Business Context and Reporting Period
This Form 6-K filing, dated October 1, 2010, contains the Notice of Special Meeting and Management Information Circular for Terra Nova Royalty Corporation (formerly Scully Royalty Ltd.). The filing solicits shareholder approval for a proposed acquisition of Mass Financial Corp. ("Mass") via a tender offer and subsequent merger. The Special Meeting is scheduled for October 29, 2010. The transaction involves the issuance of up to 25,001,089 Terra Nova common shares in exchange for Mass shares on a 1:1 basis, a move required to be approved by shareholders under NYSE rules as the issuance exceeds 20% of outstanding shares.
Key Financial Metrics
Terra Nova Royalty Corporation (Historical & Pro Forma):
- Shareholders' Equity (June 30, 2010): $206.6 million (Historical); $426.7 million (Pro Forma).
- Net Income (Six Months Ended June 30, 2010): $(18.7) million (Historical); $14.7 million (Pro Forma).
- Pro Forma Total Assets (June 30, 2010): $713.0 million.
- Pro Forma Cash and Cash Equivalents: $306.5 million.
- Pro Forma Earnings Per Share (Six Months Ended June 30, 2010): $0.27 (Basic and Diluted).
Mass Financial Corp. (Historical):
- Shareholders' Equity (June 30, 2010): $215.4 million.
- Net Income (Six Months Ended June 30, 2010): $13.4 million.
- Revenues (Six Months Ended June 30, 2010): $173.7 million.
- Cash and Cash Equivalents (June 30, 2010): $235.3 million.
Material Changes and Transaction Details
The primary material change is the proposed acquisition of Mass Financial Corp. The exchange ratio of 1:1 was determined based on the fully-diluted adjusted net book value per share of both companies. Adjustments for Terra Nova included the fair value of its Wabush royalty interest, an arbitration award recovery, a recent rights offering, and distributions of KID shares. Adjustments for Mass included the fair value of resource interests and the conversion of debt instruments.
Upon completion, existing Terra Nova shareholders are expected to own approximately 60% of the combined company, while Mass shareholders will own approximately 40%. The combined entity will operate in mineral royalties, commodities trading, and proprietary investing.
Guidance, Outlook, and Risks
Management Commentary: The Terra Nova Board recommends the transaction, citing strategic growth, complementary businesses (Mass's commodities focus vs. Terra Nova's royalty focus), and potential cost synergies. A fairness opinion from Raymond James Ltd. concluded the consideration is fair from a financial point of view.
Conditions to Closing: The transaction is subject to several conditions, including a minimum tender of 50.1% of Mass shares, shareholder approval of the share issuance, SEC effectiveness of the Form F-4 registration statement, and NYSE listing approval.
Risks and Contingencies:
- Integration Risk: Failure to realize anticipated benefits or synergies.
- Regulatory Risk: Delays or unfavorable terms in government approvals.
- Mass Litigation: Mass's subsidiary, Canoro Resources Ltd., faces a termination notice from the Government of India regarding its Amguri production sharing contract. While an interim injunction has been granted, the outcome remains uncertain and could materially affect Mass's value.
- Market Risk: Fluctuations in commodity prices and foreign exchange rates.
Important Facts for Investor Verification
- Shareholder Approval: Verify the outcome of the October 29, 2010, Special Meeting regarding the issuance of up to 25 million new shares.
- Canoro Litigation Status: Monitor the arbitration proceedings regarding the termination of Canoro's Amguri production sharing contract by the Government of India, as this is a primary operating asset for Mass.
- Transaction Conditions: Confirm that the 50.1% minimum tender threshold for Mass shares is met and that the SEC declares the Form F-4 registration statement effective.
- Pro Forma Valuation: Review the final purchase price allocation, as the pro forma statements assume a specific share price ($7.35) and fair value adjustments that may change upon closing.
- Termination Fees: Note the $6 million termination fee payable by Mass to Terra Nova if Mass accepts a superior proposal or fails to maintain its recommendation, and the reciprocal $6 million fee payable by Terra Nova for specific breaches.