A nearly five-year water supplier partnership between Primo Water Corp. and Cott Corp. produced enough familiarity to lead to Cott’s $775 million offer for Primo on Jan. 13, according to a recent regulatory filing.

Cott became a water supplier for Primo in December 2014 when it bought DS Waters. It acquired a contract that was scheduled to expire on Dec. 31, 2020. In March 2017, DS and Primo extended the contract to Dec. 31, 2025, with an automatic seven-year renewal unless the contract was terminated.

Primo disclosed a required narrative of the background of how the deal came together, downplaying the role an activist hedge-fund group, Legion Partners LP of Beverly Hills, Calif., had in compelling the transaction.

The narrative cited Legion’s share purchases as it increased from an initial 5.2% ownership stake in May 2018 to 9.1% in August 2019 — the second largest in Primo at that time.

It briefly touched on Legion’s letters of Sept. 17 and Oct. 29 to Primo shareholders that were harshly critical of executive chairman Billy Prim, chief executive Matthew Sheehan and several board members for what it called a financial underperformance.

Legion managing directors Chris Kiper and Ted White pulled no punches in their 11-page letter that called for an independent chairman and approval of several new independent board members.

The Legion officials said “we contend Primo is an incredible business with significant scale, but is being held back by a lack of critical expertise on the board and an inability or unwillingness to objectively evaluate the performance of management and directors.”

The narrative began in essence in February 2019 when Cott chief executive Thomas Harrington cited his company’s interest in buying Primo to Prim. The goal, as the companies cited Jan. 13, was to form a “pure-play” water company.

In April, Harrington sent Prim a confidentiality proposal to negotiate. Prim disclosed to the Primo board on May 1 his discussion with Harrington.

Meanwhile, Prim and Sheehan had engaged Goldman Sachs to review other potential acquirers.

At a special board meeting May 28, Primo’s management and board had become concerned by “operational challenges ... particularly the refill business” that could have negative revenue and spending implications. At that time, Primo’s board opted to end talks with Cott.

The refill business concerns also drew the attention of Legion.

Legion bills itself as “deep value, long-term oriented active investors.” Its strategies include gaining representation on corporations’ board of directors to “impact policies or strategic direction or, in some cases, simply advocating specific business activities for the fundamental benefit of a portfolio company.”

Harrington informed Prim in September that Cott was prepared to move forward on buying Prim and selling off its S&D Coffee and Tea business.

At that time, it offered $14.50 a share for Primo and up to a 19.9% ownership stake in Cott. Primo’s board authorized Prim to resume negotiations, as well as enter confidential negotiations with two potential acquirers identified by Goldman Sachs.

By this time, Prim had informed Harrington he had no interest in becoming a Cott executive if a deal was completed.

On Nov. 1, the Primo board had decided to terminate Sheehan because of “significant concerns regarding his ability to drive operational and financial improvements in Primo’s business and results of operations.” Prim returned as interim chief executive, but the company chose to pay Sheehan his full 2019 salary.

Harrington agreed to increase Cott’s offer to $15 a share on Nov. 9, to rename the combined company under the Primo Water brand, and to have Prim and another Primo board member serve on the combined company’s board.

However, after Primo’s third-quarter results showed a decline in refill business revenue, Cott reduced the per-share offer to $14.

By Nov. 15, the other two potential acquirers had ended their interest in Primo.

On Dec. 21, Cott was given an exclusive negotiating window through Jan. 15 that would give Cott time to negotiate the sale of S&D. Cott announced Jan. 8 plan to sell S&D for $405 million. It bought S&D for $355 million in August 2016.

Primo’s board held a special meeting Jan. 11 and unanimously agreed to accept the Cott offer.

On Jan. 15, Legion announced it had sold its entire 9.1% holding in Primo for a projected $49.56 million. With the share price at $11.10 at the close of trading Friday, Legion’s stake was worth $38.93 million at that time.

That means Legion’s stake rose 27.3% in value, or by $10.63 million, from the Jan. 10 stock-market close to Jan. 13 opening.

Christopher Kiper, managing director with Legion, said Jan. 13 that his group was “not entirely happy with the price.”

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

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.”

rcraver@wsjournal.com

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