Arctic Glacier still valuable, coveted despite many woes

Arctic Glacier may be mired in the worst kind of corporate mess, but it doesn't change the fact that its operations are capable of generating substantial profits.

When cocktails are mixed in six Canadian provinces and 17 U.S. states, chances are it's Arctic Glacier premium packaged ice that will be clinking in those glasses.

About 75,000 grocery and convenience stores though a large swath of Canada and the U.S. have freezers full of packaged ice on their premises and when their customers come in for ice in most cases they have no choice -- Arctic Glacier is the only brand sold.

Is is a virtually recession-proof, low-cost product with demand dampened only by cool, rainy weather, a phenomenon management recently cited at an alarming rate as an explanation for poor performances.

It's likely for all those reasons that new equity holders such as Coliseum Capital and the Talamod Master Fund are trying to wrest control of the company.

They believe there is value there, despite the collapse in unit value from $14 in the summer of 2007 to an all-time low closing price Wednesday of 5.5 cents.

They say they're so convinced of that, they will backstop an offering to inject new equity that will stabilize the balance sheet.

With all that has happened over the last couple of years and reading between lines of their public statements, it seems likely they think those positive results will have to be achieved with new management.

In 2010, the operation of Arctic's 39 production plants and 48 distribution facilities across Canada and the northeast, central and western United States generated just over $50 million in operating profits.

It is sadly ironic that it's current poor operating results are partly a result of increased competition, especially in California, since antitrust activities precipitated Arctic's decline -- we'll stay out of your turf if you stay out of mine.

Late Wednesday, Arctic disclosed it was in default on its $30-million line of credit owed to a bank syndicate. When the company announced earlier in the week it was also in default of its $192-million loan agreement with West Face Capital and the CPPIB (the Canada Pension Plan Investment Board) it was not because it's not profitable, just not profitable enough.

Arctic's loan covenant with its lenders calls for a minimum annual EBITDA or operating profit of $45 million.

If its balance sheet was not so heavily leveraged with expensive debt -- at a whopping 12 per cent to West Face and the CPPIB -- $45 million of operating profit might not be so bad.

Much has happened over the past few months to bring all sorts of nasty convergent issues to a head that are likely leading to an effective change in control of the company.

The first shoe fell at the end of July when the company failed to refinance a $92-million convertible debenture. That wiped out the former owners' equity and effectively forced the resignation of Arctic's founder Robert Nagy (whose multimillion-dollar holdings in the company were diluted down to around $100,000) from the board.

For close to a year, a special committee tried unsuccessfully to refinance that debt. The efforts incurred $3.4 million in expenses and a very bad taste in the mouths of some of those concerned unitholders now trying to force a change in control.

They claim they had made their willingness to backstop a rights offering to the special committee and say those entreaties were ignored.

That apparent failure in stewardship of corporate assets followed a disastrous financing that closed in February 2010, a time when the credit market had not fully recovered from the Wall Street meltdown of late 2008.

West Face Capital and the CPPIB came to the "rescue" and were able to extract top dollar and iron-fisted controls, including immediately putting an end to healthy distributions Arctic unitholders had enjoyed for years.

Longtime investors would not be faulted for being angry. They will likely not be the ones who will reap the dividends if and when Arctic's corporate drink finally gets topped up.

martin.cash@freepress.mb.ca

Republished from the Winnipeg Free Press print edition September 15, 2011 B4