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Winston-Salem’s Primo Water Corp. has announced a likely sale to Cott Corp., based in Mississauga, Ontario.

Primo Water Corp., facing significant shareholder pressure on its management team, said Monday it has agreed to be sold to Cott Corp. in a deal valued at $775 million.

The deal involves Cott, based in Mississauga, Ontario, paying $14 a share, or $549.4 million, plus assumption of Primo debt.

The Winston-Salem company would be the key element in Cott’s transformation into a pure-play water company.

Cott said Thursday it plans to sell its S&D Coffee and Tea business that’s based in Concord. It bought S&D for $355 million back in August 2016.

The combined company will use Primo Water’s name, brand and stock symbol PRMW, though Primo would operate as a wholly owned subsidiary of Cott. Primo shareholders would own 16% of the combined company.

Cott said the name change would put the combined company “more in line with our peers.”

The deal is expected to close in March. Billy Prim, founder and executive chairman of Primo, would join Cott’s board of directors, along with board member Susan Cates.

Activist hedge-fund group Legion Partners LP of Beverly Hills, Calif., submitted letters on Sept. 17 and Oct. 29 to shareholders that were harshly critical of then-chief executive Matt Sheehan, Prim and several board members. Sheehan succeeded Prim as chief executive in May 2017.

Legion owns 9.1% of Primo, or 3.57 million shares, trailing only Capital Research Global Investors of Los Angeles, which held a 10.6% stake, or 4.16 million shares, as of July 31.

Prim held just under 1.9 million shares of Primo, which represented a 4.7% stake, as of March 28. Prim also has 762,236 deferred stock units that he could acquire over the next three years.

Legion said three Primo board members are too closely linked to Prim to properly oversee the company from their previous relationship with Prim with Blue Rhino Corp., which was sold to Ferrellgas Partners LP for $343 million in April 2004.

On Nov. 4, Primo fired Sheehan, with Prim resuming his chief executive duties on an interim basis.

Cates told analysts in November that the firing of Sheehan was “about the company not performing to expectations that the board had for operating performance.”

Christopher Kiper, managing director with Legion, said his group was “not entirely happy with the price.”

The $14 a share offer from Cott represents a 26.2% increase from Primo’s share price of $11.09 at the close of trading Friday.

However, the offer represents a 31.5% decline from its all-time high of $20.43 on Aug. 24, 2018. The 52-week share price range is $9.54 to $16.35.

Options for Primo stakeholders involve: a mix of $5.04 in cash and 0.6549 common shares of Cott, $14 in cash; or 1.0229 common shares of Cott.

Kiper said Legion was “just days away from nominating directors for a proxy fight” over the Primo board.

“Instead, they chose to sell at an offer that undervalues the company substantially,” Kiper said.

“The entire transaction is indicative of Billy Prim finding a way to staying involved with Primo somehow. It’s further indication that Billy Prim is only concerned about himself.”

Consolidation likely

There was no immediate comment on how the planned sale affects local employees. Primo had 602 employees companywide at the end of 2018.

The company projects cost savings of $35 million over three years.

However, in a PowerPoint presentation to analysts, the companies said the combined company will “streamline back-office operations and eliminate duplicative general and administrative expenses that includes expenditures related to the day-to-day operations.”

Identified as key areas for cost cutting are: public company expenses; shared services; facility optimization and consolidation; and combined refill and filtration technologies and operations.”

Cott officials said there are plans to put Cott and Primo employees together in many of those operations.

“This is a perfect fit,” Prim told analysts, citing the companies’ partnership in the exchange business.

“This combination of two highly recognized water companies creates compelling value for all stakeholders, including our customers, employees, shareholders and suppliers.

Mayor Allen Joines said he views the pending sale of Primo "as a success story of a start-up company that was very successful and was purchased."

"It is my belief that Winston Salem’s economic strategy will produce many other start-ups that are successful. My understanding is that jobs will be minimally affected."

Bowman Gray IV, a local independent stock broker, said that Primo’s board and management “saw this as the best opportunity to create long-term value for their shareholders.”

“I am also certain there was tremendous pressure by large shareholders, such as Legion, to take additional action after Mr. Prim stepped back into the role as CEO.

“I think it may have been possible for them to fight their way back, but that would have been a very long row to hoe,” Gray said. “The sale of the company was the best choice they could have made.”

Cott background

Cott has a presence in 21 countries.

“We are excited about the opportunity to provide sustainable hydration solutions to more people than either company could have done alone,” Prim said.

Cott listed in a separate regulatory filing that it had $2.36 billion in revenue for the third quarter, while its S&D Coffee & Tea had $599 million and Primo $303.3 million.

Tom Harrington, Cott’s chief executive, said that “as we turn to our new business model, we are taking the opportunity to rebrand our company as Primo Water Corp. to reflect the leading position we have in the growing and attractive water market with the opportunity to be revalued in line with our water peers.

“As Primo and Cott have been strategic partners for six years, we expect a smooth transition and integration.” That partnership features Cott providing water for use in Primo’s bottle structure.

The companies said that, combined, they generated $2 billion in revenue in the third quarter of fiscal 2019, as well as adjusted EBITDA of $324 million.

EBITDA stands for earnings before interest, taxes, depreciation and amortization. Many analysts put their financial focus on EBITDA when evaluating the performance of a company that has yet to make a profit or is newly profitable.

In the third quarter, Primo posted a $2.62 million profit and 6.3% increase in sales to $87 million, which met the upper range of its third-quarter estimate.

However, adjusted EBITDA was down 5.4% to $15.3 million. Primo had projected a range of $17 million to $18 million.

Barrington Research analyst Michael Petusky said Monday that "Cott's reasons for desiring the Primo asset are many and make a lot of sense."

"Assuming that Cott can successfully divest its remaining non-water asset (S&D Coffee) as it hopes to do, this deal would create a very large pure-play water business that would be a market leader in home/office delivery, as well as Primo's areas of expertise - refill, exchange and dispensers."

"We see this transaction as being within the range of 'fair,' but at the lower end," Petusky said. "Given that Cott is the acquirer, there should be several compelling revenue synergy opportunities over the next few years, including the one in Europe."

rcraver@wsjournal.com

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@rcraverWSJ

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