Equity – Page 4

Yellow Pages – What now?

By virtue of two mandatory share redemptions (post 1, post 2) and some other dispositions, my position in this company is a lot less than it used to be (which at one point was over 10% of my portfolio!). However, what is remaining is not an insubstantial sum as measured in dollars and cents and I also have some sentimental value with this company as I regard it as one of my best calls ever which I made public on November 2019. Indeed, it is my longest-dated portfolio holding.

Other than capital return decisions (which has reduced the company’s shares outstanding from 26.6 to 14.2 million), the other significant event appears to have happened on March 21, 2023:

On March 21, 2023, the Company was the target of a cybersecurity incident. The Company immediately activated its internal network of IT professionals and retained the services of cybersecurity experts to assist in securing its systems and to support its internal investigation. The Company also suspended its operations and IT systems to contain the situation.

As of May 10, 2023, the Company had restored all its operations and IT systems and has taken steps to further secure all systems to help prevent a similar occurrence in the future. The Company is working with its insurance providers to make claims under its policies.

In their Q2-2023 release, they stated when discussing their decline in revenues:

… (b) a cybersecurity incident which resulted in the Company’s operations and IT systems being suspended for approximately three weeks of the second quarter of 2023.

While this did not have a material impact on Q2 (I was jokingly thinking that the company is so old-school that it generates cash even when they don’t have any computers operating), it certainly had an impact on Q3’s metrics, which significantly underperformed the decline regression model I had.

Now that this incident is over with, presumably the company can get back to its regular decline.

The only difference is that instead of working with a base of 26.6 million shares outstanding, there is about 47% less shares out there to deal with.

Management explicitly wanted to get the last buyback out of the way in calendar 2023 because of the 2% buyback tax that was going to be imposed in 2024. It would suggest that future buybacks are unlikely – perhaps this is why the stock is edging down lower due to the lack of anticipation of future demand.

This is an odd case where a company has removed nearly half its shares outstanding, but the share price has actually decreased despite the underlying financial metrics being relatively stable (the graceful decline downward). The company continues to trade at less than 4x cash generation – if there is any hints that profitability will stabilize, this multiple will rise. This has always been the thesis and 2024 is probably a good a year as any to see if it occurs. If there was ever a case study to deal with a company that should just go private to alleviate itself from public company hassles and expenses, this one is it. In the meantime, the dividend yield is around 7.5%, so at least we’re being paid a few bucks to wait for the inevitable.

Corus Entertainment

Corus Entertainment (TSX: CJR.B) has been a slow melting cube business case, dealing with the woes of competing against Netflix and streaming media, and the internet in general. Despite these competitive factors, they have still been able to generate a prodigious amount of cash flows.

They released their fiscal quarter results on January 12, 2024 and the following was their quarterly cash flow statement:

I’ve circled some relevant numbers. The key parts are that they have huge capital requirements to acquire program rights (this part makes the EBITDA look very attractive!) but these costs are necessary and increasing; they also have non-controlling interests which get claims to dividends that ordinary shareholders do not receive.

When netting this out, you have about $15 million in effective cash to work with. Management has a very strange interpretation of “free cash flow” which I won’t get into here.

This effective cash is contrasted to the $1.08 billion debt they have. Management is very fortunate to have $750 million of this at much lower fixed rates (5% and 6%) due 2028 and 2030 (the rest of it is in a credit facility) but needless to say, this leverage coupled with non-controlling interests do not leave the prospect of equity returns to be very good given the melting ice cube. The fixed rate debt is traded on the open market at a 13% yield to maturity at present.

There is some residual clout in ‘traditional media’ and Corus does still reach a lot of television sets and radios across the country. Perhaps some deep-pocketed individual will want to take control for strategic/political and not necessarily financial reasons.

The entity does appear to be more viable if they got rid of about half their debt.

Farmer’s Edge – that’s all folks!

Fairfax is generously offering 25 cents per share for the shareholders of Farmer’s Edge (TSX: FDGE).

This offer is about 24 cents more generous than it needed to be. Shareholders are getting really, really lucky!

They ended September 30 with negative $32 million in stockholder’s equity, and the three months they blew through $13 million in cash. They had $75 million in debt (lent to them from Fairfax) and $9 million in cash. Needless to say you did not need a CFA to know how this one was going to end up.

What does Fairfax get out of it? The following from the 2022 annual report:

The Company has not recorded any current or deferred income tax benefit for its tax losses in any of its reporting periods. The Company had $470.0 million of accumulated non-capital losses as of December 31, 2022, with expiry dates ranging between 2030 and 2042. These losses may be used to offset future taxable income. In addition, the Company has undeducted Scientific Research and Experimental Development expenditures of approximately $39.0 million which may be carried forward indefinitely and unused investment tax credits of approximately $3.0 million which expire between 2034 and 2039.

Fairfax just needs to find some assets in the same field of business to utilize these NOLs and they are all set.

Here’s one last fun calculation. The stock nearly doubled today on the announcement since it will not take two brain cells for the “independent committee” of directors to come to the conclusion there’s no choice.

Let’s pretend you were a fly on the wall of Fairfax and had 10 trading days of prior notice that this deal was occurring. Let’s also pretend that you were able to capture 100% of the liquidity of the stock that actually traded in those 10 trading days.

You would have been able to purchase 77,495 shares for $8,096.22. Those shares would be worth $19,373.75 if sold at 25 cents. No institutional manager would get remotely close to this even if they had the information in advance. Would have made for a perfect FHSA trade though!

Aimia – the gift that keeps on giving

I just can’t keep my eyes away from Aimia (TSX: AIM) which is a huge corporate soap opera that I am so glad I do not own.

According to Aimia’s posted statement of claim, we have one of the Mittlemen brothers going rogue, coupled with a Saudi-owned Cayman Islands corporation (Mithaq) that chose one of the worst Canadian publicly traded companies to target with their excess in capital. While they have likely blown over a hundred million or so on this venture, they apparently could not hire some junior security lawyer to write up a two paragraph memo explaining that once you get over the 20% threshold that some special rules take place. Or perhaps if they couldn’t afford a few billable hours, they could have just used Google.

84. Mithaq was aware of the take-over bid regime and understood the implications of crossing the 20% threshold. On February 2, 2023, Mr. Seemab sent an email to Mr. Mittleman with the subject line “Exceeding 20%?” and asked for help understanding “the process/implications if an investor exceeds the 20% equity threshold in the Canadian market?”

85. Mr. Mittleman advised Mr. Seemab that “if an activist’s goals can be achieved without incurring the complications of crossing the mandatory build [sic] threshold, that’s probably the easier / less expensive / better path. So I think 19.9% is probably sufficient”.

Oh my, this made for entertaining reading.

Yellow Pages – Drawing more blood from the stone!

Some history – last year, Yellow Pages announced a $100 million share buyback at a set price and shareholders almost unanimously agreed to a pro-rata buyback at $12.58 per share. They bought back 7,949,125 shares and at June 30 they had 26,607,424 shares outstanding. I wrote a little about it here.

Fast forward to today, and we have the following announcement:

Yellow Pages Limited (TSX: Y) (the “Company”), a leading Canadian digital media and marketing company, today announced that the Board has approved a distribution to the Company’s shareholders (the “Shareholders”) of approximately $50 million by way of a share repurchase from all shareholders pursuant to a statutory arrangement under the Business Corporations Act ( British Columbia ). The arrangement will be effected pursuant to a plan of arrangement (the “Arrangement”) which provides that the Company will repurchase from Shareholders pro rata an aggregate of 4,440,497 common shares at a purchase price of $11.26 per share, which represents the volume weighted average price for the five consecutive trading days ending the trading day immediately prior to October 19, 2023.

Yellow has 18,658,347 shares outstanding as of June 30, 2023, so this share buyback will result in a reduction of 23.8% of shares outstanding and bring them to about 14.2 million shares. At June 30, 2023 they had $64 million of cash on the balance sheet.

In the past four quarters, they have been able to generate $90 million in adjusted EBITDA, or about 1.6 times EV/EBITDA. The ITDA is about $10 million and the large cash drain has been the maintenance of the corporate pension plan which is still listed as a $37 million net liability, but this is slowly getting rectified.

Here is the really interesting proposition – the dividend is currently a $3.55 million quarterly cash outflow. The company is easily generating enough cash to cover the dividend. After the buyback is concluded, the 20 cent quarterly dividend could be raised to 26 cents per share and be cash neutral. At 26 cents per share, the company trades at a 9.2% yield. This is going to be difficult for algorithmic traders to avoid especially considering that the “melting ice cube” business is not melting nearly as quickly as one would expect, considering it is the Yellow Pages, after all.

If Yellow manages to generate another $80 million adjusted EBITDA over the next four quarters (this is not a given – my own model has them closer to $75), about $55 million of that will be pure cash flow and they’d be able to repeat this same maneuver again in 2024. If their stock price doesn’t move from there, another $50 million buyback would render the dividend yield at 13% – would the market be able to resist?

The funny thing is that there is a low enough price that one would actually want to purchase more Yellow Pages. Good luck, however – it takes about 2,000 shares of trading to move the stock price 70 cents per share!

I have had countless amusement and bewilderment, not to mention immediately dismissive and credibility-destroying reactions when telling people this is my longest lasting investment currently in my portfolio. For good memories, read my coming out of the Yellow Pages closet here.