Ritchie Bros (TSX: RBA) has carved out a monopoly-like niche with regards to their construction equipment auction business. As a result, they’ve received a premium valuation. Indeed, in early November their 2023 estimated P/E was around the 33 level, which puts them well beyond my own investing horizon.
However, last Monday they announced they will be spending US$7.3 billion, with about US$2.3 billion in cash ($1.3 billion in cash and $1 billion in the assumption of debt) to take over IAA, an automobile auction company. The market speaks for what I perceive to be the value of this acquisition:
The excuse given by management is one of accessing other markets, geographical diversification, “synergies”, etc.
You’re exchanging 100% of a monopoly-like business for a 59% residual interest in one, and a 41% interest in a company operating in a market that is very competitive. (NYSE: KAR) is an example of a competitor, but there are many others.
You’re purchasing a company that is inevitably at the peak of the historical earnings cycle, while the press release claims a 13.6x “adjusted EBITDA” transaction value on the trailing 12 months.
You’re leveraging a balance sheet which currently is mildly leveraged (net debt of roughly $200 million if you exclude restricted cash) and injecting $2.3 billion dollars of debt (which will suck out another $150 million or so a year in financing expenses).
Needless to say this acquisition is awful if you’re an RBA shareholder.
talking about destruction of value – take a look at AQN over the past 2 days. That CEO needs to be taken out behind the woodshed big time!! Time for an activist to move in and demand changes on behalf of blind sided shareholders.
There is a very real chance of an available liquidity-liability mismatch triggering Chapter 11 here. They will have to drop their dividend by at least half, probably 3/4 from present levels at a minimum.
Mind you, listeners of Late Night Finance would have been forewarned by this well in advance, retail’s love for AQN I always questioned.