Category: Equity

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.

The short squeeze of the year (to date) – Gamestop

GameStop has had very high short interest as a percentage of its float, and it was obviously the recipient of a short squeeze over the past two days that saw its stock price double:

Share volume yesterday was 144 million, which is over double the approximate 70 million shares outstanding. In other words, every day trader on the planet was flipping shares like pancakes. Today, about halfway through the market open, 53 million shares have been traded.

For the brave, the cost to borrow has also increased:

As readers here know, I do not speculate on these high volume issues – there are plenty of other intelligent (and not so intelligent) actors that are putting their two cents (or perhaps US$41) into the matter. But from a trading mechanics perspective, this one is an incredibly fascinating story considering that as far as I can tell, the underlying business is this decade’s version of Radioshack for gamers.

Risks of investing in foreign jurisdictions – Turquoise Hill

There are a couple hot assets that are down in the upper-teens percentages today. One is Bitcoin, but I’ll let other financial scholars write about it.

The other is equity in Turquoise Hill (TSX: TRQ), which is an entity that is 50.8% majority owned by Rio Tinto. The TRQ entity owns 65.9% of Oyu Tolgoi LLC, a Mongolian corporation that operates the Oyu Tolgoi mine, which currently is mining gold and copper. Copper represents the vast majority of revenues (roughly 75% in the 9 months ended 2020). While nominally Canadian, the primary operating entity is Mongolian and their operations are consolidated into TRQ’s financials. They report in US currency.

The company is facing significant issues concerning an ongoing dispute with the Mongolian Tax Authority, and also operational concerns regarding the expansion of their copper mine. While the GAAP financials are showing profitability, one quick look at the cash flow statement shows that the entity is (not using formal finance terms here) bleeding cash like crazy.

The first nine months of 2020, they spent $817 million on property, plant and equipment, and their net operating cash flow was negative $29 million.

At the end of September 2020, they reported $1.4 billion cash on the balance sheet, but this is offset with $4.2 billion in long-term debt, primarily consisting of a project finance facility:

They have another US$1.6 billion to draw out, but there are conditions regarding this which I won’t bother posting about here.

Last month there were news pieces about a tax dispute brewing, and today TRQ announced they are taking it to an international tax tribunal. It looks incredibly messy.

This post is not about a rigorous financial analysis about the viability of the copper mine expansion, but rather about the risk of investing in foreign jurisdictions – I know very little about Mongolia and it is very difficult to sort out how much of this is political, or false positive promises, or whatever. All I know is that an investment on the simple narrative of “Copper and Gold will go up, therefore I should invest in this” has been shown to have embedded risk that is very difficult to quantify, and quite likely the stock price was not pricing in correctly.

Also, in such majority-controlled situations, it is unlikely that the parent (Rio Tinto) will take actions that will give minority shareholders a fair shake. If there is a bailout in the works from the parent, it will be very extractive to the minority.

In my books, this is easily a stock that goes into the “too difficult” pile. But fascinating to study nonetheless.