AC repudiates catering contract with Cara

tcook052 · Nov 10, 03, 11:49 am

TORONTO, Nov. 10 /CNW/ - Cara Operations Limited ("Cara") announced today
that by written notice received at 5:30 on Friday, November 7,2003, it has
been advised by Air Canada that pursuant to the rights given to the airline
under restructuring protection pursuant to the Companies' Creditors
Arrangement Act (the "CCAA"), Air Canada has repudiated the contract for the
provision of catering and commissary services by Cara to the airline. The
effective date of the repudiation according to the notice from Air Canada is
the date of emergence of the airline from CCAA protection, currently scheduled
for December 31, 2003, but not expected to be later than March 31, 2004.
It is not uncommon for corporations undergoing court-supervised
restructuring to repudiate contracts with service providers while continuing
to hold discussions. Further discussions between Air Canada and Cara have been
scheduled for later this week. Air Canada is Cara's largest customer, with the
repudiated contract representing approximately 13.7% of the fiscal 2003 total
gross revenues of Cara and 8.8% of the fiscal 2003 total system sales. Until
the matter is fully resolved, it is difficult to completely assess the impact
of the repudiation on Cara and its earnings. In the meantime, the terms and
conditions of the existing contract remain in effect.
With annual system sales in excess of $1.8 Billion, Cara Operations
Limited, based in Toronto, Ontario, Canada, is one of Canada's leading
integrated restaurant companies, and the largest operator of full service
restaurants in Canada, providing employment for approximately 39,000 Canadians
in its owned and franchised operations. Cara's wholly owned businesses include
Swiss Chalet, Harvey's, Second Cup, Kelsey's Neighborhood Bar & Brill,
Montana's Cookhouse, and as a franchisee, Outback Steakhouse restaurants in
Eastern Canada; Cara Air Terminal Restaurants Division; Cara Airport Services
Division; and Summit Food Service Distributors Inc. Cara also owns 74% of
Milestone's Restaurants Inc., an upscale casual restaurant chain. Cara is a
values-based organization and further information may be obtained by visiting
www.cara.com.

So, what does this mean for the day-to-day food service offered by AC? That they'll continue to deal with Cara without a contract? And is this an attempt to drive down the price by a struggling AC? Someone with the big picture care to colour in some of the background.

parnel · Nov 10, 03, 11:52 am

Its all legaese;they must sever any potential liabilities in any contracts while still in CCAA and start over with new contracts. I wouldn't read any more than that into it.

B767 · Nov 10, 03, 3:01 pm

Quote:

Originally posted by parnel:
Its all legaese;they must sever any potential liabilities in any contracts while still in CCAA and start over with new contracts. I wouldn't read any more than that into it.

Why now, 7 months after they filed for CCAA protection and screwed Cara for $13M?

tcook052 · Nov 10, 03, 4:41 pm

Another biz story says the repudiation may cause Cara to rethink its plans to go private:

http://www.canada.com/news/business/...C-D4103041DC13

TORONTO (CP) - Cara Operations' $155-million-a-year food service contract with insolvent Air Canada is up in the air, prompting Canada's biggest food services company to rethink its plan to go private.

parnel · Nov 10, 03, 4:54 pm

Quote:

Originally posted by B767:
Why now, 7 months after they filed for CCAA protection and screwed Cara for $13M?

So they can screw them again----Cara must like the hits they take.

B767 · Nov 10, 03, 5:21 pm

Quote:

Originally posted by parnel:
So they can screw them again----Cara must like the hits they take.

What did AC move someone from HR over to "supplier relations" to "fix them"?

airbus320 · Nov 11, 03, 11:40 am

From the Daily:

"The facts behind the Cara contract repudiation. Air Canada has approximately 7,000 supplier contracts, several hundred of which have been repudiated under the terms of CCAA protection and many of which have been successfully renegotiated. In this context, last week, Air Canada advised Cara that our contract with them had been repudiated. Meetings with Cara will be held with the objective to reach a new contract that includes the required cost efficiencies while providing the best possible service to our customers. In the meantime, the ongoing catering and commissary services Cara provides to our daily flights will continue as usual"

Shareholder · Nov 12, 03, 10:17 pm

Interesting. Given several key controlling shareholders of CARA want to take the company private, and have offered about $7 a share. Another group of shareholders have suggested this is too low a price, and shares should not be tendered at this price. However, with the AC contract gone -- game or no game vis a vis CCAA -- this will depress the market price of shares, and make this appear to be a good offer. So this is actually a good thing from that point of view for those CARA players.

mballb · Nov 13, 03, 1:16 pm

Quote:

Originally posted by B767:
Why now, 7 months after they filed for CCAA protection and screwed Cara for $13M?

Cara's legal counsel would have advised them (Cara) of the possibility of repudiation at the onset of CCAA. There is nothing really novel here. They have been doing this with aircraft lessors, the unions and other suppliers all summer long.

Termination of the contract prior to emurging from CCAA allows AC to negotiate a new agreement rather than be bound by the old one.

Shagger · Nov 13, 03, 4:48 pm

Well hopefully the benefit is that we get better service from Cara particularly in YYZ.

Ken hAAmer · Nov 14, 03, 2:59 am

Quote:

Termination of the contract prior to emurging from CCAA allows AC to negotiate a new agreement rather than be bound by the old one.

The downside is that Cara also gets to renegotiate.

mballb · Nov 14, 03, 8:03 am

[quote]Originally posted by Ken hAAmer:

Quote:

The downside is that Cara also gets to renegotiate.

Quote:

Isn't Lufthansa's Skychef's a competitor in at YYZ and other airports?

YVR Cockroach · Nov 15, 03, 1:12 am

This reminds me of the 10 year(?) deal AC signed with Cara (with a poison pill steep breakup clause?) when Onex (owner of LSG SkyChef) was trying to buy AC.

parnel · Nov 15, 03, 3:54 am

Quote:

Originally posted by terenz:
This reminds me of the 10 year(?) deal AC signed with Cara (with a poison pill steep breakup clause?) when Onex (owner of LSG SkyChef) was trying to buy AC.

Now you know why they are cancelling the contract while still protected by CCAA

Shareholder · Nov 15, 03, 7:41 am

Well, there can be little left of that 10-year deal, given all the changes to catering that has occured in the past couple of years. Certainly the elimination of meals on medium hauls, introduction of purchased meals, etc. has reduced payments by AC to CARA.

ONEX sold the balance of SKYCHEFS to LH for a significant amount of money before the bottom sell out of the airline business, and shortly after the AC takeover bid went south. So it is LH that is suffering the hangover.

Meanwhile, the share buyback price appears to be heading lower as the company is claiming the repudiation of the AC contract means the company is worth less. A group of shareholders is disputing this -- for many of the reasons already posted above -- and there are some short items in today's financial papers to this effect [no links].

Disclosure: I own CARA shares, but thus far we shareholders have not received official notice of the buyback offer. Also, in response to a Q at the shareholders meeting, the pres of CARA indicated he would not like to receive shares in AC in exchange for creditor claims due to bankruptcy. Like many companeis that supply services to AC, CARA would have a conflict of interest holding shares in a company it offers services to, and it might not be useful in dealings with AC's competitors, which CARA and other suppliers also do.