Equity – Page 28

Genworth MI – now Sagen MI – going mostly private

This is nearing the end of the story for Genworth MI (TSX: MIC) – Brookfield is offering CAD$43.50 for the remaining 43% stake of the minority shareholders. In addition, they are ditching the Genworth name for Sagen (probably to remove any ambiguity with regards to their discontinued relationship with Genworth Financial). I don’t mind the name change, although I am confused whether it is pronounced with a soft or hard “g”.

Currently MIC shares are trading slightly higher than CAD$44, so there is some sort of anticipation of a minor sweetening to seal the deal (similar to what happened when Brookfield took over the minority stake of Teekay Offshore).

What is interesting is the following paragraph:

Following closing, Brookfield and the Company intend to continue to satisfy the public float requirement of the Insurance Companies Act (Canada) through the issuance of a new class of publicly-traded voting preferred shares of the Company, which preferred shares are intended to be issued prior to or concurrently with closing of the Transaction. A special resolution of shareholders to create this new class of voting preferred shares of the Company will be presented to Company shareholders for approval at the Special Meeting.

I do not know how this will work out in practice. I can’t think of any analogies of such publicly traded firms in Canada that have 100% of the common shares owned by one entity, but the voting rights remaining publicly traded – unless if the public listing is merely symbolic and does not actually trade in any volume. For instance, if the preferred shares have 0% of an economic stake and 100% of the voting rights of the company, what good is it if Brookfield owns 57% of these preferred shares?

In terms of valuation, in Q2-2020, the book value per share of MIC was $41.97, and on the income statement side, was supplemented by a combined ratio of 45%. Although there is a lag effect in terms of the loss ratio rising and an economic calamity (such as COVID-19), they are still minting plenty of cash. At the proposed CAD$43.50 price, shareholders are receiving a somewhat lower premium for their shares than what I would think is warranted, but this is typical to anybody that invests in an entity that Brookfield takes a bit out of – be prepared to get the short end of the stick, always.

I got rid of my shares of MIC in 2018 at a price slightly higher than the proposed takeover price, albeit I would have been a tiny bit richer had I held on – this was before the series of special dividends they declared in 2019.

This news also likely discontinues my coverage of the company – I have been writing about Genworth MI for over 8 years now. My first post about MIC was in June 2012, where I took a position at CAD$18/share. Fond memories.

The liquidity of Yellow Pages

The trading of Yellow Pages (TSX: Y) over the past week has been a relatively fascinating display of liquidity – and indeed because the publicly traded float is so tiny and volume so low, that you can review it trade-by-trade and get some insight on what is going on.

This chart does a poor job of illustrating the tick-by-tick price action of the stock.

Supply is being sucked out of the market by ETFs and algos, plus the fact that Yellow is trying to pull supply out of the market through their NCIB (limit: 2,510 shares daily). There is little demand from the short squeeze angle (short interest is about 11k shares). Although the borrow is available (IB shows 1.77 million shares available to be shorted) it is very expensive presently (30% to short). What’s really interesting are the blocks on display:

Monday (all times Pacific time zone):
12:29 Ask 5,100 @ 11.95 (not filled)

Tuesday:
Same block on the ask, trading was thin this day

Wednesday:
The block at 11.95 disappeared, and instead at the beginning of the trading day, Ask 10,000 @ 12.00. There was a bunch of volume at 11.95, and somebody front-runned the large ask by a few pennies with obvious volume.

Thursday:
The big day. Opening was Ask 10,200 @ 12.09, and there was a sizable bid (Bid 2,900 @ 11.95) which crept up in price over the next four hours. At 12:46 the block was hit, preceeded by some volume before that. The largest trade of the week was hitting the ask at 12:46:36 for 12,460 shares (multiple trades).

Friday:
A bidder appeared at 6:32 at 12.19 (1,600 shares) and this rose over the next couple hours to 12.50 (about 3,967 shares traded from the opening $12.00 to $12.50 at 7:47am). Subsequently some supply hit the market at 9:42 at 12.47-12.52, but this was quickly absorbed. From 9:57 to 12:12, there was some liquidity trading at the 12.50-12.60 level (somebody posted an Ask 5,000 @ 12.50 which was eaten in the course of an hour) and subsequently 14,740 shares traded.

At 12:12:44, somebody posted Ask 10,000 @ 12.74, and it took all of ten seconds before somebody hit the ask and picked up the shares (with 501 hidden shares at 12.70, specifically the 1 share trade was probably for the HFT processor to deliver the information before the remainder of the order was filled).

The bidder after this trade continued to increase the bid, and hit some more supply at 12.80 at 12:21:01, and finally continued to 12:59:26 where the closing trade was at 13.01.

The total volume for Friday was 35,222 shares traded, the highest since August 27.

It was very interesting week for Yellow Pages, at least in terms of how the stock traded. If they continue to financially perform as they did in Q2-2020, they should rise further. A particular price point is $19.04/share, which is the conversion price of their debentures (TSX: YPG.DB) and although they have the cash already in the bank to pay off these debentures, if the common shares trade above this, it will be akin to them raising equity financing at this price. I do not think most people would have anticipated this, especially in light of COVID-19. I still have a very significant equity position as I believe this will continue higher.

Hertz is amazing

Take a look at the stock market’s favourite car rental company Hertz (HTZ):

This is what you call a short squeeze.

The catalyst was an announcement they received $1.65 billion in DIP financing.

Considering the unsecured debt is still trading a tad above 40 cents on the dollar, the bond market still doesn’t anticipate the equity receiving anything when the courts approve the Chapter 11 resolution.

This information (the equity fundamentally being worthless) was already priced into the markets. What rational participants don’t anticipate is a huge wave of paradoxically “rational irrational” behaviour consisting of gamblers, coupled with those trying to induce a short squeeze, which is what we are seeing.

A very fascinating display of market dynamics for the textbooks!

AcuityAds Holdings

I was looking at Atlantic Power (NYSE: AT, TSX: ATP) but accidentally typed in AT on the TSX, which is AcuityAds (TSX: AT). I saw the following chart:

They have nearly quadrupled their market value in about three months.

This got my interest (considering I’ve made the same error before in typing in the ticker, I generally saw a flat chart before). I didn’t see anything relevant in the financial statements – it was pretty sedated although they’ve been reasonably decent on cost controls from the first half of 2019 to 2020. I also tried to see why they spiked in July, but couldn’t find anything of relevance other than a remarkably increased amount of receivables collection in the first half, to the tune of about $6 million free cash flow.

Is this worth a market capitalization of $200 million? I don’t know much about exactly what they do (a bunch of fancy sounding names for using software to optimize advertising campaigns) but whoever invested in them during the Covid crisis will have made out very well.

Air Canada / Air Transat / Westjet

A tale of market timing…

Air Canada (TSX: AC) was going to buy out Air Transat (TSX: TRZ) for $18/share, but of course COVID-19 hit. They will instead do so for $5/share, and also with shares instead of cash (the details of this were not clear from the press release, but a typical provision is for people to elect to take cash up to a certain aggregate amount and after they will receive cash). The shares option has Air Canada equity valued at a level that is higher than Friday’s closing trading price.

Financially, Transat is not in terrible condition, with a whole bunch of cash and equivalents that are paid in the form of customer deposits (good luck getting those ticket refunds, customers!). They are still bleeding cash by virtue of their revenues going down to nearly nothing, but Air Canada is striking while the iron is hot (or rather, while the Covid craze is hot) and removing a future source of competition. The implied value in international ticket pricing they will gain will probably be a lot higher than the immediate costs of the costs they are paying.

We contrast this with Onex’s acquisition of Westjet, which closed in December 2019 for $31/share in cash (or $5 billion, debt included). Air Canada’s equity took a 3/4 haircut after Covid, and there wouldn’t be much reason to believe that Westjet would have fared any better had they still been public. Onex is a huge entity so their financial solvency is nowhere threatened, but still, they probably took an implied $3 billion haircut if they were to float Westjet to the public again.

This, and also an examination of Cineplex’s proposed takeover (at CAD$34/share), goes to show you that timing is everything.

I don’t buy airlines, nor do I particularly care for the sector as a whole. Almost everything associated with the retail side of commercial aviation is miserable. Other components of the industry have somewhat more promise.