Category: Equity

Aimia receives a go-private offer

Two going private offers in the same day!

Aimia (TSX: AIM) – a company I have written about here many times before in the past – is receiving a $3.66/share cash offer from its 30% shareholder, Mithaq Capital.

Needless to say it is terrible to be a shareholder of Aimia – do you take the $3.66 sure bet and cash yourself out at under 40% of book value (albeit dropping despite them having invested a ton of money into two private businesses) or do you hold on and put up with the completely sub-standard management that could have done far better by just sticking their money into an S&P 500 index fund? Tough decision.

One thing I do know – part of Aimia’s value proposition is its $269 million in capital losses that has accumulated since June 30, 2023. If this buyout does proceed, Aimia will not be able to utilize this. That said, glossing over their portfolio, I’m not sure how much in the way of capital gains management could realize going forward, so perhaps it doesn’t matter.

The only question I would have is for those preferred shareholders – they are very illiquid and are trading at around 12% yields at the rate-reset assuming the 5-year government bond trades as it is today.

Neighbourly Pharmacy going private

Just over two years ago, Neighbourly Pharmacy (TSX: NBLY) went public at $17/share.

Their valuation post-IPO puzzled me given the relatively simple nature of the business (retail pharmacy consolidator) and especially given the competitive landscape (you’re competing against Loblaws a.k.a. Shopper’s Drug Mart, Rexall, and the like). So while I kept a corner of one eye in the stock, I was never really interested.

The balance sheet also traded like a serial acquirer – tangible networth was negative, and financial metrics weren’t that great in relation to valuation despite posting quite healthy “adjusted EBITDA” numbers. They had lease liabilities as one might expect from a retail pharmacy operation. More relevantly, they had a couple hundred million in debt which wasn’t over-leveraged but wasn’t exactly confidence-inspiring given the interest rate environment (the loan was at BA-plus and termed to May 2026).

However, in the past few months, the stock really started to trade down to a point where I was getting interested.

They got as low as $12.05/share yesterday before today morning their 50% shareholder decided to just say ‘screw it’ and put in an offer to buy the remaining half and go private for $20.50/share. It is very likely the offer will be accepted by the remaining shareholders. They would be stupid not to.

It’s too bad considering that my own pen-and-paper valuation would have started buying them below $10/share (about 5 times EBITDA). Sort of got close, but not quite.

The analogy here is like a leopard or cheetah stalking in tall grass looking at a target and waiting for the right moment to pounce, but in this case the prey got away before they even got to the point where they were close. There will be other opportunities ahead but there is always this feeling of regret when you put some of your most valuable commodity (time and brainpower) into something that doesn’t come to fruition.

Pipestone Energy – Strathcona Resources

Shareholders of Pipestone Energy last Wednesday approved (with a 67/33% yes/no vote) a reverse merger with Strathcona Resources. Strathcona (substantially owned by a private fund) will own 91% of the remaining entity, while Pipestone shareholders will own 9%.

Needless to say the valuation received by Pipestone shareholders was lacklustre (hence describing the minority protest vote). On August 1st, when the reverse merger was announced, the stock traded down 10% to close at $2.42. After the deal with approved, the stock is now at $2.14. It has dramatically unperformed as almost every other oil and gas equity has appreciated considerably since then. Next week they will complete the acquisition and there will be a share consolidation.

Strathcona has assembled a bunch of relatively interesting assets over the past decade. Considering I have owned debt securities of some of the entrails they have devoured, it is something I still keep track of once in awhile, but now they are public I can continue taking a more relevant look at them.

One of them was the acquisition of Pengrowth Energy for $0.05 a share (and the assumption of their not-inconsiderable at the time debt of about $700 million). I had owned Pengrowth’s convertible debentures ages ago (and they were matured at par, pretty much just before the company was running into liquidity issues). An interesting asset was the SAGD heavy project near Lindbergh, but it was relatively inefficient (recently reported steam to oil ratio was around 4), producing around 20k boe/d.

The total estimated production of Strathcona and Pipestone is 185,000 barrels/day, at apparently a $735 million sustained capital spend (this estimate seems a little bit low in my estimation). At US$80 WTI the estimated EBITDA is $2.5 billion. The metrics at the current commodity price structure is relatively favourable. The market cap, at $2.14/share, will be about $6.8 billion and the debt that will get added on will be in excess of $3 billion. Relatively speaking, the valuation is roughly in the ballpark of (a small number of) peers, so paying attention to asset quality and management’s intentions on how to best work with their capital remain to be seen.

One thing is undeniable – Waterous Energy Fund (the private owner of Strathcona Resources) is going to make a fortune on their investment in Pengrowth Energy made back in 2019. They timed the low nearly perfectly (I do not think they could be faulted for not foreseeing Covid-19). That said, there are other companies out there that have proven shareholder-friendly policies and are trading at even better valuations.

REITs cutting distributions

True North REIT (TSX: TNT.un) – down 50% from 0.049/month to 0.02475/month
Slate Office REIT (TSX: SOT.un) – down 70% from 0.0333/month to 0.01/month
Just last Friday – Northwest Healthcare REIT (TSX: NWH.un) – down 55% from 0.80/year to 0.36/year

There’s a few more on the chopping block. I won’t name them here.

The underlying cause is pretty simple – they are unable to raise rents at the rate their interest expenses are rising. Because they typically run at high leverage rates, they are forced to pare back distributions.

Much of the damage is usually done by the point they announce the cut, but because some investors are solely obsessed about distributions and dividends, they will be receiving a nasty capital shock upon such announcements.

BBTV – Lights out, pretty soon

Accounting is not complicated, but knowing the tricks of the trade really help when doing financial analysis.

One thing that confuses most laymen is that a company can generate net income but bleed cash like crazy.

This describes BBTV’s (TSX: BBTV) second quarter report.

They reported a $3.7 million net income, but still are bleeding cash like crazy. It is because they restructured a piece of debt for a non-cash gain:

On June 20, 2023, UFA Note had another amendment whereby UFA provides the Company with an option (the “Discounted Payout Option”) to discharge the Convertible Promissory Note at 10 cents for every dollar of outstanding principal and accrued interest if that Discounted Payout Option is exercised at the earlier of (i) September 15, 2023 and (ii) 5 business days following the closing of any financing that provides the Company with the option to exercise the Discounted Payout Option. If the Discounted Payout Option is exercised, the Company would be subject to a covenant for the next six months from the effective date of this amendment whereby the Company would need to increase the payout (the “Increased Amount”) to UFA if the Company discharges certain other financing debts at an amount that is more than 8 cents for every dollar of outstanding principal and accrued interest. The Increased Amount is calculated using a formula specified in the amendment, subject to various limitations. This amendment is considered a substantial modification under IFRS, resulting in a gain of debt modification of $18,337 for the period ended June 30, 2023.

… essentially they want the company to suck up blood from a stone and try to suck up as much cash as possible while they can.

Also you do not want to be reading this paragraph on Note 1 of the financial statements:

As at June 30, 2023, the Company had a working capital deficiency of $44,303 compared to a working capital deficiency of $44,876 as at December 31, 2022. For the six months ended June 30, 2023, the Company incurred a loss of $10,757 (June 30, 2022: $26,783) and used cash in operations of $14,738 (June 30, 2022: $14,365). As part of the Company’s working capital and cash flow management, the Company has a receivables purchase agreement as described in Note 5. On February 14, 2023 the Company obtained additional loan financing of CAD$21,485 and received proceeds of CAD$20,926 (net of transaction costs). Immediately after the closing of this loan financing, the Company used part of the proceeds to pay off the balance in its overdraft facility and subsequently, the aforementioned overdraft facility was terminated. The loan financing arrangement includes an earnings performance target covenant for the six months ended June 30, 2023 and as a result of the Company not meeting this performance target, it is required to repay US$6,000 to the lender originally by August 18, 2023 and subsequently extended to August 31, 2023. The Company is in discussions about further extending the timing of the US$6,000 payment until such time that it can be settled in accordance with a signed non-binding proposal from a new third party investor. The Company presently remains in good standing with the Term Loan (Note 8). Subsequent to the quarter end, the Company received a shareholder loan of $4,000 (Note 22).

Needless to say, the balance sheet is in need of restructuring and I can’t see an escape route considering they can’t seem to stem the cash bleeding – about $15 million gone in the first half of this year. Even the most elementary of financial statement analysis, current assets over current liabilities, indicates that with $28.9 million of current assets, over $73.2 million in current liabilities, at 39% this is just not good news for shareholders. Most of the liabilities consist of payments to content creators – and if your business is about content creation and if you’re not paying them, they’re not that likely to stick around!