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David Luxton (Darren Brown, OBJ.)

Allen-Vanguard Corp. (TSX:VRS) has agreed to a merger with a U.S. buyout financing firm in an effort to bring in funds to ease its long-term debt problems.

The Ottawa-based company, which makes bomb jammers and other defence products, said Delaware-based special purpose acquisition company Tailwind Financial Inc. (NYSE Alternext US:TNF) will offer 0.046493 of a Tailwind share for every Allen-Vanguard share, pricing Allen-Vanguard at about $40 million, or almost double its current market value.

The deal would allow Allen-Vanguard to continue operating under its own name, and would give the combined company a listing on the NYSE Alternext US, formerly known as the American Stock Exchange.

"New capital from the Tailwind transaction and concurrent rights offering will enable us to reduce our long-term debt in the timeframe required by our lenders," said Allen-Vanguard CEO David Luxton in a statement. "This will allow management and the board to focus on important global business opportunities following the progress that we have made since last summer to improve the company's operating profit through cost restructuring and building a strong revenue pipeline."

As part of the transaction, Allen-Vanguard is also doing a shareholder rights offering that will give stakeholders the opportunity – pro rata with their existing ownership – to acquire subscription receipts at 28.5 cents each, allowing holders to acquire one additional common share per receipt.

The agreement allows for a rights offering for up to C$100 million, the company said.

"We are particularly pleased that the proposed rights offering will allow shareholders to continue to participate in the future growth of a healthy, recapitalized Allen-Vanguard," said Mr. Luxton.

He added to OBJ that the deal would mean business as usual for Allen-Vanguard, with the company's headquarters remaining in Ottawa while executive management stays unchanged.

"A fund like this has a strategic purpose for investing its funds; it's prepared to recognize the inherent equity value of a company that may not be reflected in its market price in the capital markets we're in. For Allen-Vanguard, which has a requirement to reduce its debt, it's a way to access money at a premium to our share price instead of a discount," said Mr. Luxton in a phone interview. "We will have an additional set of institutional shareholders, with a lot of them in the United States, which is good for the liquidity of the stock, but other than that, absolutely nothing changes."

However, the deal does involve some share dilution, depending on the amount of actual cash brought in from Tailwind, as well as on the amount of takeup on the rights offering, Mr. Luxton said.

As well, the company hinted it would, at least temporarily, lose its listing on the Toronto Stock Exchange, although Mr. Luxton said he could not provide details on what would happen to the listing on Canada's main board, or if the company would be reapplying. Allen-Vanguard would be listed on the NYSE Alternext US board upon closing of the transaction, which is anticipated to be towards the second or third week of April.

He noted, however, that Allen-Vanguard "plans to be dual-listed."

The company has had trouble making its quarterly debt payments ever since the collapse of a deal in September that would have seen an outside investor take up a significant investment position in the company, a fact that observers have said could be due to Allen-Vanguard's dramatic drop in stock price since the offer was originally made.

Since then, the company has put off its payment deadline four times, only working out new credit terms with its lending syndicate in December. The latest arrangement allows Allen-Vanguard to cut its upcoming quarterly payments and defer US$44 million in past-due payments to May 2011.

The company's stock rose by 20.5 per cent shortly after the news of the deal emerged, pushing the share price up to 23.5 cents on the Toronto Stock Exchange, although the stock later cooled to close at 22.5 cents. Tailwind's stock gained by 0.51 per cent to $7.95.

Allen-Vanguard's purchaser Tailwind made its debut in April 2007 in a US$100-million initial public offering, with the goal to "effect a business combination with an operating business." Tailwind has indicated it could buy other businesses in the future, although its website says it has not discussed any other prospective acquisitions.

Allen-Vanguard must pay a $5-million break fee if the deal falls through, although the company said it is permitted to recommend an alternative transaction ahead of its shareholder meeting in March if it finds one with more favourable terms.

The transaction is contingent on approval by two-thirds of Allen-Vanguard's shareholders at that meeting, as well as on the successful negotiation of a revised credit agreement with the company's lenders. The lending syndicate must also consent to the completion of the deal.

However, Mr. Luxton said Allen-Vanguard's interests in recommending the recapitalization deal are "aligned with the lenders," in that the transaction would allow the company to pay down a portion of its debt and replace it with equity, indicating a favourable reception for the deal on that front.

"At the end of the day, it provides us with more financial flexibility to fund the business unencumbered by a heavy debt structure," he added.