Aecon Merger Arbitrage

Aecon Merger Arbitrage

After putting itself up for sale a few months ago, Aecon Group Inc. (TSX:ARE) finally found a buyer. Chinese construction giant CCC International (or CCCI for the rest of this post) agreed to pay $1.5 billion for the company, or $20.37 per share. The deal is expected to close by the end of the 1st quarter, 2018.

Aecon shares currently trade hands at $19.56 each, translating into a potential profit of $0.79 per share in approximately five months. A gross profit of 4.03% works out to 9.7% annualized, assuming the deal takes the full five months to close. An early closing could easily push the total return into the 10% range, and the company does owe at least one more dividend payment to investors.

Let’s take a closer look at this merger arbitrage situation and see if it’s a good place to park some cash.

Deal type

This is as straightforward as they come. CCCI agreed to pay the full purchase price in cash money, baby. I like to think they’ll actually deliver the money in a series of unmarked briefcases like a bunch of drug dealers.

Buyer’s willingness to pay

Experienced merger arbitrageurs (spelled that one right on the first try, what’s your superpower?) know that Chinese buyers have a terrible reputation for actually completing these kinds of deals. They’re as reliable as your slacker kid brother, essentially.

The good news is CCCI bucks that trend. The company acquired 100% of Houston-based F&G Construction in 2010 and followed that up by buying John Holland in Australia in 2015. Both of these deals closed without incident.

Scuttlebutt

What a great word. Scuttlebutt.

The big risk to this deal is the small chance the Canadian government squashes it. There are several reasons why this is unlikely to happen.

When he isn’t appearing at gay pride parades, Prime Minister Justin Trudeau has indicated his government will be more friendly to foreign takeovers than his predecessors’. Trudeau also has much stronger links to China than Stephen Harper, which is also a positive for this deal.

Both Aecon and CCCI have taken steps to ensure the deal goes through as planned. The company’s head office will continue to be in Canada and the current management team will stay in charge. There’s also a decent-sized break fee of $75 million if CCCI pulls out of the deal.

Most government observers say the deal will close without incident, and I agree with them. This looks like a fairly low-risk merger arb situation.

Disclosure: No position today, but shit can change yo.

New Position: Hibbett Sports

New Position: Hibbett Sports

Somebody prepare the fainting couch. Nelson is about to do two blogs in a month. MY STARS.

Shitty retailers are pretty much my kryptonite. I just can’t help myself. They continue to be the cheapest stocks out there today. If the market’s outlook can only improve slightly from “this thing’s going to zero,” then I”m in business. Sometimes this works (I’ve made money on Hudson’s Bay twice now), and other times the investment turns into Reitmans, which continues to languish under my purchase price despite reporting pretty good numbers.

After selling Dream Office REIT and Cloud Peak Energy for nice gains, I found myself with a 39% cash position in my TFSA. That is way the hell too much, even if you think the market is long overdue for a correction. So I put a bit of it to work.

The stock

I went ahead and took a relatively small position in Hibbett Sports (NASDAQ:HIBB). It’s about 5% of my TFSA at this point, and my cost is $13.90 per share.

Canadian investors should think of Hibbett as a mini version of Sport Chek. It operates more than 1,000 stores in small and medium-sized communities across the United States. They call themselves a “sports-inspired fashion retailer,” which basically means they sell a lot of shoes, athletic wear, and so on. The average store size is about 5,000 square feet.

The stock has really gotten hammered of late. Shares peaked at just over $45 each in November, 2016. A few quarters of disappointing results later, the stock currently sits under $14.

While earnings have taken a hit, the company is still solidly profitable. Hibbett earned $2.02 per share in earnings over the last year, despite posting a loss in its most recent quarter. Free cash flow was even better; its been just over $49 million in the last 12 months. The company has less than 21 million shares outstanding.

The balance sheet is a fortress. Hibbett has no debt and a cash hoard of nearly $53 million. This gives it an EV/EBITDA ratio of just 2.5. You won’t find many stocks cheaper than that. Shares also trade comfortably under book value.

Management are doing exactly what they’re supposed to be doing when shares are this depressed. The company continues to buy back its own shares (shares outstanding went from 22.03 million to 20.75 million in the last year) while insiders buy with more gusto than a horny 1860s teen waiting for the latest copy of Chicks Showing Their Ankles from the Pony Express. FINALLY, A PONY EXPRESS JOKE ON FINANCIAL UPROAR.

Insiders have bought more than 25,000 shares at between $10 and $13.

That’s really about it. This isn’t a very complex story. It’s just an obscenely cheap stock that just needs to go from insanely cheap back to merely cheap and I’ll make a decent return. Hibbett will likely get punted from the portfolio if it gains 25 to 50%. It just isn’t the kind of stock you want to own over a decade or two.

He’s Back, Baby! (At Least Temporarily)

He’s Back, Baby! (At Least Temporarily)

Well, hey there, Financial Uproar. I haven’t seen you in a while. Hold on, let me clean up the dust. You’re looking worse than that time the media caught Hillary Clinton without her Spanx. OH, HE’S STILL GOT IT, BABY!

Should I do an update on my financial life? Or would you kids rather see me hit some dingers? I can totally hit dingers.

Let’s start the update.

Mortgage payoff

As a reminder, the loan was originally $190,000 when we bought the place in July, 2016. We owed approximately $107,000 when I posted the last update, back in March.

We’ve still been aggressively shoveling wheelbarrows full of cash towards buying loaves of bread in 1921 Germany our mortgage, getting the balance down to approximately $78,000. I don’t know what’s more exciting — knowing we’re easily on pace to erase the debt by the beginning of 2019 or a Weimar Germany hyperinflation joke finally appearing on Financial Uproar. Let’s go with the latter.

With markets bumping up against new highs seemingly daily, I think this continues to be a prudent use of my excess cash. There are some interesting stocks out there, but nothing that terribly excites me.

Work

Remember when I posted that financial independence made me lose my ambition? Fortunately for me, those feelings quickly went away. Imagine doing the same thing for 20 years without ever getting promoted or doing anything more exciting. I can’t think of a worse version of hell. Okay, maybe I can. I’ve watched a cirque du soleil play, after all.

Anyhoo, I’ve made it clear to my company’s management that I’d like to get promoted. This would likely involve a move to a different store in a new community, which I’m quite okay with. I like small towns, but I’m kinda over the one I’m in.

We’d likely rent if my job took us anywhere else, for a few reasons. While the risk doesn’t really bother me, my wife doesn’t like the idea of being responsible for a new furnace or shingling a roof. Real estate prices are not as reasonable in other parts of the province, which makes the rent vs. buy debate lean towards renting. And the places where we’d like to go have a much greater supply of nice rentals than where we are currently. And hopefully a Wendy’s. God I love Wendy’s.

Investments

While I continue to hold and like most of my portfolio positions, I have sold a few things into strength.

In the latter part of 2015, the Canadian preferred share market got whacked. Taking advantage of the carnage, I picked up a medium-sized position in Shaw Communications’ preferred shares (among others), paying approximately $13 each. I exited last week at $17 per share. Including dividends, the total return was about 20% a year.

To minimize the tax impact of that sale, I finally punted Winnipeg Free Press from the portfolio and took the tax loss. Let that be a lesson to you kids. Never look at anything associated with Winnipeg in a positive light.

I also tendered my Dream Office REIT shares at $21 per share, netting a succulent return of 40% (plus dividends of approximately 12%) in just over 18 months. That position was in my TFSA, so there’s no tax implications there.

I invested some spare cash into an ETF, specifically the BMO Canadian Dividend ETF (TSX:ZDV). While the MER is a little high at 0.39%, I like the fact the ETF gives me access to an index of dividend payers that isn’t dominated by Canada’s five largest banks. I’d also be reluctant to buy an ETF that tracks the TSX Composite because of the large energy/materials weighting. And with a beta of 0.57 (according to Google Finance), I sort of view it as a way to participate in some of the market’s upside while minimizing the downside.

Will I invest more in ETFs in the future? I dunno, but I kinda like the hands-off approach ZDV offers, and the 4.4% yield ain’t bad either.

Miscellany

We’ll probably buy a second (used) car in the next few weeks, since sharing a vehicle has become hella annoying now that both of us have jobs. That’ll temporarily delay the ol’ mortgage payoff plan, but that’s okay. What’s the point of money if you can’t use it to make your life easier?

One of my Lending Loop loans is currently delinquent, and LL has employed a collection agency to help get the maximum amount of principal back. The rest of the portfolio is performing well, however. This is why something like peer-to-peer lending should only be a small portion of your portfolio, kids.

And that’s about it. Maybe I’ll write about actual stuff next time.

Tender Your Shares: A How-To Guide For Canadian Investors

Tender Your Shares: A How-To Guide For Canadian Investors

Back in that magical year of 2016, I revealed to y’all that Dream Office REIT was, the largest holding in my TFSA. It alone made up approximately 31% of all assets in my special tax-free fund, or about an 8% total weighting in my portfolio.

I liked Dream because it was stuffed with what I thought was undervalued assets. When the shares dipped below $15 and net asset value was close to $30, I backed up the proverbial truck. NAV was subsequently wrote down to $22, which I thought was a little aggressive. I figured the trust’s true NAV was closer to $25.

Management has been busy in the last year and a half. They ended up selling much of the company’s portfolio, raising a tonne of cash in the process. The proceeds will be used to pay down debt, purchase other assets, and, most importantly for the purposes of this blog post, the company will do a big share buyback.

The rules of this share buyback are relatively simple. Dream has offered to buy 24.444444 million shares from current shareholders for $440 million. It will pay anywhere from $18 to $21 a share. What investors who are interested in selling have to do is tell their broker they’d like to tender their shares to Dream’s offer.

Here’s how you do that.

 The Tender Process

I’m not even sure why I’m writing this blog post, to be honest. Tendering your shares is really easy.

First of all, any company who is going through the tender process will send you the full offer. Spend a little time and read it, but most of the important information will be on the very first page. It’ll tell you the price offered, the total number of shares that’ll be purchased, and so on.

Most tenders are pretty straightforward. The company offers to buy x number of shares for y price. Y is often a range, like with Dream, but it can also be a single amount. If too many shareholders say yes to the offer, then you’ll only sell a pro-rated amount. If it’s a range of values and the company buys the whole allotment at a level below your asking price, you’ll get nothing.

Odd Lot Tenders

One thing of note are odd-lot tenders. If you own an odd number of shares (anything not in equal increments of 100), then you’ll often get first dibs. A provision will be put in the offer saying that all odd-lot tenders will be filled first.

In certain situations, this is an easy way to make some guaranteed money. A couple of years ago, a company called Tier REIT did a tender offer. Shares were trading at $17.50 each. The offer was between $19 and $21 per share, with the guarantee odd-lot tenders would be processed first. So I did what any rational person would do — I bought 99 shares in both my accounts, tendered at $19, and pocketed the guaranteed $300.

The Dream Office tender also guarantees all odd-lot purchases will be filled first. The problem is setting your price. Shares trade hands at $19.40 as I type this. It’s likely people aren’t going to tender for anything under $19.50. But still, where do you set your price? Do you go for the full $21 and maximize your profit? Or do you take the conservative route and go for $20? Or even $19.75? Is such a trade even worth it for $50?

Why am I Tendering?

It’s pretty simple, really. The strategy is to lock in $21 per share today and then buy back at $19.50 or so. I may also decide to move on from Dream, since the dividend going forward is only going to be $1 a share annually. Remember, it was $2.25 annually a couple of years ago. $2.25 was too high, and $1 is probably too low.

$21 will also be a nice ~50% gain on my investment, not including the dividend. I’ve done well on it.

How to Tender

I can only speak of how to tender your shares using Questrade and Qtrade, the two brokers I use. Although the process is likely very similar with every other broker.

Questrade has a really easy system. First you go to My Questrade, and then click on requests. Then you hit corporate actions and fill out the form. Mine looks like this:

tender screen

That’s some high quality account number removin!

It’s a tad bit more difficult if you’re doing this using QTrade. You have to physically call in and talk to someone. I can attest that at least once I’ve talked to someone who had no idea the tender offer existed, which is hella annoying. It’s usually a pretty painless process though.

And that’s it. You’re done. The tender process is easy.

Stock Picking Contest Q2 Update

Stock Picking Contest Q2 Update

I’m kind of tired of doing these, so this will be short and sweet. If you’d like to see what each competitor picked, go to the 2017 entry page. And here’s everyone’s Q1 results.

If you’d like to view the spreadsheet that tabulates everyone’s results, too damn bad. THAT’S PROPRIETARY, YO.

The results

Contestant Results
1. Boomer and Echo +28.5%
2. Dividend Growth Investor +18.7%
3. Kapitalust +16.7%
4. Roadmap 2 Retirement +15.7%
5. Steveonomics +15.0%
6. Tawcan +12.8%
7. Ian Bezek +11.8%
8. Ezriek +10.9%
9. JT McGee +9.8%
10. Financial Canadian +9.1%
11. Vanessa’s Money +8.8%
12. Jeff +8.0%
13. Canadian Value Investing +6.0%
14. Asset-Based Life +4.4%
15. Ben +2.2%
16. Janine Rogan +1.7%
17. Freedom 35 Blog +0.8%
18. My Own Advisor -0.4%
19. Marty Guthrie -9.1%
20. Holy Potato -10.1%
21. Doug -14.09%
22. Don’t Quit Your Day Job -14.14%
23. Financial Uproar -14.6%

Overall, we averaged a 5.15% return. That beat the S&P/TSX Composite Index (which is up a little less than 1% thus far in 2017, including dividends), while trailing the S&P 500, which is up close to 10%. We’re lagging the Russell 2000 ever so slightly; it returned approximately 5.2% thus far in 2017.

Just think. If it wasn’t for Financial Uproar and his four terrible picks, our group of misfit bloggers operating out of their mothers’ basements would be beating the market.

Congratulations to Boomer and Echo for pulling into the lead. Remember, he stunk up the joint last year with picks so bad I was at least 70% convinced he was trying to lose on purpose. It just goes to show how much of a crapshoot this thing really is.