Tag: CERV

It has been an exciting 2021 with my third company getting receiving a takeover solicitation. Cervus Equipment (TSX: CERV) announced it was being acquired by Brandt Tractor for CAD$19.50/share in cash.

This is still a dirt cheap valuation.

Not surprisingly, they want to close the deal pretty quickly:

Cervus expects to hold the Special Meeting of shareholders to consider the Transaction in October 2021 and to mail the management information circular for the Special Meeting in September 2021. Subject to the conditions set forth above, the Transaction is expected to close in the fourth quarter of 2021.

A two-thirds vote is required, with the chair holding 18% of the stock, coupled with Brandt holding another 9%. Unless if there is some organized opposition to this deal, it looks like it is going to proceed.

The price that is being paid is cheap. CERV has 15.4 million shares outstanding and from the first half alone has generated about $1/share in earnings. Cash-wise, in the first half they have generated about $23 million (about $1.5/share) in free cash. Full-year, they’re probably going to pull in something around $2.50-$3.00/share. Balance sheet-wise, they are at around $40 million net cash, and approximately $13/share in tangible book value, or $16.85 if you include the intangibles and goodwill. Brandt is paying a slight premium over the balance sheet value, but given the earnings power of the company, they are getting a very good price. It is too good a price.

A fair deal would be around $23-24 in my estimation, but who am I to say?

There is some precedent for a small boost up in price – Rocky Mountain Equipment (formerly TSX: RME) was taken over in the middle of the Covid crisis last year for what could be considered a total steal of a price. The original all-cash $7.00 management takeover was boosted to an all-cash $7.41.

In a final slap in the face, the following:

Pursuant to the Arrangement Agreement, the Company has agreed not to declare or pay any common share dividends until the completion or termination of the Transaction.

That said, overall, if the deal goes through at the $19.50 price, I would have made around a 150% gain on this over a year. It was a small position (obviously should have been larger, but the liquidity was awful and there was other stuff on my radar at the time), but just like most good trades, you always wish you took more of it.

I’ll be voting against the deal if I still have my shares. The price of $19.29 presently is a 21 cent merger arbitrage on an October closing and at 6.5% annualized, I’ll hold and hope that there is a minor increase in the takeover price. Other than the Chairman, the greater than 5% owners holding this, at least according to TIKR, are Invesco Canada (7.3%), Burgundy Asset Management (7.2%), Fidelity (6.6%) and Van Berkom (5.8%). They will have to get together to extract another few dollars out of this thing before it delists.

Unlike Atlantic Power and its convoluted capital structure, I have no fears that this deal won’t be closing. At worst, it’ll be cashed out at $19.50/share in October and the capital will go to another happy home.

I have not written about Cervus Equipment (TSX: CERV) before, but I took a small position in them last autumn. Unfortunately the size I received was less than what I wanted, because the stock took off shortly after. You can see the candlestick where my limit orders were filled (I won’t highlight it, but it definitely sticks out):

This is part of my ‘real world’ economy theme, where Cervus is a farm equipment retailer and practically anything relating to agriculture post-Covid is going to be heading up. They used to be twins with their competitor, Rocky Mountain Equipment (now delisted because they went private in a management-assisted buyout), but aside from John Deere (NYSE: DE), there aren’t really any good comparables in the farm space.

Given the business of selling equipment and servicing, perhaps the best analogy is with an auto dealership, and Autozone / AutoCanada (NYSE: AZO / TSX: ACQ) fit this particular bill.

Indeed, given the record level (both quantity and price) of used automobile sales occurring, perhaps it is not that surprising that the same is being encountered in the agricultural equipment space. The company has markedly improved its inventory balances ($320 million at end-of-2019 to $229 million at end-of-2020). The question is whether this had anything to do with management’s explicit actions or whether they are just the recipient of people spending money on farm equipment since they can’t do anything else during the Covid lockdown.

In a retailing environment, there is high sensitivity to gross margins and also the cost of getting those margins (SG&A). In 2020 vs. 2019, the contrast was pretty clear, revenues were up, margins were up, and SG&A was down, so this made for a very successful year (about $25 million in income, plus some favourable FX to boot). Balance sheet-wise, tangible book value is $12.26/share, and they eliminated the majority of their bank debt (clearing out net $91 million in inventory would help, noting that a good chunk of that is supported by short-term vendor floor plan financing, note 11 on the financials for those interested in following along).

During the year, CERV was able to repurchase approx. 290,000 shares at an average of $7.35 a piece, which offset some dilution on the share purchase plan. They also have financial room to raise the dividend, which they did – from $0.06/share quarterly to $0.11/share, which is what the dividend was before this Covid-19 mess began.

All things considered, a very good quarter for the company. While not at a valuation I would purchase the company, they are not in nosebleed territory by any stretch. If they receive a growth valuation, there’s further room to go on the stock price.

(Update, March 12, 2021: After hitting the “post” button, I noticed on my Twitter feed that Jason at Chapter 12 Capital did a small bit on it, a few hours before this article went out. Great minds think alike… let’s hope.)