The new spring lines from fashion retailer Aritzia Inc. feature a floral-pattern Sunday Best Cropsey Romper that rivals may knock off, along with an innovative $437-million deal for a long-time backer that Bay Street bankers are already emulating.
Aritzia offered a new take on an old-fashioned financing tool, a share buyback, to pave the way for a recent stock sale by private equity fund Berkshire Partners LLC. Within weeks, real estate company First Capital Realty Inc. used the same approach to help a long-time shareholder unload a $1.2-billion stake.
Buybacks are typically unremarkable. They simply see cash-rich companies repurchase and cancel their own stock, returning capital to their owners and boosting earnings per share.
At Aritzia and First Capital Realty, share buybacks served a different purpose. They solved a problem that plagues public companies when significant shareholders – typically founders or private equity funds – cash in their holdings. These exits typically see the seller forced to accept a price for its shares that is 10 per cent or more below where the stock is trading. For example, the British and Italian companies that owned a stake in Montreal-based lumber company Stella Jones Inc. accepted a 13-per-cent discount when they sold $877-million of stock last July.
Any investor who followed Aritzia knew Berkshire wanted for more than 14 years to move the last of a stake the fund owned. The Boston-based fund has been selling down gradually since Aritzia went public in 2016. The prospect of further stock sales by Berkshire weighed heavy on the share price over the past year, and strong performance from the chain’s 90 clothing stores and website never translated into a pop in the stock.
Rather than see Berkshire dump its entire holding into the market, the typical approach, cash-heavy Ariztia offered to buy back $107-million of its own stock from the fund, while Berkshire sold the remaining $330-million of its stake to the public.
In a news release, Brian Hill, founder and chief executive of Aritzia, said, “The repurchase of shares from Berkshire Partners represents a compelling opportunity to deploy Aritzia’s capital in a manner that is accretive to shareholders.”
By decreasing the amount of stock that public investors needed to soak up, Berkshire was able to sell at a relatively thin 6-per-cent discount to Aritzia’s share price the day of the deal. CIBC Capital Markets, RBC Capital Markets and TD Securities led the Aritzia deal, along with Stikeman Elliott lawyers.
Ariztia struck a special board committee to bless the transaction, advised by Greenhill & Co. Canada Ltd. and law firm Borden Ladner Gervais LLP. Since the transaction was done in mid-February, Aritzia’s stock price is up 9 per cent, closing Friday at $18.47 on the Toronto Stock Exchange.
Fast fashion is a concept in finance as well as haute couture: Weeks after the Aritzia deal, First Capital Realty (FCR) is using a similar approach to help Gazit-Globe Ltd. sell a $1.2-billion position. FCR was motivated to invest in its own stock because shares in the Toronto-based company traded at a discount to that of rival REITs, due in part to speculation that Gazit, a mall owner based in Israel, planned to dump its stake.
In a transaction announced in late February and led by RBC Capital Markets, with legal input from Torys LLP, FCR offered to buy back $742-million of its stock from Gazit at the same time the Israeli company sold $453-million of FCR stock to the public. Again, a board committee signed off on the transaction, advised by Blair Franklin Capital Partners Inc. and Stikeman Elliott LLP.
Gazit sold its stake at a 4-per-cent discount to the price of FCR stock on the day the deal was announced. Gazit still owns a 9.9-per-cent stake in the Canadian company. Adam Paul, CEO of FCR, said paving the way for Gazit to exit “will bring certainty to FCR’s ownership structure.” In a vote last Wednesday, 99 per cent of FCR shareholders approved the buyback, and the deal is expected to close on Tuesday.
Investment bankers and corporate lawyers can be like kids with Swiss Army knives, always trying out new blades. This spring, the blade of choice is share buybacks, a previously mundane form of financing that’s now being used in ways the Street has never seen before.
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Andrew Willis