Canada – Page 8

Verticalscope IPO

I’ve got it give it to the people that bought the Toronto Star back in May of 2020, they got a very low valuation which assumed the residual business was relatively worthless (the company had a lot of cash on the balance sheet and the pension debts weren’t too onerous). They really cashed in the middle of the COVID-19 crisis.

However, never in my mind did I anticipate that they’d be able to bring public their Verticalscope subsidiary (TSX: FORA) for triple the value that they bought Torstar for.

My, oh my, are the founding shareholders of Torstar probably feeling like they got ripped off.

Skimming the Verticalscope June 14, 2021 prospectus, we see a corporation that is flat on revenues (approx. $57-58 million/year in 2020 and 2019) and capitalized with about $100 million in debt on the balance sheet. The net debt will be gone with proceeds from the public offering. The entity does generate cash (about $14 million in operating cash flow in 2020) but overall it isn’t exactly what one would consider to be a huge money-winner, especially given what has been invested in it.

The business itself is a collection of online properties. It is a faint resemblance of what the Yellow Pages (TSX: Y) was probably trying to originally execute on their “digital strategy” before management (rightly) corrected that course from 2017 onwards. And just like Yellow’s original digital strategy, it’s likely they’ll use their enhanced liquidity position and/or their stock to acquire more online properties.

Indeed, one of the businesses that Verticalscope owns, Red Flag Deals, was sold to them by none other than the Yellow Pages.

Verticalscope extensively uses the phrase “adjusted EBITDA” to justify valuation and it indeed appears that investors are happy to overlook all the adjustments. At least with the IPO, there won’t be much in the way of interest expenses anymore.

It won’t be myself buying shares of this offering. I really wonder what the thought process of the institutional managers that do, or people that bidded it up another 10% on the after-market trading today!

Who falls for these types of offers?

Ag Growth (TSX: AFN) sold off heavily today as a result of overall market weakness coupled with the markets not liking the fact that their costs are going to be increasing in the upcoming quarters due to the surge in steel pricing, coupled with a likely re-valuation of their technology platform. It’s not great having your top holding taking a haircut like this, but that’s how markets work – things go up and down, and this is also buffered by other things in my portfolio which take advantage of inflation.

However, what really got my attention was a tender offer from a “Sustainable Agriculture & Wellness Dividend Fund“, which will soon by listed as AGR.UN on the TSX.

They want me to flip my AFN shares in exchange for yet-to-be listed units in their fund, based off of the average trading price on June 1-3, at a par value of $10/unit.

I can only assume it was also offered to other securities they plan on holding in their fund (they list the prospective holdings on a one-pager, including companies such as Beyond Meat, Farmers Edge, Goodfood Market, Rogers Sugar, etc.).

I have stronger wording which I will not type in, but will state that this offer is highly unattractive for a few reasons. I’ll list a couple.

One is that right away, such an offering will involve a 4.5% payment to the agents, so effectively your $10 ‘value’ will be reduced to $9.55 immediately, plus another $500k in expenses associated with the offering (it costs legal fees to process partial tender requests such as these).

Assuming you were silly enough to go with it, the MER of the fund in question is 125bps.

I just shut off the prospectus from my computer screen before I wasted more mental space on it. But it was worthy of a post – who actually falls for these types of offers?

Small portfolio note

The universe of Canadian convertible debentures is ever-shrinking – there are 92 issues remaining, and three of them (Atlantic Power, Great Canadian, Yellow Pages) will be going in a month, and there are a few more that are obviously slated for rollover/maturity in the coming months after.

I’ve recently unloaded my last convertible debenture today. It is a statement on this particular market that there isn’t much point in putting capital into this when returns are so weak in relation to the apparent riches available in the equity market (of course, this could be a sign that equities are topping out!).

Junk bond yields are also at lows (ETFs include JNK, HYG). An interesting hedge here is longing puts on these in anticipation of some credit action.

My only material debt instruments I currently own are the Gran Colombia Gold notes (TSX: GCM.NT.U) which continue to happily slide into maturity (and if the underlying corporation has any financial sense whatsoever, will be called out before July 31st).

Reasons to shut the radar off IPOs and SPACs entirely

Here is a prototypical example. MDA (TSX: MDA) has gone public yet again. Most people here probably know the financial history of the firm – purchased by Maxar (TSX: MAXR), and then taken private so that Maxar could de-leverage, and then now it is taken public again with a price of CAD$14/share.

The company had its founding in the Greater Vancouver area, and continues today to perform engineering services in the space satellite domain, among other things.

The offensive thing about the public offering is page 65 of the 275 page prospectus:

The overlords of MDA knew perfectly well that they were probably going to go public again, and in the process granted themselves a ton of cheaply issued stock (noting that the right-hand table contains the applicable prices because of the 6:1 reverse split they performed before the IPO). They were looking to raising more money (at a higher share price) but had to taper it back to CAD$14 due to the tepid reception – probably partly due to this table. The other is the financial status of the company (it isn’t making that much money).

At the very minimum, I’d wait until the 180 day lockup period is over before even considering it, but knowing that space is a hype sector, I’m sure it’ll take off soon before then. Comparisons to SpaceX, however, is incredibly misguided – SpaceX has the reusable rocket technology which contains a massive competitive advantage on launch costs, while satellite construction and manufacturing is a much more competitive (and hence lower margin) industry, albeit played by a much fewer number of participants.

The search for yield is yielding a wasteland

The title says it all, but the market is again at a point where if you want a double digit return on your money, it has to come from the equity side. With equity comes risk.

Over the past year there has not been a lot of TSX-traded debenture issuance (indeed, the list of traded debentures is down to 94 and there does not appear to be much compelling value in the list – anything trading below par is doing so for what I consider to be a valid reason).

On the preferred share space, while it is easy to make a relatively stable 5% return, the risk you have to take to move up the yield chain goes higher and higher – e.g. Aimia’s preferred shares give you an extra 250bps or so based off of the 5yr reset rate, but you’re more or less investing in a hedge fund with a current market cap of half a billion.

Want less risk? Canaccord’s preferreds reset at about 100bps less than Aimia’s, have much higher revenues, but when the investment banking gravy train stops (and indeed – it will) you can be sure that people like me will be buying these preferred shares for less than half of par value, like we did back in 2016.

The surest 500bps I can find at present appears to be Pembina Pipeline’s minimum rate preferred shares that they acquired from Kinder Morgan Canada (PPL.PF.A/C/E), and in the case of the C and E series, likely to get called out in less than 2 years. Aside from a mention of Birchcliff Energy’s preferred shares, Pembina’s is probably the closest instrument that you can treat as a term GIC instrument with a ‘probable’ fixed maturity. Between now and then, however, things can always change and there could be some credit crisis that’ll blow the capital value of the stock – as witnessed during the CoronaCrisis – what trades at par value today traded at 44 cents on the dollar on “Margin Call Day”, March 23, 2020. It does an effective job of wiping out people that take out excessive leverage to buy these types of issues.

All in all, if your target is to make a 5% income stream, there is still plenty of selection (with capital risk in the event of market stress), but this is a far cry from the days of last year or in early 2016 when finding low risk double digit yields in fixed income was like the proverbial shooting fish in a barrel.

This environment is making me suspicious and indeed elevates my sense of paranoia that we are ripe for something bad to happening.