UPDATE AS OF 31 AUGUST 2009
TO THE FAIRNESS OPINION AS AT 26 JANUARY 2009
ON THE ACQUISITION THROUGH AMALGAMATION
OF ALL THE SHARES OF
GENTERRA INC.
BY
CONSOLIDATED MERCANTILE INCORPORATED
9 September 2009
(C:\CVS\CLIENTS\Genterra\2009\Genterra Fairness Opinion 2009 SEP 09 FINAL.doc)
9 September 2009
The Independent Committee of
The Board of Directors
Consolidated Mercantile Incorporated
106 Avenue Road
Toronto ON M5R 2H3
And
The Independent Committee of
The Board of Directors
Genterra Inc.
106 Avenue Road
Toronto ON M5R 2H3
Gentlemen,
You have asked Corporate Valuation Services Limited (“CVS”) to update you as to the “fairness from a financial point of view” to the minority shareholders of the terms of the acquisition of all the Shares of Genterra Inc. (“Genterra”) by Consolidated Mercantile Incorporated (“CMI”), through their amalgamation to form Genterra Capital Inc. (“Amalco”).
Proposed Terms
| For each of the following shares of a predecessor | Shares of Amalco to be received |
| 1 CMI Common | 1 Common |
| 1 Genterra Class A Series 1 Preference | 1 Class A Preference |
| 1 Genterra Class B Preference | 1 Class B Preference |
| 3.6 Genterra Common | 1 Common |
The terms of the Genterra Preference shares are:
Class A, issuable in series - Series 1 – non-voting, non-participating, redeemable & retractable at $15.00 per share, annual 8% [$1.20] cumulative dividends; each is convertible into either (i) 20 Common Shares [at $0.75] or (ii) 300 Class B Preference Shares [$0.05].
CONSOLIDATED MERCANTILE and GENTERRAFAIRNESS OPINION
Class B – non-voting, non-participating, redeemable at $0.05 per share, annual $0.00248 [4.96%] non- cumulative dividends.
The terms and conditions of the Class A Preference Shares and the Class B Preference Shares of Amalco will be identical to those of the comparable shares of Genterra adjusted for the exchange ratios.
Relationships Between the Companies
The companies are closely linked:
| | CMI | | Genterra |
| Stan Abramowitz | Director/Secretary | | Director/Secretary |
| Alan Kornblum | - | | Director |
Fred A. Litwin Mark I. Litwin | Director/President - | | Director/President |
| Mark E. Dawber | Director | | Director |
| Ian Dalrymple | Director | | - |
| Sol D. Nayman | Director | | Director |
Mr. Mark I. Litwin is the son of Mr. Fred A. Litwin. Entities controlled by Mr. Fred A. Litwin and his family own securities representing 58% of the common equity of CMI and 51% of that of Genterra.
Business of Genterra
Genterra is a real estate holding and management company that directly, and through subsidiaries, owns five buildings in Ontario, with a total of 743,000 Square Feet ("SF"), of which 430,000 SF is industrial and the remaining 313,000 SF is commercial. The industrial space is leased to a related entity, The Cambridge Towel Corporation, a manufacturer of textiles.
Business of CMI
CMI is a management holding company. Until December 2007, it had major interests in two operating companies as follows:
| 1. | 22.15% of Polyair Inter Pack Inc., a manufacturer of protective packaging products; this was sold privately on December 31, 2007; and |
| 2. | 50.33% of Distinctive Designs Furniture Inc., a manufacturer and importer of upholstered furniture. This investment, together with the debt owed by Distinctive to CMI, was sold to the other major shareholder on December 28, 2007. |
The disposal of the two operating investments was intended to allow CMI to utilize its financial and management resources in long-term strategic acquisitions with potential for future growth. In the interim, CMI has invested a portion of its working capital in relatively short-term, income producing assets.
Relative Values
In an update, as of 31 August 2009, of the “Comprehensive Valuation of the Shares of Consolidated Mercantile Incorporated as at December 31, 2008” dated 2 September 2009 and prepared under Multilateral Instrument 61-101, HJF Financial Inc., Chartered Business Valuators, determined that the Fair Market Value of the 5,076,407 issued and outstanding common shares of CMI is $16,286,000 or $3.208 each.
On 9 September 2009, CVS issued an update, as of 31 August 2009, (the “Valuation Date”), using unaudited Financial Statements as at 30 June 2009, of its Formal Valuation, under OSC Multilateral Instrument 61-101, setting out an “Estimate of Fair Market Value of all the Shares of Genterra, as at 31 December 2008”. Our conclusions are as follows:
| Share Capital | | Number | | | Redemption | | | Book | | | Fair Market | | | FMV | |
| | | of Shares | | | Amount | | | Equity | | | Value | | | Per Share | |
| Class A Preference | | | 326,000 | | | $ | 15.00 | | | | 5,284,415 | | | | 5,382,215 | | | $ | 16.510 | |
| Class B Preference | | | 26,274,918 | | | $ | 0.05 | | | | 2,150,684 | | | | 1,313,746 | | | $ | 0.050 | |
| Common | | | 19,339,211 | | | | | | | | 13,919,974 | | | | 19,269,694 | | | $ | 0.996 | |
| | | | | | | | | | | | 21,355,073 | | | | 25,965,655 | | | | | |
The total was rounded to $25,965,000. Each of the 326,000 Genterra Class A Preference Shares is convertible into 20 common shares. Such conversion would require the issuance of 6,520,000 new common shares, a 33.7% increase, giving them a fully diluted Fair Market Value of $0.95 (rounded) each. This represents a 15.5% gain for the Class A and a 4.3% dilution for the existing common shares.
| Per Diluted Common Share | | Exchange | | | Number | | | Fair Market | | | FMV | | | | |
| | | Ratio | | | of Shares | | | Value | | | Per Share | | | Dilution | |
| Class A Preference | | | 20 | | | | 6,520,000 | | | | 5,382,215 | | | $ | 0.825 | | | | 15.5 | % |
| Common | | | 1 | | | | 19,339,211 | | | | 19,269,694 | | | $ | 0.996 | | | | -4.3 | % |
| Diluted | | | | | | | 25,859,211 | | | | 24,651,909 | | | $ | 0.953 | | | | | |
Comparative Financial Positions
| ADJUSTED BOOK VALUES | |
| | | | | | | | | | |
| | | Genterra | | | CMI | | | Amalgamated | |
| | | $ | | | | $ | | | | $ | | |
| ASSETS | | | | | | | | | | | | |
| Current | | | | | | | | | | | | |
| Cash & Equivalents | | | 7,839,627 | | | | 14,643,128 | | | | 22,482,755 | |
| Marketable Securities | | | 1,774,493 | | | | 2,272,444 | | | | 4,046,937 | |
| Receivables | | | 598,927 | | | | 10,527 | | | | 609,454 | |
| Perpaids & Deposits | | | 377,727 | | | | 228,979 | | | | 606,706 | |
| Investments - Current Portion | | | 371,975 | | | | - | | | | 371,975 | |
| Future Tax Benefits | | | 59,953 | | | | - | | | | 59,953 | |
| | | | 11,022,702 | | | | 17,155,078 | | | | 28,177,780 | |
| Capital | | | - | | | | | | | | | |
| Investments | | | 249,000 | | | | 274,590 | | | | 523,590 | |
| Rental Real Estate | | | 22,500,000 | | | | - | | | | 22,500,000 | |
| Future Tax Benefits | | | 138,735 | | | | 206,008 | | | | 344,743 | |
| | | | 22,887,735 | | | | 480,598 | | | | 23,368,333 | |
| | | | 33,910,437 | | | | 17,635,676 | | | | 51,546,113 | |
| LIABILITIES | | | | | | | | | | | | |
| Current | | | | | | | | | | | | |
| Payables & Accruals | | | 507,210 | | | | 120,593 | | | | 627,803 | |
| Taxes Due | | | 120,742 | | | | 1,089,843 | | | | 1,210,585 | |
| Mortgages - Current Portion | | | 294,330 | | | | - | | | | 294,330 | |
| | | | 922,282 | | | | 1,210,436 | | | | 2,132,718 | |
| Term | | | | | | | | | | | | |
| Mortages Payable | | | 3,142,420 | | | | | | | | 3,142,420 | |
| Future Tax Liabilities | | | 3,880,080 | | | | | | | | 3,880,080 | |
| Class A Retractable Shares | | | 5,382,215 | | | | 138,839 | | | | 5,521,054 | |
| | | | 12,404,715 | | | | 138,839 | | | | 12,543,554 | |
| | | | 13,326,997 | | | | 1,349,275 | | | | 14,676,272 | |
| EQUITY | | | | | | | | | | | | |
| Share Capital | | | | | | | | | | | | |
| Class B Preference | | | 1,313,746 | | | | | | | | 1,313,746 | |
| Common | | | 9,983,862 | | | | 2,688,939 | | | | 12,672,801 | |
| | | | 11,297,608 | | | | 2,688,939 | | | | 13,986,547 | |
| Retained Earnings | | | 9,285,832 | | | | 13,597,462 | | | | 22,883,294 | |
| | | | 20,583,440 | | | | 16,286,401 | | | | 36,869,841 | |
| | | | 33,910,437 | | | | 17,635,676 | | | | 51,546,113 | |
| | Note: The CMI balance sheet reflects Class A Preference Shares which are to be redeemed for cash before the amalgamation. |
Benefits of the Amalgamation
The Directors of both Genterra and CMI believe that the Amalgamation should result in an enhancement of shareholders’ values. They expect this to occur for the following qualitative reasons:
| (a) | Both firms are engaged in similar investment and management endeavours; |
| (b) | The Companies have management and several directors in common; |
| (c) | Control of both ultimately rests with Fred A. Litwin and his family, hence the formation of Amalco will simplify the corporate structure; |
| (d) | Amalco will be a larger entity with more varied assets, a greater equity and income base and increased opportunities for future growth; |
| (e) | The combined corporation is expected to have a larger public float which should result in increased market liquidity for its shareholders; |
| (f) | Amalco will benefit from increased efficiency and reduced costs as a result of only one set of administrative, overhead and accounting facilities as well as ongoing public company expenses. |
CVS believes that the quantitative benefits will have a favourable impact on Amalco’s results for the fiscal year ending in 2011, as those for fiscal 2010 will be affected by the various costs relating to the transaction.
Exchange Ratios
The relative fully diluted Fair Market Values of the common shares ($3.208 for CMI and $0.953 for Genterra) indicate an exchange ratio of 3.37 Amalco common shares for each CMI common share and 1 Amalco common share for each Genterra common share. However certain other factors need to be considered.
CMI
The bulk (96%) of the CMI assets are either cash equivalent (83%) or easily convertible into cash (13%). This gives the CMI portfolio two characteristics at the Valuation Date. The first is CMI’s lower risk than that of Genterra, which is substantially invested in commercial real estate. The second is minimal potential returns as the yield at the Valuation Date was 0.24% for 3-month Treasury Bills.
Genterra
The real estate appraisals underlying the Fair Market Value of the Genterra shares took place during May 2009 when liquidity in the ICI (Industrial, Commercial and Investment) real estate market was substantially less than a year before. They reflected reductions in the Fair Market Value (as defined) of the Genterra properties from the summer of 2008. However a small premium for the CMI shares over the relative Fair Market Values to reflect the lower risks and return of its portfolio still seems appropriate.
Conclusion
The directors of CMI and Genterra have determined that it is in the best interest of all shareholders to reduce the number of Amalco common shares to be issued by establishing their value as equivalent to that of a CMI common share. Accordingly, each CMI common share will be exchanged for one Amalco common share, as will each 3.6 Genterra common shares. This does not change the relative valuations of CMI and Genterra, but the directors believe that the lesser number of issued Amalco common shares will enhance their prospects for an increased trading price and compliance with market listing requirements.
In our view, based on 31 August 2009 updates to the CMI and Genterra valuations, the exchange of 1 Amalco common shares for each CMI common share and 1 Amalco common share for each 3.6 Genterra common shares, the ratios selected by the Directors of Genterra and CMI, are still fair, from a financial point of view, to the minority shareholders of both companies; they give rise to the following results:
| Per Amalco Common Share | Exchange | | | Number | | | FMV | | | FMV | | | Premium | |
| | Ratio | | | | | of Shares | | | Equity | | | per Share | | | (Discount) | |
| CMI | 1.0 for | | | 1.0 | | | | 5,076,407 | | | | 16,286,401 | | | $ | 3.208 | | | | 4.1 | % |
| Genterra fully diluted | 1.0 for | | | 3.6 | | | | 7,183,114 | | | | 24,651,909 | | | $ | 3.432 | | | | -2.7 | % |
| Amalco | | | | | | | | 12,259,521 | | | | 40,938,310 | | | $ | 3.339 | | | | | |
The ratios result in a minor dilution (2.7%) for Genterra shareholders and a small (4.1%) premium for those of CMI, to reflect their lesser risk.
Stock Market Trading
CMI is listed on the Toronto Stock Exchange (TSX) under the symbol CMI, while Genterra trades on the TSX Venture Exchange as GIC. Values for the common shares of CMI and Genterra were obtained by two independent approaches, the Adjusted Book Value and the Transaction Based Value, reflecting average prices from stock trading. For this Fairness Opinion, CVS has relied on the fully diluted Adjusted Book Values, as the shares of both companies trade at significant discounts to their Adjusted Book Values. CMI’s discount (recent trading price $2.25) is 30%, which is at the high end of the range for a marketable non-controlling interest. For Genterra (recent trading price $0.60), the discount is slightly higher at 37%.
Canadians prefer direct real estate investments, or, if liquidity is important, via flow-through vehicles such as Real Estate Investment Trusts, rather than indirect holdings through real estate holding companies, such as Genterra. For this reason, according to stock market analysts, widely held shares of real estate investment firms normally trade at significant discounts from their underlying Adjusted Book Values. In times of financial stress, such as the Valuation Date, the discount will be greater. For Genterra, the 37% discount includes not only that from a minority interest, but also one relating to its principle activity of real estate ownership.
Conclusion
The directors of CMI and Genterra have agreed on the following exchange ratios:
| For each of the following shares | Shares of Amalco |
| 1 CMI Common | 1 Common |
| 1 Genterra Class A Series 1 Preference | 1 Class A Preference |
| 1 Genterra Class B Preference | 1 Class B Preference |
| 3.6 Genterra Common | 1 Common |
In our opinion, the ratios set out above are fair from a financial point of view, to the minority shareholders of both Consolidated Mercantile Incorporated and Genterra Inc.
The purpose of this Fairness Opinion is to supply information to the Directors and shareholders of both Genterra and CMI in considering and approving the acquisition, through amalgamation, of all the Shares of Genterra by CMI.
Should you require additional information about our conclusion, or have any questions or comments relating to this Fairness Opinion, please do not hesitate to get in touch with us.
Yours very truly,
CORPORATE VALUATION SERVICES LIMITED
Per
James P. Catty, MA, CA•CBV, CPA/ABV, CFA, CVA, CFE.
President
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