Equity – Page 2

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.

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.

Teck / Anglo American

Less than two months after I wrote about Teck, they have agreed to a so-called “merger of equals” (not! – Anglo will have 62%, Teck 38%, and that is after a US$4.5 billion asset strip!) where Anglo American would take out Teck in a stock swap – Teck holders will receive 1.3301 shares of Anglo American.

The other salient term is that Anglo will also take out US$4.5 billion cash before proceeding with the merger – which is a pretty big way of effectively extracting the remaining equity out of the Teck operation and leveraging the crap out of it! Teck is still relatively under-levered by virtue of selling their coal mining operation (having blown a serious amount of this cash on a buyback at higher stock prices than today). But none of this will matter for Teck shareholders anymore as they will be gone!

The big opportunity here are for so-called synergies (which take a much longer time to materialize, if at all, in these mega-mergers) but there is some basis for finding synergies with Teck’s QB2 project and the Collahuasi mine, which is 44% owned by Anglo and 44% by… Glencore. Collahuasi is about 15 kilometers away from QB2 and there is potential for some engineering synergies to be realized to combining assets, but first Teck has to get its own crap together on QB2!

Anglo, pre-merger, is involved in copper (28% of revenues), Iron (24%), Platinum (22%), the infamous De Beers (yes, the diamond cartel, 12%) and Metallurgical Coal (13%).

Ironically De Beers is the only significant business unit that is not making money for the company at present. Perhaps diamonds are not forever!

Skimming the Anglo financial statements, it is not a company that I want to be holding for very long. It is completely outside of my desired investment profile. All of these synergistic promises will take a ton of time to materialize. The forced internationalization and geographical diversification of executives and staff sounds like a total nightmare to manage. I also don’t want to have to care what’s going on in South Africa – my investment in First Uranium sufficiently traumatized me.

However, I think the institutional money will love it. I actually think there is enough pro-Canada material in there for them to get the stealthy “Canada is open to foreign investment” nod of government approval.

Before thinking there will be a superior counter-proposal, the only logical other suitor out there for Teck was Glencore. After the sale of the coal unit to them, this is simply not happening. The deal should be a done deal. If only Cenovus, Strathcona and MEG Energy was as clear!

Finally, part of the deal was them changing their name from “Anglo American” to “Anglo Teck”. It looks like they were really eager to shed the “American” part of their name and needed an excuse!

I’ll be looking to divest my remaining small stake in Teck, but I am not in any rush. Commodities are skyrocketing (monetary debasement is a very powerful force) and even though it looks like that Anglo American is doing just as bad a job of cost containment as Teck, in a rising price environment they won’t be crashing down anytime soon.

Apparently the merger is expected to take 12-18 months and so this is not to be a case of selling on the first day – there will be a link going forward to Anglo’s common stock and my paper napkin adjusted income has them trading at around a P/E of 14. It’s not as if Microstrategy did a stock swap for them.

I originally acquired a substantial stake in Teck a couple months after everything hit the fan in the 2020 Covid shutdown. About 2/3rds of it was eliminated in 2024 for an average of $66/share. It looks like there will be another opportunity to disposing of the rest soon enough. Needless to say, the market timing has been borderline perfect – it rarely works this way!

Smallcap Time – Andrew Peller

This is another “low risk, medium reward” small cap situation. The risk is tempered with balance sheet assets but also incremental improvement in underlying operations in part due to a significant management transition.

Andrew Peller trades on the TSX as a dual-class stock company (TSX: ADW.a and ADW.b).

The company is a vertically integrated wine conglomerate. They own many producing vineyards in southern British Columbia and southern Ontario. They also own three significant wine production facilities, in Kelowna, BC, Grimsby, Ontario and St. Catherines, Ontario. There are also retail/tourist destinations (the type of places that would host fancy reception parties and the like) in the same geography. Finally, the company owns a significant plot of land in Port Moody, BC which was the subject of municipal rezoning procedures spanning most of a decade but is thankfully done. Unfortunately, since the initial concept was conceived, interest rates have risen and the residential construction market has collapsed in the BC Lower Mainland (similar to the situation in the GTA).

There are headwinds with the main business – the younger demographic is drinking less alcohol than it has historically. Wine sales trends (by volume) suggest that aggregate consumption is flat to slightly negative. There may be opportunities in expanding to alternative markets (e.g. non-alcoholic beverages and the like) but this is going to take development and time. The main value proposition of the company, however, is not through the commodity production of grapes (essentially agricultural production), but rather the distribution network and the accumulation of “mind-share” with its various brands – which is a very expansive collection of names, e.g. Wayne Gretzky Estates and Copper Moon. Branding of wines is very fragmented and it takes nothing other than walking through the shelves of a liquor store to realize the diffuse nature of branding – but if you own multiple brands you get more real estate on the shelf! The company believes it has about a 9% share of the wine market in English Canada, second in the country.

Financially, Covid-19 did not treat the company well, but current results have regressed to the pre-Covid metrics.

Examining the pre-Covid and post-Covid financial metrics, we have a company that posts approximately $400 million in revenues and operating margins of about 11%. Bottom-line net income for the past 12 months total 37 cents a share. The company’s balance sheet has consistently been in a net debt situation, peaking roughly around $200 million during Covid, but presently about $169 million, which is funded by a $275 million available credit facility at 2.5% + CORRA (right now 5.25%). This number is approximately the amount of inventory the company keeps on its books. The assets on the books (including the real property) collateralize the loan. Finally, the company pays out a modest dividend – last couple fiscal years about $10.4 million, which is amply supported when looking at the cash flow statement.

On the downside, Note 17 of the Fiscal 2025 financial statement outlines the amounts of government subsidies they receive from the Wine Sector Support Program and the Ontario Grape Support Program – a non-considerable amount of money that makes gross margins appear far greater than they are in reality. There are political reasons why this stream of money is unlikely to abate, especially in context of the international trade issues with the USA at present.

However, the most significant change that got on my radar was the ownership and changes of management structure.

There are some unusual features worth noting with the dual class stock structure. The Class A shares (35.3M outstanding, trades as ADW.a on the TSX) are non-voting. Class B shares (8.0M outstanding, trades as ADW.b) are voting. Class B shares can be exchanged 1:1 for Class A at any time. The two classes are economically different – Class A shares are entitled to 15% higher dividends than those declared on Class B shares (currently A shares are paid $0.0615/quarter while B shares are paid $0.0535/quarter). However, Class B shares have the preferential right to be subject to a takeover bid without the Class A shares having participation rights. The history of the Class B shares is quite interesting but in present-day, 49.8% is owned by a corporation called Peller Family Enterprises Inc., 24.8% by John Peller, and CDS Clearing (essentially the public portion of the trading float seen on the TSX) holding another 21% of the shares. The remaining 4.4% are held by various other private individuals.

The majority of voting stock used to be held by Joseph Peller through his majority-owned corporation, but has subsequently devolved into the current structure – while the Peller family still collectively owns the voting interest in the corporation, there are different entities in the family having control elements. In particular, Jeff Peller died in 2021 and for estate management reasons, the company had to sell Class A shares in 2022 (definitely did not help the stock price at this time) – SEDI filings suggest this was executed October 2022 at about $5.60/share. Long story short – the Pellers (via the family corp and John) still have about 75% of the voting stake in the company.

A pivotal moment was when, in November 9, 2023, management announced that there would be a transition and the then-CEO, John Peller, would be retiring:

John Peller announced his intention to retire as President and Chief Executive Officer of the Company within the next year. The APL board of directors (the “Board”) is engaged in a process, together with its outside organizational consultants and a leading executive search firm, to find a suitable successor for the CEO position.

For almost 30 years, John Peller has led APL as Chief Executive Officer and been the driving force behind the Company’s growth and success. The Board is seeking to identify and attract a CEO who will respect APL’s core values and will continue the rich traditions that have been ingrained in the Company due to the contributions, efforts and commitment of the Peller family.

In addition, the Company’s independent directors, Perry Miele, Shauneen Bruder, François Vimard and David Mongeau, have announced that they will be retiring effective immediately, to support a proactive refreshment of the Board. The Company intends to add independent directors to the Board within the next few weeks. The identity and details regarding the new Board members will be announced at that time.

We see a public post from Miller Thomson (legal firm) that advised Peller Family Enterprises on this transition. The company has kindly paid $3 million in professional advice to assist with the family corporation.

On February 9, 2024, five directors were announced to the board and the following:

As part of John Peller’s retirement and transition, the Company has agreed to pay $4.5 million in a retirement allowance in addition to his ongoing salary as President and CEO until a successor is appointed. In addition, the Company has also entered into a consulting agreement with John that will take effect upon his retirement to ensure a smooth transition, which provides for a $2.0 million consulting fee for services provided, paid quarterly.

The Company has entered into a transition agreement with Peller Family Enterprises Inc. and the Peller family, which includes provisions relating to the composition of the Board for a 24-month period, as well as standstill and other provisions. Later (see below) it was disclosed that the Company has paid $3.0 million in legal and advisory fees incurred by the shareholders in connection with these agreements.

Finally, on July 9, 2024 it was announced that a couple internal hires would lead the company as CEO and President, and John Peller stepped away as CEO. Later that year (September 17, 2024) announced were some other hirings and firings. However, what got my attention was on November 6, 2024’s quarterly report results, the following sentence was included:

In response to these margin pressures, the Company has executed numerous production efficiency and cost savings programs including the renegotiation of inbound and outbound freight rates and alternate sourcing for glass bottles.

One of the problems with having family-run enterprises is that management can get quite entrenched in old ways and become stagnant. Another problem is that they treat the family business as their own personal spending conduit to the detriment of the non-controlling shareholders. They might surround themselves with staff that are too afraid to rock the boat or suggest changes to long-held methods of doing business that have long since been outdated (perhaps I should take hint at my own words here). By getting new (hopefully competent) eyes to look at business practices, it may lead to better results. Definitely something such as looking for cheaper sources of glass bottles would be low-lying fruit?

On February 12, 2025, John and Angus Peller stepped away from the Board of Directors, completing the transition.

From November 2024 onwards, I made the decision to take a stake in the company, both the voting and non-voting stock. Having really lost my mind on Teck Resource’s reclassification of their super-voting shares (where their voting stock received a 60% premium in their Class B stock and I remember on my trading screen during the depths of the Covid panic looking at the A and B shares and deciding to save a buck and go with the Bs – a mistake that regret), I was very intent on obtaining voting shares of the company. The non-voting stock was easy enough to accumulate, but the voting stock was a real pain in the ass to transact. It is incredibly illiquid with some days featuring zero trades and very high bid-ask spreads. Since November 6, 2024, there have been 94,000 shares trading in this class of stock on the TSX. The premium one pays for the voting stock is typically a dollar over the non-voting stock price, but over the past week this equilibrium has broken – somebody has really wanted to accumulate the B stock and it doesn’t take a lot of dollar volume to inflate the price! I have managed to take a reasonable chunk of the historical trading volume but now that the premium to non-voting is so high, I can reveal this trade which has taken 10 months to perform. I’m no longer in the market for the B shares at present pricing.

My investment thesis here is fairly simple:

1. The company still has the Peller family with control and I am presuming they have an incentive to ensuring that it is being managed with an eye to continuing the dividend stream (providing cash flows to the family) and that their main priority is to capture cash flow – John Peller still controls about 5.1 million shares of Class A stock in addition to the voting stock;
2. The company operates in a stable and very mature industry and should exhibit a small amount of incremental improvement in results;
3. The company is a stealth play on the ownership of agricultural land which should retain value in most economic climates;
4. The non-trivially sized development property in Port Moody which will eventually be disposed of; this continues the theme of new management in Q1-2026 announcing the disposition of “non-core” assets:

During the first quarter of fiscal 2026, as part of its strategy to divest non-core assets, the Company initiated the proceedings to sell land, vineyard, and building assets in Kaleden, British Columbia with a net book value of $977. The sale closed in the second quarter of the fiscal year for proceeds of $1,260.

… it should be noted the BC Assessment value of the Port Moody property is $50,800,000 land value for one parcel (there are other parcels in the vicinity which will add to this value).

5. There is a chance the stock structure will be flattened, Teck-style. From the 2024 November quarterly conference call:

————–

Operator
Your next question comes from [ Dave Boychuk ] shareholder.

Unknown Shareholder
I was at the AGM in September, and this is actually just a clarification question because somebody in the — somebody at that meeting asked the question about the current, I guess,

the current shares of the A and B value

. And I forget which one of you guys answered back something that you were working with somebody or some firm or something. And I just wanted clarification what that was.

Paul Dubkowski
To be honest, I’m actually don’t recall that or mention anything around that. I don’t think that’s something we would speak about at an AGM nor do I have anything to report on that. But I’d be happy to — if there’s something specific, I’d be happy to take a call on it. But no, nothing to report, and I don’t recall speaking about that.

————–

… after the 24 month “stand-still” provision with regards to the board composition is expired, there is a decent chance that there will be some “make whole” arrangement that will invoke a single class of shareholder and compensate the voting shareholders, similar to Teck. This will align with the Peller family receiving cash flows and a still significant control (although far from majority control) of the company. This would likely make the company more attractive for public investment.

6. The financial metrics are relatively cheap when compared to similar participants. The closest comparison is to Corby Spirits and Wines (CSW.A/CSW.B) and although their business is somewhat different, it makes ADW look relatively cheap. Another comparable is Lassonde (LAS.A) but they have been performing shockingly well over the past decade.

At my purchase price, the downside appears to be quite limited and getting paid 5% to wait seems to be a good proposition. Despite the increase in the share value over the past 10 months, the overall firm appears to be relatively cheap. For the better part of the last decade, the company’s stock traded in the double digits and there is a reasonable possibility over time they will see this again.

Long both ADW.a and ADW.b – and a liquidity disclosure – ADW.b is incredibly difficult to trade efficiently. I’ve learned a lot about trading very illiquid stock and needless to say, I won’t be exiting it anytime soon, even if I wanted to!