Category: Equity

When a dual-listed company delists on one exchange

On the morning of February 27, 2023, Greenbrook TMS (TSX: GTMS, Nasdaq: GBNH) announced that they are voluntarily delisting from the TSX, effective close of March 13, 2023.

In theory, not being listed on a stock exchange should have no theoretical difference in market value, but certainly on this thinly traded company (prior to this, it was lucky to see more than 10,000 shares a day of volume), it had quite the impact of people trying to stampede out the exits:

The stock went from CAD$2.50 to CAD$1.65 as I write this today, about a 1/3rd drop.

Ordinarily I would be salivating at the opportunity to take advantage of a forced liquidation that is clearly going on here, but financially speaking the company’s contribution to the economy has been paying their massive lease bills and not making nearly enough gross profits to eclipse their fixed expenses.

Teck’s coal spinoff (Elk Valley Resources)

Many smart people have already written about this, and many smart people have traded this. I won’t repeat their analysis.

The key point was this line in the conference call:

Concurrent with the separation, we announced agreements with two of our steelmaking coal joint venture partners and major customers to exchange their minority interest in the Elkview and Greenhills operations or interest in EVR. Notably, Nippon Steels $1 billion cash investment implies an $11.5 billion enterprise value for our steelmaking coal assets.

Given the amount of cash the EVR spinoff is producing at current met coal prices, the EV that they gave the equity stake to is low, which is probably why they got the minority shareholders to subscribe to EVR.

I surmised in my previous post:

What you also do to complete the financial wizardry is that you load the coal operation with debt, say around $10 billion. Give it to the parent company as a dividend, or perhaps give it to shareholders as a dividend in addition to the spun-off equity and the projected return on equity will skyrocket (until the met coal commodity price goes into the tank, just like what happened two seconds after Teck closed on the Fording Coal acquisition before the economic crisis).

It turned out my $10 billion dollar figure was nearly correct, but in the form of a 60% royalty on the first $7 billion of cash, coupled with $4 billion in 6.5% mandatorily redeemable preferred shares. Instead of doing a straight debt deal, this all just goes into Teck’s bank account.

The length of the payout period depends on met coal pricing being sufficiently high – something that I don’t think can be depended on for the majority of the rest of the decade.

Quite frankly, I think they screwed it up and hence the market reaction.

Since Teck is likely to make huge positive cash flows coming forward with their copper operations, they did not need to do a cash grab on the coal operation. If the spinoff was a simple one, I think much more market value would have been assigned to the joint entities.

Also, not being given enough attention is the give-away to the Class A shareholders. This is a very rare situation where you have a dual class structure and the voting shares get a huge payoff. (Looking at Rogers’ stock here!). I will be voting against this arrangement.

Refinery explosions

Oil refineries are incredibly complex pieces of machinery.

I’ve read the technical report at the now-Cenovus, formerly Husky Superior refinery that occurred in 2018 (this was before Cenovus took over Husky).

If you ever want to get a sense of appreciation at the technological marvel of oil refining, you should read this report.

This refinery is currently being rebuilt and should become operational again sometime this year.

Cenovus has had bad luck with their refineries. About a month after they signed a deal to acquire the remaining 50% of their Toledo refinery (the other 50% is owned by BP and the refinery is operated by BP), the refinery blew up on September 20, 2022 which resulted in the death of two workers. Thankfully for Cenovus, it was before the deal actually closed, and one would presume that the acquisition contact would require the refinery to be in a non-blown up state before the deal closes.

The preliminary report, released on October 31, 2022, indicates that a release of flammable materials from a specific drum was the origin of the fire.

These investigations take a lot of time and I do not think the repair job will be a speedy process either. It is too bad for Cenovus, as refinery spreads are sky-high at the moment and considering the lack of capacity expansion on downstream operations, will likely be this way for some time.

Canaccord – Going Private?

Canaccord (TSX: CF) put forward a management-led buyout proposal of the company at CAD$11.25/share. The total price is expected to be $1.127 billion, which also includes a consortium of people, including management, of 21.3% of the company.

The balance sheet of CF is not the cleanest:

The significant amount of minority interest stems from the roughly 2/3rds ownership CF has in its UK and Australia subsidiaries (which are consolidated on the statements) – and 55% of the Goodwill stems from these divisions.

I remember looking at CF last year (when it was still around $8/share) and decided against it given where I thought the economic climate was going (2021 was a banner year for public offerings, while subsequent to this things are going to be quite dry, relatively speaking). This doom-and-gloom did appear to be baked into the stock price, but as to what degree, I could not say. Dividend investors would have been happy considering they have found a new appreciation for giving out their cash flow to shareholders.

There are a lot of companies that have “covid characteristics”, whereby one has to look back to 2019 results of being more representative of a baseline performance. 2020 to 2022 are abberations for many companies.

In 2019 (backing out dividends), CF was trading at around $5-6/share. Even after adjusting for inflation, an $8/share price seems to have embedded in a reasonable amount of risk. It was not ridiculously under-valued.

However, the special committee to review this CAD$11.25 deal is not thrilled:

The Special Committee and the Management Group engaged in prior discussions concerning a proposal from the Management Group regarding a potential Board-supported transaction to be executed by way of a plan of arrangement. The Special Committee advised the Management Group that it was not prepared to support an offer of $11.25 per common share based on the preliminary financial analyses conducted by RBC. To date, engagement between the Special Committee and the Management Group has not resulted in an agreement on a value per common share that the Special Committee could support and recommend to shareholders.

…

Importantly, the Special Committee has not agreed to recommend that shareholders accept the Proposed Offer.

One danger of investing in smaller-capped companies is that on occasion you will have management try to low-ball an acquisition of the rest of the company. Jimmy Pattison’s firm tried to take out the minority stake in Canfor (TSX: CFP) which nearly succeeded. I still remember being resentful when Cervus Equipment got taken out by management. Almost anything with the name “Brookfield” in it is susceptible to this phenomena. There are plenty of other stories out there. The danger of having these management-lead buyouts increases in proportion to the smallness of the company and the proportion of ownership of management.

As a final point, my last ownership in CF has been through its preferred shares many years ago – which I have long since sold. In early 2016 they were yielding double-digits and were too tempting to not purchase (indeed, they were a steal at the time). However, preferred shareholders get no preferred treatment as a result of this management buyout – the CF.PR.A shares traded up today, but basically at the asking price of a very high bid-ask spread. CF.PR.C traded down! The shares reset in September and June of 2026, respectively, and with current yields of 7.09% and 8.31%. If you believe that 5-year interest rates will remain at around 3.25% around the middle of 2026, the reset rate goes up considerably.

Reviewing major index sector performances in 2022

Not surprisingly, energy had a banner year in both Canadian and US indexes.

TSX:

The big two losers were health care (think: marijuana companies and biotechs dropping from grace), and information technology (think: Shopify and practically every technology IPO). Real estate was the third worst with a -24.3% performance (office REITs, in particular, were slammed more than the other sectors).

S&P 500:

The forward P/E on the S&P 500 of 16.8 still appears to be quite a rich valuation (5.95%) over the risk-free rate of interest (the one-year US treasury bond yields 4.7% at present).