Search for yield – Dundee Corp

Dundee (TSX: DC.A) is an investment corporation. They are family-controlled (by the Goodman family) who control approximately 87% of the voting interest and 18% of the economic interest of the firm through a typical dual class share structure.

By virtue of owning Dundee Financial and other majority and minority-held investments, their consolidated financial statements are a mess to read. When pulling apart the components, they are diversified among real estate, energy, financial, mining and agriculture, in that order.

At the end of the day their stated book value is about $1.45 billion dollars, trading at a market capitalization of about $540 million. There are good reasons to believe the book value will be impaired simply due to their slowness in writing down some investments that clearly will not perform, but even assuming a 50% write-down (which seems appropriate) this brings the entity down to a liquidation value that is still well above its market capitalization.

On the liability side, the holding company has $92 million in term facility debt and subsidiaries make up approximately $100 million more in non-recourse debt. The leverage is not huge. The term facility is good for $250 million total and expires in November 2016 which is salient to the discussion below.

I generally have an aversion to controlled corporate structures as a minority holder unless if there are significant reasons why one would believe there is an alignment of interests. There also needs to be some reasonable assurances there isn’t a cesspool of conflict of interests in the other subsidiaries / operating companies that would cause shareholders to believe they are being taken to the cleaners with. I don’t get this element of confidence with Dundee, so I would steer away from the common shares. This is also found in companies with similar capital holding companies, including firms that have been on and off my radar (let’s be specific: Pinetree Capital is one of them – trading at around 50% of reported net asset value!).

On a more humorous note, Dundee’s logo also looks like the Blackberry logo, which is kind of disturbing considering how Blackberry has fared:

At least their logo is pointing upwards instead of flat.

I am writing not about the common shares, but rather the preferred share securities of Dundee. They have a series of preferred shares (Series 4) which has a par value of $17.84/share. The reason for the unusual par value was because Dundee split off DREAM Unlimited (TSX: DRM) which partitioned the original preferred share series issue (into DC.PR.C and DRM.PR.A). The shares have a coupon of 5%, paid out quarterly.

The preferred share series has an interesting feature: they are redeemable by the holder for $17.84/share after June 30, 2016. They are also retractable by the company indefinitely (at $17.84/share cash) and convertible into common shares at 95% of TSX market pricing or $2/share, whichever is more until June 30, 2016. The aggregate value of the preferred shares at par is $107 million.

This creates a rather interesting situation where an investor can purchase shares today (trading at roughly 97 cents on the dollar) and force a redemption in about 10.5 months’ time, skimming a 5.15% preferred yield and a 3% capital gain. One clear risk is whether the common shares will be trading above $2/share by June 30, 2016, which would seem to be a likely bet even if the underlying asset value of Dundee’s oil and gas companies are seriously impaired. It also does not help that most of their operating entities and equity-accounted entities are losing money, but the question is how much money will they actually end up losing between now and June 30?

There is also sufficient management interest in ensuring that their (not trivial) 18% economic stake in the firm is not diluted with a share conversion, coupled the with the fact that their operating credit line appears sufficient to pick up the bill (in addition to the $87 million cash they already have on hand in the holding corporation).

The preferred shares are extremely illiquid and trade in a narrow range that is presumably due to the redemption/retraction feature.

It is an interesting gamble that seems like it is reaching out for yield, but with an element of security given the pre-existing credit facility and 80% distance between the existing common share price and the $2 floor for preferred conversion.

In relation to the tax-preferred status of an eligible dividend coupled with a (presumed) capital gain at the end, one is looking at a functional tax-preferred 8% with a reasonable amount of asset security (although the security is implied by redeem-ability, definitely not direct security!), contrasted with a fully-taxable 1-year GIC at 1.2% (without liquidity) or 0.85% with liquidity. The spread seems to be a reasonable compensation for risk.

I would like to thank a comment poster by the name of Safety, who on May 25, 2015 posted about this in one of my prior rantings. I was indeed quite surprised at the quality of this person’s comments and hope he can chime in here again.

Anyhow, I finally picked up a few shares.

10 thoughts on “Search for yield – Dundee Corp”

  1. Thanks for the shoutout!

    I’m having my worst month in my Canadian book since I started running my own money three years ago so the quality of my comments is not translating to results right now! BBD prefs, rate-resets and a couple of tiny energy positions are the source but wow is it dramatic and painful!

    I do think that DC.A is in safer hands with David Goodman and the common equity will do well eventually too and I also continue to believe that the DC.PR.C are pretty safe.

  2. I have some dream unlimited prefers, getting the discount broker to exercise the retraction is a pain and takes a long time, far longer than the 30 days required notice.

  3. Will,

    Generally they have traded above the retraction price haven’t they? Why not just sell them on the exchange?

  4. The shares haven’t trade at the retraction price for a while – retraction price is $7.23 if exercised by holder before Dec 31. Wonder if you have researched into Temple Hotel’s debenture?

  5. I do not like TPH equity for a variety of reasons. Likewise for TPH debt. If they were secured debentures I might look at them differently, but not in their current form and not with the company’s weak balance sheet position. I promised to myself after my (profitable) rollercoaster journey with Holloway debentures I’d swear to myself to never venture in the hotel sector again.

  6. TPH debentures look a little more interesting with the rights issue (assuming it gets done). I like that there are some lead equity investors who want to protect their equity (as like you I want nothing to do with the common). I also like the covenant on the F class debentures.

    I’m amazed to see how well PAR.UN has done since they announced their rights issue (mostly today) but I don’t know that story very well.

  7. Any thoughts on this DC.PR.C exchange offer?

    Personally, I find it disappointing and have sold most as I’m worried brokers will have enough incentive to carry the proposal.

  8. I have a write-up pending, but I want to read the official documentation, which has not been posted on SEDAR to date. My quick recommendation is shareholders should vote no to the proposal.

  9. I don’t think the consent fee and the bump in dividend justify extending the retraction date by 3 years. It trades 3.5% discount to par with 7 months to retraction date – a decent return on annualized basis.

    My concern is, if the proposal past but you voted no, do you get to keep your series 4? What’s the dissent right in a typical transaction like this?

  10. Will, I agree re: the 3 year extension to retraction date. DC’s asset portfolio is terrible and in 3.5 years they could be well south of $2/share with the way things are going in their operating businesses.

    If 2/3rds of voters vote in favour, your shares will be force-converted.

    Dissent rights are only for beneficial shareholders and exercising them through a broker is costly and is not practical unless if you are an institution. However, details will be in the formal offering, still yet to be sent to SEDAR.

    I hope some large shareholders picked up the phone and talked to them and told them to sweeten the deal.

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