Hudson’s Bay – Internal take-over

This is a few days late, but the headline coming from (TSX: HBC) is: “Shareholders Collectively Owning 57% of Hudson’s Bay Company’s Outstanding Common Shares Submit Take-Private Proposal for C$9.45 per Share in Cash”.

Almost anybody investing in this company from 2018 back will have lost money.

Today, HBC announced a very tepid quarterly report (this surely is not coincidental to the timing of the take-private offer – gives it some urgency to accept it). Sales down, gross profits down. Not good.

The takeover offer gives a $1.74 billion valuation to the equity, which I think existing minority shareholders will take in a heartbeat. I can’t see anybody else step in and give a better offer.

I think it is pretty inevitable that HBC will cease ordinary retail operations very soon – they either have to go very specialty or just get out of the business – a struggle not unknown to other retailers which have also been hammered to death as purchasing trends continue to shift.

Atlantic Power / Williams Lake

There is a staggering degree of government regulation with any projects of significance. This creates competitive barriers to entry for would-be entrants.

The most public of these projects are oil pipelines, but even operating power plants are subject to a ton of public scrutiny and the wrath of the public.

Atlantic Power operates a biomass power plant in the northwestern outskirts of Williams Lake, BC, generating up to 66 megawatts of power.

They had applied in 2016 to amend their permit to accept the chipping and burning of used railroad ties. The BC Ministry of Environment approved this, but it was appealed on behalf of certain residents of Williams Lake, BC. The BC Environmental Appeals board ruled on April 11, 2019 that Atlantic Power could burn an average of 35% rail ties as its biomass each year, up to 50% on a daily basis. The community group that effectively lost the appeal took it to City Council, but council denied their request (which, in any respect, would be non-binding).

In 2018, Williams Lake generated $8 million in EBITDA. The main power purchase agreement expired on April 1, 2018 and has been extended on less favourable terms on a short-term basis.

Finally, for those that are willing to get into the nitty-gritty of the technical assessment of Atlantic Power’s biomass power plant in Williams Lake, you can read the 2016 technical assessment concerning their request to burn rail ties.

Gran Colombia Gold’s confusing capital allocation strategy

One yellow flag for investors is if company management starts to deviate away from previously professed strategies without giving reasonably decent justification for such changes.

Since 2016’s recapitalization, GCM has been focused on improving its mining operations (so they could pay back the debt incurred from the recap). The debentures issued in the 2016 recapitalization were redeemed and refinanced in May 2018, which provided less restrictive covenants for the debt that was issued (TSX: GCM.NT.U).

At the end of June 2018, GCM had about US$32 million and US$98 million in notes outstanding. For the first half of 2018, they generated US$14 million in “excess cash flow”. They continue to generate excess cash flow today.

The point of the above narrative is to illustrate that GCM’s financial situation is a lot more favourable than it was three years ago. They have a lot more flexibility to invest internally in their own operation (Segovia, Marmato), but they have taken an interest in Sandspring Resources (TSX: SSP).

We continue down the timeline:

  • July 26, 2018– GCM buys CAD$4 million of SSP, also receives shares for Chicharron project in Segovia (they sold their 30% interest to SSP for 15M SSP shares, about 5km east of GCM’s current operation in Segovia – SSP owns 100% of it now).
  • October 3, 2018 – GCM buys another CAD$1 million of SSP
  • February 11, 2019 – GCM buys another CAD$0.7 million of SSP

Everything to this point is consistent – now that they have capital, GCM chose to invest in a project in Guyana.  I don’t really like these corporate inter-relationships since there is so much room for error, but at least the strategy is consistent.  After this date, things get screwy:

  • March 1, 2019 – GCM files for an equity offering, wants to raise gross CAD$25 million. Warrants for C$5.75, stock price to be determined by market. Stock crashes. Cited reason for the capital offering: Accelerated drilling in Segovia.   It raises the hidden question – why are they dumping money in SSP (CAD$5.7 million to date plus disposition of 30% Chicharron stake) if it was better spent on drilling in Segovia or Marmato?  GCM earned US$44 million in free cash flow in fiscal 2018, is this not enough?  GCM ended 2018 with US$39 million cash+equivalent and the only debt on the books was the US$89 million in GCM.NT.U.
  • March 4, 2019 – GCM opts to change the offering and raises CAD$20M instead in debentures (convertible at CAD$4.75), CAD$18M from MM Capital Partners, CAD$2M from insiders.
  • May 30, 2019 – GCM will be buying 2/3rds of a $3 million non-brokered placement (another CAD$2 million of SSP) – this was “up-sized” two days later to a $4 million placement – not clear whether the 2/3rds applies to the $4 million or whether it will be a $2 million commitment.  Let’s assume $2 million.  As of the date of this writing this has not been confirmed. (Update, June 12, 2019: $2 million investment)
  • June 10, 2019 – NCIB announcement. Wasn’t this capital supposed to go to Segovia drilling?  In fairness to management, this does not commit them to repurchasing shares, but it does signal odd capital priorities (raising capital three months earlier, only to buy it back?).

MM Asset Management, the firm that bought the CAD$18 million in debentures, filed June 10, 2019 that their stake is now 6,510,699 shares of GCM, plus $18 million in debentures, for a consolidated ownership of 19.77% if they convert (doesn’t factor in the dilution with the outstanding warrants, however).

To date, GCM has sent CAD$7.7 million into SSP stock (with the $2 million invested on June 12, 2019).

I find these capital allocation decisions to be highly mysterious.  Now that the debt covenants have been relaxed (you can read the restrictions in Section 5.10 of the indenture – condensing the legalese, the material points are a 50% consolidated net income (note: as defined on page 9) restriction, subject to a $10 million or 2.5% tangible net asset floor), GCM has the ability to dabble externally and also with its own stock.

At least there is protection for Noteholders.

Beyond Meat, beyond amazing

I just take a look at this chart from Beyond Meat (Nasdaq: BYND):

What is the first thing I think of when I see this chart?

“Follow-on offering”. BYND did their IPO in early May, and insiders are restricted from selling shares (not distributed during the IPO) for 180 days, but the company can raise capital in the meantime! I would not be shocked at all to see them raise another $750 million or so this month.

They haven’t even filed Form 10-Q yet, but when skimming their Q1 earnings press release, net revenues of $40 million for the quarter, and management estimates $210 million for the year. They raised a net of $252 million on their IPO (which was in early May, at a price of $25/share).

Needless to say, the $10 billion market capitalization is frothy. Investors in this stock better heed the following entry in the prospectus (I’ve highlighted the relevant section below, with a link for those so interested):

We may not be able to protect our proprietary technology adequately, which may impact our commercial success.

Our commercial success depends in part on our ability to protect our intellectual property and proprietary technologies. We rely on a combination of patent protection, where appropriate and available, copyrights, trade secrets and trademarks laws, as well as confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our proprietary technology or permit us to gain or keep any competitive advantage. As of March 30, 2019, we had one issued U.S. patent and 21 pending patent applications, including eight in the United States and 13 international patent applications.

We cannot offer any assurances about which, if any, patents will issue from these applications, the breadth of any such patents, or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful opposition to these patents or any other patents owned by or, if applicable in the future, licensed to us could deprive us of rights necessary for the successful commercialization of products that we may develop. Since patent applications in the United States and most other countries are confidential for a period of time after filing (in most cases 18 months after the filing of the priority application), we cannot be certain that we were the first to file on the technologies covered in several of the patent applications related to our technologies or products. Furthermore, a derivation proceeding can be provoked by a third party, or instituted by the U.S. Patent and Trademark Office, or USPTO, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications.

Patent law can be highly uncertain and involve complex legal and factual questions for which important principles remain unresolved. In the United States and in many international jurisdictions, policy regarding the breadth of claims allowed in patents can be inconsistent and/or unclear. The U.S. Supreme Court and the Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, international courts and governments have made, and will continue to make, changes in how the patent laws in their respective countries are interpreted. We cannot predict future changes in the interpretation of patent laws by U.S. and international judicial bodies or changes to patent laws that might be enacted into law by U.S. and international legislative bodies.

Moreover, in the United States, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, enacted in September 2011, brought significant changes to the U.S. patent system, including a change from a “first to invent” system to a “first to file” system. Other changes in the Leahy-Smith Act affect the way patent applications are prosecuted, redefine prior art and may affect patent litigation. The USPTO developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act became effective on March 16, 2013. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, which could have a material adverse effect on our business and financial condition.