Newton Glassman and the takeover deal that went on (and on, and on)

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Just over a year ago, Newton Glassman hinted to the rest of Bay Street that the lineup of potential bidders for his Callidus Capital Corp. was a long one.

The Toronto-based firm, a lender to distressed companies, had announced in September 2016 that it was hiring advisers and putting itself up for sale. The firm set a bar at between $18 and $22 a share, based on valuation done by National Bank Financial.

Callidus didn't scrimp on financial advice, hiring Goldman Sachs & Co. to aid it through the process. And on Valentine's Day, 2017, Mr. Glassman followed up with a hopeful note to shareholders: 17 parties had come forward to talk about a deal.

Twelve months and no shortage of intrigue later, the trail looks to have gone cold. At the very least, it has gone quiet. Meanwhile, the market has settled on a stock price that's less than half of what was touted. Callidus shares closed at $8.75 on Thursday.

What gives?

A whole lot of complications, many of them playing out in court. It's hard not to tie the weak stock price and silence on potential bidders to a legal whirlwind whipped up by lawsuits brought by Mr. Glassman, involving Callidus and its parent firm Catalyst Capital Group Inc. – and counterclaims against him and his firms.

Most relevant to the Callidus sales process is one that targets several defendants, including Mr. Glassman's archrival, Greg Boland of West Face Capital, a Wall Street Journal reporter and several other people. The Callidus boss contends they cooked up a conspiracy to drive down the stock price to benefit short sellers. Mr. Boland struck back with a countersuit, stating that he and West Face were not party to any conspiracy, and that he closed out his short position in Callidus in 2015.

That's but one part of a dust storm of litigation that began with West Face's hiring of a former Catalyst analyst in 2014, and its subsequent $300-million acquisition of Wind Mobile. It flipped the cellphone company a year and a half later to Shaw Communications Inc. for $1.6-billion. Catalyst had previously been in talks to acquire Wind, but didn't get it and missed out on the big payday. (Catalyst sued West Face, lost, appealed, and had its appeal rejected by an Ontario court on Feb. 21.)

But back to Callidus. It is not clear whether the specific charges being lobbed back and forth – including an alleged "short attack" on Callidus – or the general litigiousness of the whole thing have so far kept a privatization deal out of reach.

Indeed, even before the Journal reported in August that whistleblowers had complained to the Ontario Securities Commission, accusing Catalyst and Callidus of fraud, Mr. Glassman began to discuss the possibility of a Plan B for privatization of the public company. That is, the absorption of Callidus by a private debt fund.

With each passing quarter, the odds of a transaction at that previously touted valuation look more remote. To get to the target value, a bidder would have to provide a premium of double the current price, which, by one analyst's calculation, may be almost triple the 2018 book value. Not helping matters has been a dearth of new lending announcements in recent months.

In the latest quarterly results in November, Mr. Glassman, whose Catalyst Capital owns the majority of Callidus shares, would only say that there was nothing to report about the sales effort. It also disclosed a $17.6-million quarterly loss, which took the book value down to $7.04 per share.

The path to $18 looks arduous.

"My gut sense is that it's increasingly difficult," Scott Chan, an analyst at Canaccord Genuity, said in an interview.

The idea behind the business, which went public in 2014, is relatively simple. Callidus makes loans to businesses that are in serious financial difficulty and cannot secure financing from traditional lenders, and generates cash flow through high interest payments. If a company can't make its payments, Callidus acquires the operation, with a view to restructuring it and selling it off.

Later this month, Callidus is slated to deliver its fourth-quarter results and, presumably, provide an update on the sales process. Following the last quarterly report in November, Mr. Chan estimated the company's book value per share will be $7.05 at the end of the year.

In his report, he set out a laundry list of tasks the company will likely need to complete to achieve his own expectation for a sale price, which is a more modest $16.

According to the analyst, to get to that level, the company must expand its loan portfolio, improve the overall credit quality of the loans, boost the value of its acquired companies and diversify its lending. Loans have been heavily concentrated on two companies, Oklahoma-based Horizontal Well Drillers and C&C Wood Products of Quesnel, B.C. Meanwhile, the litigation makes it all tougher.

For its part, Callidus says it is still working toward the goal of taking itself off the stock exchange and getting itself out of the public eye. A sale is meant to be the final step in a shareholder-value process that also included a big stock buyback and the establishment of a 10-cent-per-share monthly dividend.

"The privatization process for Callidus is ongoing," said Dan Gagnier, a spokesman for the company. "Since the beginning of the short attack against Callidus, the company has taken significant steps to protect its minority shareholders, give them optionality regarding share repurchases and seek ways to further enhance value. We will continue to do so."

Meanwhile, the company is said to be trying to convince authorities that it is a victim of market manipulation and an abuse of the whistleblower process.

Despite Callidus's financial engineering, the share price shows investors and would-be buyers remain wary of its prospects. The unceasing legal battles may well be the biggest impediment to a deal.