Tag: ZZZ

Sleep Country Canada (with the cutest ticker symbol on the TSX, ZZZ) goes public after they were taken private half a decade ago. The hedge fund that took them over is still up on a market capitalization basis, but they still have to liquidate approximately 47% of their holdings in the post-IPO organization. The hedge fund also lent the operating entity money which they received a slick 12% for (this is being converted into equity again and replaced with a more conventional credit facility post-IPO).

ZZZ raised a ton of money in the equity offering but it went to facilitate the internal takeover of the operating subsidiary and a partial buy-out of the hedge fund. There is also some equity remaining to pay off some debt of the operating entity so the business in general doesn’t look like a leveraged train wreck.

The underlying business within the holding company is of average financial profitability considering its retail business – very roughly speaking over 2012 to 2014 it has cleared a 9% profit margin before interest and taxes.

When doing the analysis, however, my question was not whether this company should be going public or whether it should be purchased, but rather: how the heck did they manage to get people to pay $17/share for this? On almost every valuation metric I can think of, I would not be interested in looking at this company until it reaches about $10/share (this is roughly 20% under a fair value estimate of $12.50/share). There are a lot of strikes against ZZZ at $17/share:

1. Its retail niche is not a growth market (despite what is claimed in the prospectus), especially considering its top-dog status in the Canadian market – thus not warranting any sort of real “growth valuation”.
2. The profitability of the market is not extreme (although one can make an argument that it will be more difficult to erode from the Amazons and big-box retailers compared to the retailing of trinkets) and one is very hard-pressed to find why existing margins will rise beyond economies of scale;
3. Investors should continue to pay a discount, not a premium, due to the fact that they are (nearly) minority investors in relation to the 46% owner (Birch Hill) sitting in the room looking for an exit;
4. Tangible book value after offering is going to be negative ~$142 million – this is purely a cash-flow entity one is investing in. If they were a growth company, why would they give out a planned 11 cents/share/quarter dividend?
5. I don’t ever invest in companies that have their ticker symbols not represent an abbreviation of their company name. Seriously.

At $17/share ($640 million market cap), I don’t have a clue why people would want to invest in this. Who should be congratulated are the insiders and the financial institutions that actually managed to find purchasers of this stock – well done!