Category: Equity

Enbridge Line 5 and pipeline politics

It is going to be very interesting to see what happens with Enbridge and Line 5.

The reason why the Federal Government cares about keeping Line 5 operational is because it processes about half of the crude oil that is refined for southern Ontario and Quebec. You can take a car to Sarnia and see the refineries.

A shutdown of Line 5 would, needless to say, be very disruptive for the region. There isn’t a good way to get additional capacity into the area – the other routes are fully utilized.

The federal government only cares about what is good for, roughly, the traditional boundaries of Upper and Lower Canada. Any policies that are tailored for areas away from this geography is strictly coincidental.

Thus, the Keystone XL cancellation was of little concern to Ottawa. The usual lip service of condemnation by politicians, when it is so obvious they don’t mean it.

I am still somewhat mystified today that the federal government bought out the Transmountain pipeline project – most people do not know that there is an existing (profitable) pipeline in place. Its existence does not matter an iota to Ottawa.

Line 5, however, is different. It fuels Ottawa’s core geography.

It was not longer than a decade ago when this strategic and political vulnerability was identified and hence the Energy East project was conceived. After the Liberals got into office in October 2015, they proceeded to kill the project with a never-ending wall of regulation.

We fast forward today and see where such lack of strategic thinking is par for the course in Canada.

It is not my job to moralize about the inadequacies of government thinking, but rather to pick out winners and losers.

I am still puzzled why so many people are in love with Enbridge as being a staple in their yield portfolios. There is far more risk than they imagined.

The sentiment will change when there is a real connection between very poor decisions and actual hardship experienced by people. The lag between the two, however, could take many, many years and attribution of blame may be misdirected.

Likewise, few lament over how much richer we could have all been, collectively as a society, had we had our act together to begin with.

Politicians, however, are not rewarded for making optimal or efficient decisions. In fact, they have a gigantic incentive to not solve problems, lest their purpose of existence be threatened.

Dorel’s going private takeover bid increased

Dorel (TSX: DII.B) was in the process of going private. Their previous bid had been CAD$14.50, but today they announced this will rise to CAD$16.00.

This post is not to discuss the valuation of the offers, but to highlight a trend of increased bids:

Rocky Mountain Equipment: CAD$7.00 -> CAD$7.41
Great Canadian Gaming: CAD$39.00 -> CAD$45.00
Dorel: CAD$14.50 -> CAD$16.00

Dorel’s bid was already somewhat anticipated by the market, where at around Christmas they started to trade over the CAD$14.50 threshold:

One can have hope for Atlantic Power, but I’m not holding my breath!

Clarke / Slow-motion privatization

Clarke (TSX: CKI) is George Armoyan’s publicly traded holding company. On September 15, 2020 he owned 10,399,101 shares of 15,697,324 outstanding (66.25%).

Since then, the company has managed to retire 639,432 shares through buybacks and 363,893 of those shares was through a creative 1:1000 reverse split and split, repurchased at $5.60/share on October 20, 2020. Shares outstanding has been reduced to 15,057,892.

As a result, Armoyan’s ownership has risen to 69.1%.

Letko, Brosseau & Associates Inc. owns 2,345,308 shares, or 15.6%.

Thus, the public float available is 2,952,915 shares.

Today, Clarke announced:

HALIFAX, NS , Jan. 21, 2021 /CNW/ – Clarke Inc. (“Clarke” or the “Company”) (TSX: CKI) (TSX: CKI.DB) today announced its intention to commence a substantial issuer bid (the “Offer”) pursuant to which the Company will offer to purchase up to 1,150,000 of its outstanding common shares (the “Shares”) at a purchase price of $7.00 per Share in cash (the “Purchase Price”).

The Purchase Price represents a 6.3% premium over the 30-day volume weighted average closing price of the Shares on the TSX for the period ending on January 20, 2021, being the last full trading day prior to this announcement. The number of Shares subject to the Offer represents approximately 7.64% of the total number of Shares outstanding.

Considering that Clarke last traded today at C$7.04/share (all of 500 shares), I have my doubts whether this offer will be subscribed to any real extent unless if Letko wants to get liquidity on its stake (which will be nearly impossible to unload in the open market).

My impression is that this is a continuation of a slow-motion takeover before Armoyan decides to just buy everything at a modest premium. Maybe the minority shareholder fleas will get another dollar or two out of the stock, but the time for Clarke as a publicly traded entity is soon coming to a close.

Atlantic Power – Counter-bid?

Today, Atlantic Power had trades above US$3.03 (the proposed cash merger price):

At 11:04am (pacific time) somebody pumped in an order for 400k shares.

Although I have expressed my doubts at the feasibility of a counteroffer scenario, we will see. The past couple trading days saw the stock trading at a relatively high merger arbitrage (roughly 3-4% for a half year) and I was expecting this to close a little. However, trades above the US$3.02 point are highly suggestive that somebody is gambling on a superior bid coming.

I haven’t sold any of my shares since the initial merger announcement.

Atlantic Power – Goodbye!

January isn’t even half way done, and I’ve already had two of my companies receive takeover offers. The first one was FLIR Systems (Nasdaq: FLIR). Now it is Atlantic Power’s turn.

Atlantic Power (TSX: ATP / NYSE: AT) has been one of my longer term holdings, most of it purchased around the US$2 point.

I’ve written a lot about it in the past including my July 2018 post about a great company in a terrible industry.

This evening, they agreed to be acquired by i Squared Capital for US$3.03/share in cash, which is about a 44% premium to their last trade today. I Squared Capital, according to Wikipedia, has about $13 billion in assets under management, so this isn’t going to be an Input Capital type situation where the counterparty is questionable.

Other Atlantic Power securities will participate – the convertible debentures (TSX: ATP.DB.E) will be redeemed at 113.5, about a 10% premium at last trade; their preferred shares (TSX: AZP.PR.A/B/C) will all be taken out at CAD$22/share which is 27%/16%/29% above their last trade. This translates into a yield of 5.5% for the As and a 5.26% rate reset yield for B/Cs.

Until now, Atlantic Power has been one of the laggards in my portfolio. The way that this ended is somewhat bittersweet, but I’ll find a place to reallocate the capital. The power purchase agreements that were expiring would have become an issue in the next few years and I was expecting a strategic acquirer to come along.

There is a faint chance that there will be a higher bid, so I will not be selling immediately. However, I will not get my hopes up.

One thing I will be doing, however, is try to track where CEO James Moore goes to. If it is another publicly traded company I’d give it very good consideration – he was masterful.