Michael Wekerle poses for a portrait in Toronto, Tuesday January 27, 2015.
DEAL OF THE DAY
Monster beer deal
Anheuser-Busch InBev (AB InBev) launched an offer worth approximately $106-billion (U.S.) for fellow brewing behemoth SABMiller on Wednesday.
In an attempt to assuage concerns with regulators, AB InBev, the world's biggest brewer, says it will sell SABMiller's 58-per-cent stake in MillerCoors to Molson Coors. If the deal happens, it will be one of the biggest mergers and acquisitions (M&A) in history. Story
MERGERS AND ACQUISITIONS
Extendicare strikes again
Extendicare Inc. announced the acquisition of three properties on Wednesday, the latest in a long line of transactions for the Ontario retirement residence and nursing home owner and operator.
The company says it intends to buy Harvest Retirement Community, a residence in Tillsonburg, Ont., from a partnership owned by Baybridge Seniors Housing and Nautical Lands Group, for $28.4-million.
Extendicare is also paying an additional $50.2-million to buy two senior living residences in Saskatchewan from Brightwater Senior Living Group.
Extendicare is far from the only company wheeling and dealing in the sector. In October, Chartwell Retirement Residences announced it was buying five Ontario retirement residences for $254-million. Press release
INSIGHT
Difference lightens debt load
Difference Capital Financial Inc. reported a $3.8-million profit in the third quarter – one its best showings as a publicly traded company, and drastically better than the $12-million loss that the merchant bank co-founded by Dragons' Den star Michael Wekerle reported in the same quarter last year.
Arguably the smartest move the company made in the quarter was its decision to buy back a substantial amount of its own debt. Difference acquired and cancelled $12-million in convertible debentures at 88 cents on the dollar. By buying below par, the firm saved 12 cents on the dollar it would otherwise have to pay holders at maturity. In addition, Difference won't be liable for millions of dollars in future interest payments. All in, the transaction netted the firm a capital gain of $3.1-million.
Debt investors were offered roughly a 10-per-cent premium to the market price. (The original 85 cents on the dollar offer was bumped up to 88 cents). Mr. Wekerle, the firm's chairman, blew out much of his $5-million stake in Difference's debt – at a loss – by tendering to the offer. According to the the System for Electronic Disclosure by Insiders (SEDI), Mr. Wekerle currently owns only $1.8-million worth of the debt. A little over a year ago, he held a stake worth $10.7-million. Curiously, around the same time Mr. Wekerle sold his debt, he funnelled money back into Difference, shelling out $3-million to acquire an additional 11-per-cent common share stake. The Dragon currently owns or controls about 37 per cent of the equity, making him by far the single biggest shareholder.
"Although the [share] purchase increases his risk profile (versus holding debt), it reflects his optimistic view of [Difference's] performance and of the management changes that have taken place over the last year or so," Kelly Pullen, a spokesperson for Mr. Wekerle, wrote in an e-mail to The Globe and Mail last month. Mr. Wekerle himself was part of those management changes. He stepped down as chief executive officer in June.
Not only does the debt buyback boost Difference's earnings in the short term, it also delevers the company in a big way. One of the biggest overhangs on Difference is a "bullet" payment due in the summer of 2018, when its convertible debentures mature and the entire principal is due. But over time, the company has been able to whittle the original $56.1-million liability down to $35.6-million. Since Difference has $20-million in cash on the balance sheet, eliminating its entire debt load doesn't appear doable any time soon. The company's investments are also for the most part tied up in illiquid private securities, in which it has little say or influence over an exit point.
Only one of the firm's privately held investments has hit the public markets so far – Mogo Finance Technology Inc. That one has not turned out well. The Vancouver-based online lender has been one of the worst performing initial public offerings in Canada this year. The stock is down 64 per cent since going public in June. The sting for Difference is that it could not sell on the IPO. The firm was – and still is – subject to a lockup agreement that prevents it from unloading its $2-million stake in Mogo. (The lockup agreement expires in December.)
Despite the heavy hit on Mogo, fintech (financial technology) investments are one of the few bright spots in Difference's portfolio. The company values its fintech holdings at $8.9-million versus a cost of $6.9-million. The overall portfolio, which includes health care and media investments, is worth just over $82-million – or about 20 per cent below cost. Press release
A year of dismal returns on resources share offerings
Maybe Canadian investors are masochists. That might be the only way to explain why they keep supporting big share offerings from resource-related companies amid mixed market returns and a weak outlook for commodity prices.
Pembina Pipeline Corp. is the latest to ask investors for fresh funds, selling $400-million worth of new shares in a bought deal late Tuesday.
The track record for all large resource-related financings this year has been mostly dismal. Of the 12 offerings worth $300-million or more, none is trading at levels that make investors any money. The average return for anyone who bought shares in these offerings is a loss of 29 per cent. Story
Tech disruption top of mind for Canada's bankers
Financial executives polled at the Global Risk Institute in Financial Services' annual conference identified competition from rising financial technology, or fintech, competitors as a key risk to incumbent players, suggesting that the sector has emerged as hot topic among bankers.
According to a poll of 180 senior Canadian financial executives, 83 per cent agreed that Canadian financial institutions were vulnerable to technological disruption, essentially adding credence to some of the more alarming warnings that the so-called fintech sector is poised to take significant market share from the banks. Story
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Niall McGee