain intact for the benefit of all unitholders. Additionally, the Trust benefited in the past from the relationship with ARC Financial Corporation with respect to research and strategic advice services. These services were pre-paid as part of the agreement and will continue for a minimum of five years at no further cost to the Trust. Two assets were acquired in the internalization transaction; a future cash flow equal to three per cent of net operating income and the direct hiring of existing management and approximately 135 employees of the manager. Prior to the transaction, management fees and acquisition fees were paid to the manager. In 2001, the fees were $16.7 million, including $8.8 million for the base management fee and $7.9 million in acquisition fees. Since the transaction, these fees no longer exist. While the accretion to cash flow and distributions will be modest in the short-term, the over life accretion could be significant. There are many benefits to the internalization of the management contract. The internalization provides absolute
Internalization Once all the criteria were considered, the committee drafted up terms of agreement for the transaction to present to the Board of Directors of ARC and to ARML shareholders. The terms of the transaction provided that, subject to unitholder approval, total consideration for ARML was to be approximately $55 million. ARML shareholders would receive $5.0 million less than the agreed purchase price to allow for retention bonuses declared by ARML to its officers but not paid before closing. The net purchase price to ARML shareholders included $4.25 million in cash and 3.58 million trust units or exchangeable shares valued at a price of $12.78 per unit. The agreement also contained escrow and forfeiture provisions for senior employees. The escrow provisions guaranteed several factors; the units and exchangeable shares would be retained by management for a significant period of time and management would remain
alignment between management and unitholders. It broadens our potential investor base by eliminating a component of the Trust’s structure that precluded certain institutions from investing in our sector. The transaction improves the Trust’s competitiveness for acquisitions and creates greater opportunity to make value-adding acquisitions to the benefit of our unitholders. The internalization eliminates the barrier to pursue consolidation opportunities and positions the trust to take a leading role in any consolidation of the sector that may occur in the future. Our corporate governance is improved through the simplified corporate structure, allowing greater transparency in compensation reporting. The number of non-management directors increased to six out of a total of seven. Finally, long-term commitment of the Trust’s existing management team and their vision for the business is maintained.