Billy Prim

Prim

A high-profile mutual-fund group based in New York appears to have acquired the top ownership stake in Primo Water Corp., shortly after the Winston-Salem company announced its plans to be sold.

Gabelli Funds and three other affiliates of Gamco Investors Inc. purchased a combined 7.74% stake, or 3.03 million shares, in Primo, according to a regulatory filing by Gamco and Primo. The combined cost is about $43.41 million.

Gamco could not be immediately reached for comment about the ownership stake.

Gamco bought the vast majority of the Primo shares after Canadian beverage company Cott Corp. said Jan. 13 it would pay $14 a share, or $549.4 million, plus assumption of Primo debt. The deal, valued at $775 million, is projected to close in March.

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

The week before announcing the Primo deal, Cott said it planned to sell its S&D Coffee and Tea business that’s based in Concord. It bought S&D for $355 million in August 2016.

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

Primo shareholders combined would own 16% of the combined company. Cott’s share price has ranged from $13.70 to $14.96 since Jan. 13.

Gamco purchased the vast majority of the Primo shares between Jan. 13 and Wednesday. Gamco paid in a range of $13.83 and $14.68 for those shares.

Primo was worth $11.24 a share before Cott announced its plans. Gamco would have paid about $34 million for its current Primo stake at that price.

Bowman Gray IV, a local independent stockbroker, said “there is a bit of an arbitrage play there on the equity exchange.”

Arbitrage investing typically is defined as spreading around an ownership stake by wagering on all possible outcomes of an event with odds that guarantee making a profit no matter the final result.

Each share of Primo will be exchanged for 1.02 shares of Cott. Since Cott has risen to as high as $14.96, the implied value is $15.25 for Primo, “so you buy the Primo stock and subsequently short 1.02 times the amount of Cott stock,” Gray said.

“When the transaction closes, you pocket the difference” between the implied share-price value and the share-price offer.

“Or, they might think it’s a slightly cheaper way to enter Cott for a longer term investment,” Gray said.

The largest stakeholder in Cott is Levin Easterly Partners LLC at 10.54%, or 14.18 million shares. Altogether, there are eight institutional stakeholders holding about 60% of Cott.

The previous second largest investor in Primo, activist hedge-fund group Legion Partners LP of Beverly Hills, Calif., said in a Jan. 15 regulatory filing it sold its entire 9.1% stake, or 3.57 million shares, for a combined $49.56 million.

Legion submitted letters on Sept. 17 and Oct. 29 to shareholders that were harshly critical of Primo’s then-chief executive Matt Sheehan, founder and chairman Billy Prim and several board members for what it called a financial underperformance. Sheehan succeeded Prim as chief executive in May 2017, but was terminated on Nov. 4, 2019.

Capital Research Global Investors of Los Angeles held a 10.6% stake in Primo, or 4.16 million shares, as of July 31.

Prim would join Cott’s board of directors, along with Primo board member Susan Cates.

Prim held just under 1.9 million shares of Primo, which represented a 4.7% stake, as of March 28. That investment was worth nearly $28 million as of Friday.

Prim also has 762,236 deferred stock units that he could acquire over the next three years.

rcraver@wsjournal.com

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