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Bombardier's former recreational-products division is revving its engines, and its private owners are offering investors in the public market a chance to come along for the ride. But if you're an investor thinking of buying, beware: You'll be taking a back seat, sucking the fumes of the company's success.
The owners of BRP Inc. – a consortium led by U.S. private equity giant Bain Capital (yes, that's Mitt Romney's old firm), along with the Caisse de dépôt et placement du Quebec pension fund and members of the founding Bombardier family – this week filed a preliminary prospectus for an initial public offering of shares.
This IPO has been anticipated pretty much ever since the consortium bought the division from Bombardier Inc. a decade ago; it's pretty much what Bain does. It buys assets. It gets what value it can out of them. Once it's done with them, it sells them.
And it does none of this for charity – it makes sure it pays itself handsomely first. There's nothing wrong with that; it's just business. But if you're a small investor coming in on the deal after Bain has already had it's slice of the pie, you'd better be happy with leftovers.
In this case, Bain and its partners didn't even wait to make their killing from the IPO proceeds. The consortium is extracting $531-million in dividends from BRP in advance of the public offering (a $376-million payout two days before the prospectus was filed, and another $155-million to come before the share issue closes). That, essentially, eats up all the cash the company had on its balance sheet as of Jan. 31, 2013; it also represents almost all of the company's cash flow from operations (excluding changes in working capital) for the past two years.
BRP is also going public with a dual-class share structure – a distinctly inequitable arrangement for public investors, and one that rightly has fallen out of favour in the Canadian market. Under this set-up, the existing ownership consortium will own 100 per cent of the multiple-voting share class, which gives them six votes for every share held. The public investor buying the subordinate shares issued in the IPO will have one vote per share.
In practice, these arrangements keep voting control of a company in the hands of the privileged few original owners, even if public share issues result in them no longer owning the majority of the equity. (We don't yet know the details of the proposed share offering, so it's impossible to say how big an equity stake will end up in the hands of the public.) More importantly for many bottom-line-focused investors, dual-class companies are also notorious underperformers in the stock market.
For some, the company's growth prospects will outweigh these undeniable inequities. But if you're one of them, you might want to remember that the owners have entrenched their own interests ahead of yours – and pick your price point accordingly.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow David on Twitter at @ParkinsonGlobe .
David Parkinson