ARK, Rewards to merge, plan $55m raising

Publicly listed property investment company, The Ark Fund, has announced a $55 million capital raising and a merger agreement with its major shareholder, embattled managed investment scheme player Rewards Group.

The merger follows previous attempts to recapitalise Rewards Group which has been hit by the downturn in MIS sales after the collapse of key industry players Great Southern and Timbercorp.

A recapitalisation of the combined Ark-Rewards group via a convertible bond issue hopes to raise a minimum of $55 million.

The convertible bond issue will comprise an institutional placement of $44 million and an entitlements issue to ARK shareholders of $11 million.

The investor consortium Uliel Indi Rewards (UIR) has committed $10 million to the institutional issue and to underwrite a further $2.5 million of the entitlements issue.

Both issues are being managed by UIR, Azure Capital Limited and Argonaut Limited.

Argonaut managing director Eddie Rigg recently told WA Business News that the existing environment meant an IPO, which had been mooted alongside a potential merger to help alleviate the company's bank debt, was not the best path for the company, which needed more patient capital.

"We would have got it away but we were not raising enough money," he said.

"We had to raise more money and get the banks completely out of the story.

"You can't have a financial partner who wants to get out at the wrong time."

Ark said it anticipated that the entitlements issue will be on a non-renounceable basis and will be fully underwritten, with the proceeds of the recapitalisation to be used to retire bank debt (approximately $28 million), with the balance applied towards enhancing the working capital position of the merged group.

The directors believed that the recapitalised combined Ark-Rewards business will be a significantly stronger participant in the forestry and agricultural managed investment scheme industry.

Rewards is the largest shareholder of Ark and the tenant on all of its 32 properties and the two companies have substantial business connections from equity holdings, debt guarantees and a related-party management contract.

As previously reported by WA Business News, Rewards owns around 13 per cent of Ark Fund.

The stake cost more than $3 million but would be worth about $1.3 million based the company's last close at 41 cents per share before trading was suspended on February 15.

Ark's next biggest shareholders are Australian Executor Trustees with more than 12 per cent and Wyllie Group at almost 10 per cent.

At the start of this month Ark extended its deadline for Rewards to pay rent owed on its widespread portfolio having previously given Rewards until February 15 to pay the rent only to extend the deadline once more to March 15.

At the time of going to print it was not known if this deadline had been extended for a third time and how much rent is in arrears, but last financial year Rewards paid $6.4 million as Ark's sole tenant.

Ark siad the National Bank of Australia has been fully supportive of the proposed transaction and has signed "standstill agreements" with both Ark and Rewards which provide a standstill on debt repayments to the NAB so the parties can pursue the capital raising and agreed transaction path without further working capital pressure from interest payments.

Full announcement below:

THE ARK FUND LIMITED (ASX:ARJ) - MERGER WITH REWARDS AND CONVERTIBLE BOND ISSUE

The Board of The ARK Fund Limited (ARK) is pleased to announce it has entered into an implementation agreement to effect the merger of ARK with Rewards Group Limited (Rewards) and to undertake a recapitalisation of the combined group via a convertible bond (CB) issue to raise a minimum of AUD$55 million.

Rewards is a leading developer and operator of forestry and agricultural managed investment schemes, and is the largest shareholder of ARK and the tenant on all of its 32 properties.

The CB issue will comprise an institutional placement of CBs of AUD$44m and an entitlements issue to ARK shareholders of AUD$11m. It is anticipated that the entitlements issue will be on a non-renounceable basis and will be fully underwritten.

The proceeds of the recapitalisation will be used to retire bank debt (approximately AUD$28m), with the balance applied towards enhancing the working capital position of the merged group.

The directors believe that the recapitalised combined ARK-Rewards business will be a significantly stronger participant in the forestry and agricultural managed investment scheme industry with shareholders being offered the opportunity to participate in one of the strongest companies in the sector.

The merged company will benefit from:
 Large agricultural land bank comprising the combined ARK and Rewards landholdings,
 Strengthened Board and management team, with substantial industry experience and expertise, and
 An enlarged investor base, including a number of strategic investors with a long-term view on the industry in which the merged entity will operate

The investor consortium Uliel Indi Rewards (UIR) has committed AUD$10 million to the institutional CB issue and to underwrite a further AUD$2.5m of the CB entitlements issue, subject to transaction conditions precedent being satisfied. UIR is being co-managed by Uliel Capital Advisory Pte Ltd, a Singapore based investment group, IndiEnergy Pty Ltd, a Sydney based advisory firm and is supported by a number of well known sophisticated investors, both domestically and internationally.

The institutional CB issue and entitlements issue are being managed by UIR, Azure Capital Limited and Argonaut Limited, the latter two being Australian based investment and advisory firms.

The transaction is subject to conditions precedent including firm commitments to the CB issue being received, due diligence, completion of an independent expert's report, completion of formal documentation, receipt of all necessary regulatory approvals, ARK shareholder approval at a general meeting, lodgement of a prospectus for the CBs rights issue, and acceptance of the CBs for public listing.

Merger Transaction

Under the merger transaction, it is proposed that ARK will acquire 100% of Rewards Group Limited (Rewards), forming an enlarged group that will have significant agricultural land holdings as well as one of Australia's leading forestry and agricultural managed investment scheme (MIS) businesses.

At the same time ARK will also acquire 100% of ARK Capital Pty Ltd (ARK Capital), currently the manager of ARK's business, in order to internalise the management of the merged entity to create significant cost savings.

The merger terms that have been agreed will require ARK to issue the following securities to acquire Rewards and ARK Capital:

 65.5 million ordinary fully paid ARK shares;

 10 million performance shares, which will be capable of conversion by the holders into ordinary fully paid shares when ARK's share price, calculated on a volume weighted basis over a 90 day period, is 50 cents or greater; and  10 million options, exercisable at 50 cents per share with a term of 5 years from the date of issue.

It is envisaged that post merger:

 The company's name would be changed to Rewards Group

 The Board of the merged entity would be restructured to reflect the changed shareholdings Recapitalisation ARK proposes to issue a minimum of AUD$55 million via a combination of a placement of CBs to institutional and sophisticated investors (AUD$44 million) and an underwritten non-renounceable entitlement issue of CBs (AUD$11m).

A book-build to secure commitments (subject to completion of the overall transaction) for the CB institutional placement will occur during April 2010. Institutional investors will be required to sub-underwrite the entitlement issue on a pro-rata basis.

As noted, UIR has committed AUD$10 million to the CB institutional placement (subject to commitments for the entire CB placement being received) and to sub-underwrite the corresponding pro-rata portion of the rights issue (AUD$2.5 million).

Capital Structure

Given ARK currently has 23,922,149 shares on issue, following completion of the merger, existing ARK shareholders will:

 Hold around 24% of the merged entity on an undiluted basis;

 Hold around 21.5% of the merged entity on a fully diluted basis (pre-conversion of any of the CB's); and

 Hold around 10% of the merged entity on a fully diluted basis post any conversion of the CB's (assuming current anticipated terms).

Application will be made to list the CBs.

NAB Standstill Agreements

The National Bank of Australia Limited (NAB) has been fully supportive of the proposed transaction and has signed "standstill agreements" with both ARK and Rewards. Essentially the agreements provide a standstill on debt repayments to the NAB so the parties can pursue the capital raising and agreed transaction path without further working capital pressure from interest payments.

Voluntary Suspension

Given that the transactions contemplated are conditional on a number of matters, the Directors are of the view that uncertainty around ARK's financial position remains. The Directors have therefore requested that the Company's shares continue to be suspended from trading on ASX.