Is Dye and Durham going to… die?

Dye and Durham (TSX: DND) has an interesting story but sadly it may be coming to a close simply because they couldn’t produce financial statements and creditors tend to not like it when the entities they lend money to aren’t in any position to pay back, let alone knowing how much money they are making! As there is a possibility it may be delisted in the near future, I will post its 5-year chart:

During the Covid era the company made many software acquisitions and paid for it with debt financing – amassing about $1.6 billion net from their last reported date, albeit generating $150 million in free cash flow in the past 12 months they have reported. Other than the software they have acquired (amounting to $1.8 billion in goodwill and intangibles) and the material amount of debt, there is nothing else of note on the balance sheet – tangible book value is about negative $1.5 billion.

However, reporting is one of the issues going on – their last financial statement available is from March 31, 2025 (their Q3-2025 as they have a June 30 fiscal year end!).

After they produce the audited financial statements (if they do!), it would not surprise me if there was a massive writedown in the goodwill.

The other issue is that they have been perpetually at war with their shareholders. The drama is simply too much to repeat here, but just giving a scan of the press releases over the past couple years should give a good indication of what is going on.

Notably, despite any lack of financial reporting, one significant shareholder (Plantro) reportedly was going to offer CAD$5.72/share for the entity.

However, just yesterday the TSX finally halted trading on the stock for prolonged non-reporting. Pretty much whichever shareholders are in the stock are locked in until the company either produces audited financial results, or their creditors lower the boom on them.

One interesting data point is that despite the stock not being tradable, their corporate debt is – their 8.625% issue maturing April 2029 (senior secured!) is currently trading at a yield to maturity of just over 12%, about 90.5 cents on the dollar. Given the seniority status of the debt, if DND does go into CCAA, there will likely be some form of recovery by the debtholders (they share the status with the bank creditors, for a total of about USD$905 million plus whatever is on the revolving loan facility).

There is no point for a small fish like myself to get involved with this, but it is interesting to watch. It is also a cautionary tale of companies that expand themselves with debt financing too rapidly.

Thankfully, no positions.

Teck / Anglo American – it’s almost done

Teck announced today that Industry Canada approved the merger between Teck and Anglo American. This cleared one of the most significant regulatory hurdles to the merger and basically clears the way for the merger to proceed sometime in 2026.

The last trading price of Anglo American and Teck was at a -17.7% merger arbitrage spread at the 1.3301 share conversion factor. This will most likely converge to a single digit number and close to zero as the hurdles clear.

It pretty much will be a matter of valuation at this point. The 437 page management information circular gives some hints on how to approach this, but given how both companies have various write-downs on income, the net income pro-forma is not useful for analytical purposes.

The combined entity will have approximately 1.94 billion shares outstanding, diluted.

The balance sheet, after Anglo shareholders receive their one-shot dividend to strip Teck’s cash, will have a negative net cash position of about US$18 billion.

At US$38.14 per Anglo share, this gives them a market cap of US$74 billion or an EV of about US$92 billion.

Looking at Anglo, we have an entity with US$6.4 billion in operating cash flow in the trailing 12 months. If you include Capex, the free cash flow is about US$1.4 billion. The commodity environment going forward should be a bit more favourable than those numbers.

We have Teck, with LTM operating cash flow of US$1.1 billion and Capex of US$1.3 billion as they try to figure out how to run QB2 efficiently.

It doesn’t take a CFA to figure out that the promise of this combined entity will rely on increased commodity prices, an element of balance sheet value (i.e. the reserves they are dredging out of the ground) and moderating capital expenditures (yeah right!).

These mega-mergers always take a ton of time to figure out as there will inevitably be huge cultural clashes, not to mention figuring out how to fix QB2 and realize “synergies” in that mining operation.

Teck was one of my Covid trades and they have gone through a lot since then – selling Fort Hills (an oil sands project that Suncor is now taking great advantage of), selling their metallurgical coal operations in Elk Valley (to Glencore), and now selling the the rest of it. They are going out at nearly all-time highs and so will I with the rest of this trade. I have zero interest owning the merged entity.

More consolidation

This has been quite a year for mergers.

Teck (TSX: TECK.b) is on the way (although definitely not confirmed) to being acquired by Anglo American (possibly to be Anglo Teck). There is a 16% merger arbitrage spread still going on, reflecting the regulatory uncertainty – but I do think this will be passed.

I have written ad nauesum (for years) about MEG being taken over, and Cenovus (TSX: CVE) was finally the suitor. Husky Energy (which itself was taken over by Cenovus) originally took a shot at MEG more than half a decade back. There were other oil patch consolidations I will not write about here which went through consolidation mergers.

Telus International (TSX: TIXT) was majority owned by Telus and Telus was able to re-absorb it into the main entity.

I recently wrote about Laurentian Bank effectively selling itself off to a couple institutions, one of which was National Bank (NA).

On the heels of this, a couple days ago Equitable Group (TSX: EQB) announced that they were acquiring Loblaws’ (TSX: L) PC Bank business and Loblaws is taking a minority stake in Equitable.

Finally, Canfor (TSX: CFP) announced it is proposing to take over the 45% interest in Canfor Pulp (TSX: CFX) that they did not own, for a 20% premium to market, and an option to take cash or shares of Canfor – looking at the balance sheet and the state of the pulp market (which is seemingly deader than 8-track audio), their minority shareholders are quite likely to proceed with this consolidation. Canfor itself tried to take itself private in 2020 and failed by a few percentage points on the shareholder vote – is this far behind?

What is causing all of this? Natural economic forces, but also that credit is cheap and plentiful if you have it – Canadian Natural Resources, for example, just issued $1.65 billion in 3, 5 and 10 year debt at a spread of about 85bps, 100bps and 130bps to GoC equivalents, respectively – dirt cheap!

I see the preferred share market is quite low-yielding – the spreads between yields to corporate debt has narrowed significantly over the past couple years and many of the issuers have their shares trading well above par value (e.g. most of the PPL.PR.x complex, FFH, BIP, etc.) – they are being called out at their 5-year rate resets.

High prices means low yields, and in order to get higher returns, one has to venture further up the risk spectrum. It’s getting quite competitive out there.

Laurentian Bank – more consolidation and general comments

Laurentian Bank (TSX: LB) finally found its solution to its years-long strategic review and found a way to carve itself out to various suitors, leading to a CAD$40/share cash buyout offer. The three year history of the stock graph pretty much tells the story – with the prior outsider CEO in 2023 getting fired for not being able to sell the company, and new management being successful:

I was contemplating taking a relatively mid-sized position in LB around $25-ish early this year but simply didn’t. Even worse yet, I had a tiny position (a fraction of a percent) in late 2024 but cleared it out in early 2025 to just simplify my portfolio and reduce the number of names that sucked up my attention. It’s one more illustration (more like a financial slap in the face) of how 2025, despite the major indexes posting somewhere around a +20% year, has been quite sub-par for my own personal decision-making, which is shaping up to be my worst relative performance since 2014.

Going back to LB, this pretty much eliminates the “pure banks” out there, albeit LB was a very small fish in a large ocean and also Quebec-centric. We have the following banks remaining on the TSX with a market capitalization of over a billion dollars, and needless to say, they are names that you’d all recognize, in order from largest to smallest market capitalization as of 31-Oct-2025, and I will also post the approximate YTD performance (NOTE: CAGR over the past 0.9 years) and market cap as of the writing of this post:

RY (+28%, 304B)
TD (+60%!!!, 200B)
BMO (+31%, 126B)
BNS (+32%, 121B)
CM (+36%, 112B)
NA (+30%, 66B)
LB (+45%, 2B)

There’s pretty slim pickings when it comes to publicly traded Canadian Schedule 1 banks out there. They have all done pretty well this year. The only notable valuation nook was when CM was trading around book value earlier this year. Indeed, banking world-wide has done very well as interest rates have dropped – many of the European Banks have posted triple-digit percentage returns (e.g. DB is up +115%, etc.).

With Canadian Western Bank (CWB) being picked up by National Bank a little while back, this leaves the “sub-bank” companies, such as Equitable (EQB) and the like being potentially picked off – notably Equitable is one of the few that are down year-to-date, presumptively due to its exposure to less than ideal real estate financing assets. This is also likely why he largest residential REIT trading in Canada (CAR.un) is also down YTD.

If I were to describe my investment tone at the moment, it is quite restless. High valuations do not make for high returns, and with credit seemingly plentiful and corporate debt yields relatively tight to risk-free rates, it has been a struggle to find value. Indeed, holding a grenade like Ag Growth (AFN) has not been a particularly thrilling experience although thankfully I lightened out of that one in 2023 when things were a bit more optimistic there.

I do intend to continue my Late Night Finance episodes, but only when I have something meaningful to contribute. In our make-belief world of generative AI, it is difficult to compete – I do not know whether I am adding more to the slop or whether what I am contributing is signal. Based off of my performance as of the past couple years – it seems to be noise.

The good news – past successes or failures do not have to equate to future successes or failures – each decision can be considered afresh.

The merged Cenovus/MEG Energy entity

This is simply a compilation of known information. No special insights in this post.

Now that Cenovus is the ‘winner’ of the MEG sweepstakes, what will be the merged entity?

MEG has 255 million shares outstanding. CVE is paying $14.75 cash and 0.62 CVE shares for MEG, or approx. $3.8 billion cash and 158 million shares of CVE.

With dilution from warrants that are highly in the money, CVE will have approximately 1.98 billion shares outstanding after this transaction.

Balance sheet-wise, CVE announced after the sale of their 50% interest in one of their jointly owned refineries netting $1.8 billion, which gave their Q3-ending balance sheet a $3.5 billion net debt pro-forma. CVE purchased $512 million of their own stock in September. After the MEG acquisition, which had about $617 million in net debt at the end of Q2-2025, CVE will have approximately $8.4 billion in net debt pro-forma post-acquisition.

MEG’s production was estimated to be 100,000 boe/d; CVE’s production was estimated to be 800,000 boe/d, hence the combined entity will be approximately 900,000. Combined FCF for 1H-2025 is $1.56 billion, annualized $3.1 billion (noting WTI pricing is considerably lower today than it was in 1H-2025). This assumes no cost synergies when the assets get merged (in reality, there will be considerable synergies to be had with the Christina Lake project being so geographically close, and they will also be able to make proper capital allocation decisions in the whole geography instead of in isolation – MEG was going to blow some money on raising the production and this project is likely to change scope after the acquisition).

At WTI at US$58, I have the FCF of the combined entities at roughly $2.8 billion, but for the purposes of this analysis I will use 1H-2025 numbers.

Analysis: The pro-forma entity currently has an EV of about $55 billion at current market prices; net they are trading at about 18x EV/FCF, which historically has been higher than the typical high single-digit multiples seen in earlier years for most Canadian oil and gas companies. CNQ, notably, is sitting at around 12x EV/FCF on their annualized 1H-2025 numbers – if they creep much lower they might be a reasonable ‘low risk, low reward’ type candidate for incremental capital.

There is likely a considerable amount of value baked into the asset base (which is top-tier low steam-to-oil ratio, i.e. low cost production with most capital already spent) and there is considerable balance sheet value baked into the combined entity. This completes what was attempted nearly a decade ago when Husky Energy tried to take over MEG Energy in 2018. Now it is likely to be completed. The combined entity will be one of the premiere low cost oil sands production companies and should be quite income trust-like in nature, similar to how the old Canadian Oil Sands Trust used to trade (TSX:COS.un if anybody remembers those days – they got bought out by Suncor). The only question is a matter of valuation in this ‘price-taker’ market – WCS differentials are once again creeping higher (about US$13/barrel as I write this).

It is going to be difficult for high-cost producers (shale, and most conventional drillers, and the high steam-to-oil ratio oilsands) companies to make money in the existing environment. One reason why I suspect Strathcona was so desperate to acquire MEG, aside from trying to dump their own stock to MEG shareholders, is because their own assets are marginal (many acquired through prior CCAA or near-CCAA discards such as the old Pengrowth Energy) and will not be doing well in a low price environment – their common stock to me seems frothy. One advantage of the top four dogs in Canadian Energy (CNQ, CVE, SU, TOU) is their ability to make a little money in a low price environment, and making a lot of money in a high price environment. The forward-looking return should be better than the 3.1% that you can currently get for a 10-year Government of Canada bond. If we do get some energy crisis, there is embedded optionality which seems to be underpriced – of course, the painful trade when this occurs is selling the shares when they are trading at 4 times free cash flow.