I promise, this will be the last one of these posts for a while. P.S. please read how my Danier Leather investment didn’t end up being a total disaster despite the company entering bankruptcy protection.
Let’s recap. I purchased 3,500 Automodular shares back in 2013. Here’s where I wrote about it. Long story short, I bought 3,500 shares at an average cost of $2.25 per share.
The company eventually lost its only customer (don’t worry, I knew that going into the investment) and languished as a zombie company. It just sort of existed and didn’t do anything. Shareholders were slowly losing out because it was maintaining its listing on the stock exchange and paying top execs to still work, albeit at a greatly reduced salary. Still, money was going out the door at a slow pace, which is never good.
The main reason for not just shutting down and returning money to shareholders was an outstanding lawsuit launched against General Motors after that company severed its parts agreement back in 2012. AutoModular was seeking $20 million for breach of contract. These things move slowly. The original lawsuit was filed back in 2015 and it didn’t actually get settled until a few months ago. More on that, later.
So what happened?
Let’s start back in 2015, when the company announced a tender offer for up to $15 million worth of shares. That was about a third of the market cap at the time. The company offered to pay between $2.55 and $2.65 per share. It would buy all the shares at $2.55 first, then move onto the ones offered for $2.60. If there were any left after that, it would pay $2.65. This is a dutch auction type of buyback. The other kind is when the company just offers to pay a set price.
I was enticed by this offer, so I placed a call to my broker. I won’t say directly which one it was, but it rhymes with Wu Braid. I connected with a very helpful rep who informed me there was no record of any such tender offer.
I couldn’t believe it. I gave the guy specific directions on how to find the offer online. He didn’t care, telling me that if his system didn’t have record of it then it might as well not exist. Fuming, I hung up and abandoned the whole exercise. Yes, I am a moron.
Aside: Not all of my shares would have been tendered in the auction, but most of them would have been. I probably would have sold the few stragglers in the open market shortly afterwards. I’m guessing my sale price would have averaged $2.60 or so.
So I held onto my shares and watched them slowly sink down to what I paid. I remember trying to sell for $2.45 at one point but couldn’t find a buyer.
Then, at around this point last year, news. Automodular announced it had agreed to a reverse takeover from a company called HLS Therapeutics, which looked to me like a miniature version of Valeant or Concordia Health Care. Basically it acquires drugs from existing pharmaceutical companies and milks that sweet cash flow. It then uses that to take on debt and buy more drugs.
Note this might be wrong. This shows how much I researched this new company.
The terms of the agreement were that every Automodular share turned into 0.165834 share of this new company. Automodular holders would also get one preferred share for each existing common share, which would be their share of any winnings from the GM lawsuit. I ended up with 586 shares of the new company and some preferred shares which as far as I can tell have a par value of $0 and don’t trade on a stock exchange. In other words, I’m stuck with them.
Then, more news. Earlier this year (again, I’m too lazy to look up exact dates), Automodular announced a settlement with GM. After lawyer costs and whatnot, Automodular shareholders would be getting $6.3 million from the GM lawsuit. There would also be $0.7 million placed in an escrow account to cover any potential unforeseen costs. This money will be given to preferred shareholders in 2020 if there’s any left.
This translated into a $0.65 per share payout for your’s truly. Now we’re getting somewhere.
Finally, there was the matter of selling my HLS shares. I waited patiently for months for a good time to sell, but they kept trending a little downwards. Let’s throw up a chart. Note the end of the chart, when SEXY TIMES started to happen.
I wish it was up 545%.
You can ignore the first half of that chart. That was from when the shares were still Automodular. You can see the big spike, when the new company started to trade. The shares trended downwards until a couple of weeks ago, when they went sharply higher. I sold into that strength, getting out at $14.80 per share.
The best part? I still don’t know what caused the big spike. I’m not going to find out, either. That’s how regret happens, people.
Remember, each Automodular share was about 1/6th of a current HLS share. The result isn’t nearly as good as it looks.
Let’s break it down. I got:
- $0.18 per share in dividends
- $0.65 per share in lawsuit proceeds
- $2.45 per share from the sale
That works out to a total of $3.28 per share. I paid $2.25 per share, giving me a profit of $1.03 per share. In total, I made a 46% profit.
The only problem? It took five years to get there. That works out to a little over 8% a year. That’s not a disaster by any means, but it’s not great either.
The bottom line
Automodular is the perfect example why I don’t do special situations stuff much anymore. Sure, it worked out, it just took a long-ass time to get there. I’d rather buy boring stocks I don’t have to keep an eye on. These days I mostly just log into my accounts every few weeks and reinvest dividends. It’s a much nicer existence, even if it doesn’t provide blog fodder like this.
Long-term readers might remember my investment in Danier Leather, which, at the time, was a struggling retailer that sold leather coats, purses, handbags, and so on. Whips, probably too. OH I’M BAD.
The company had a tradition of slowly buying back its shares via tender offers, an outcome I viewed at the time as pretty likely. It would struggle along, make a little money, and then offer to buy back my shares at a nice premium. I’d sell and everyone would live happily ever after.
If I remember right, I paid about $9 per share.
We all know what happened next. Danier faced bankruptcy about a year later, thanks to the further deterioration of its market and retail’s struggles in general. I remember at the time thinking the company probably threw in the towel too early. It barely owed anything to creditors. In fact, it had been debt free up until about a month before going to donut land. I chalked it up to an odd case and moved on. It wasn’t until a couple years later until I learned my lesson once and for all — do not invest in trash retailers. I’ve since extended that ground rule to cover retailers in general. It’s serving me well.
Little did I know my initial feelings would be right. Danier had thrown in the towel too early. Here’s the story of the Danier Leather bankruptcy.
On March 21st, 2016, Danier Leather officially entered into bankruptcy proceedings. KSV Kofman Inc. was assigned as the bankruptcy trustee and Koskie Minsky LLP was assigned the task of representing Danier’s employees.
Danier had some decent assets heading into bankruptcy. It sold the lease for its largest store and headquarters to Michael Kors. It also had the option to sell other leases held in malls across Canada, although I’m not sure any were actually transferred. The company also sold intellectual assets to a firm called Rehan Marketing. The company also got some cash when it liquidated all of its inventory.
After paying the bankruptcy trustee for their work, Danier was left with approximately $36 million in cash. Just under half went back to creditors because they always get paid first. The rest — or a little more than $18 million — have been earmarked for shareholders. Thus far, some $11 million has been returned to shareholders.
This means I’ve gotten $4 per share from the Danier Leather bankruptcy proceedings. I remember the stock trading at $2 per share just before it went under, which would have been a nice profit. Still, I was thrilled to be getting anything back, never mind almost 50% of my initial investment. If only my other bankruptcy would have gone so well.
The bottom line
Overall I’m very pleased at what happened here. Sure, I lost money, but the Danier Leather bankruptcy could have been a lot worse for me. I recouped some of my capital and went on to fight another day. And there’s still a tiny bit of money left over, so I could still see a little more cash come my way.
It just goes to show that, at least sometimes, bankruptcy doesn’t mean shareholders lose everything. It’s never a great outcome, but this one worked out about as well as you could hope.
The most important part is the lesson learned. I now stay away from retailers in general and make it a rule to avoid crappy businesses as well. Sometimes that’s easier said than done, but at least I’m not actively wading into these situations enticed by cheap assets.
Have you kids made your RRSP contributions yet? Don’t sweat it, you’ve got hours left until you miss the deadline.
God, you people and your procrastinating make me sick. I got my contribution in more than a week before the deadline. There’s no need to say it; I am a better person than you are.
I used to be very patient when putting money to work, waiting for an outrageously good opportunity to pile into some obscure value stock. While I still follow such a strategy in my TFSA, I’ve started to take a different approach in my other accounts. I’m looking for high quality businesses trading at half decent prices. Yes, kids, I’ve turned into one of those guys.
In fact, as you’ll see, not only do my new investments pay a dividend, but they also have a history of consistently upping their payouts over the years. That sound you just heard? It was Dividend Growth Investor getting a bit of a chubb.
Let’s not delay any longer. Here’s what I bought with my latest RRSP contribution.
The Keg (18.2%)
I touched on the logic behind buying The Keg Royalty Fund (TSX:KEG.UN) when revisiting my Pizza Pizza shares.
There’s a lot to like about the restaurant royalty business. The cash comes directly off the top line, which insulates it from a lot of the challenges that keep down operators. The bad news about this arrangement is it stymies hardcore dividend growth since there’s virtually no operating leverage. If a restaurant can grow sales by 5% while keeping costs the same, it has a huge impact to the bottom line. A royalty trust would see profits go up by about 5%. Big whoop.
I chose The Keg over some of its competitors for one important reason. Cara Operations just announced it would be acquiring the restaurant operations. Cara, which owns brands like Swiss Chalet, Harvey’s, New York Fries, and many others, is a hell of an operator. It’s capable of taking The Keg to the next level, which will likely include further expansion into the United States.
In the meantime, I’m paid 6.3% to wait. If same store sales go up 2% a year and the company expands operations by 2% a year, I’m looking at a 10%+ return over time. I think 2% expansion is a pretty achievable goal, since the company only has 106 locations today.
Essentially, I’m buying a 6% yield that I believe has the ability to grow slightly above inflation for a long time. I expect capital appreciation to be somewhat minimal, although keep in mind that shares are up 53% in the last decade.
I think Canada’s so-called Big 3 telecoms are pretty much like legalized crack dealers. Have you seen how often the average person checks their phone? It’s bananas.
While I do prefer Telus over BCE (TSX:BCE)(NYSE:BCE) because the former is a pure-play telecom, there’s a lot to like about BCE too. It boasts nearly 14 million customers between its wireless, internet, and television divisions. Management continues to grow the company by making smart acquisitions, including picking up a former member of my borrow to invest portfolio, Manitoba Telecom. And thanks to a recent sell-off, shares are down nearly 10%. This has boosted the yield to a succulent 5.4%.
BCE isn’t necessarily cheap, but companies like it never really enter value territory. It did approximately $3.5 billion in free cash flow in 2017, putting shares at just over 14 times that metric. Or, if you’re a traditional P/E guy, shares trade at about 17 times earnings. Again, not really cheap, but hardly expensive.
Canadian Utilities (33.5%)
Fun fact: Canadian Utilities (TSX:CU) shares are down approximately 13% over the last five years despite:
- Increasing revenue from $3.0 billion in 2012 to $4 billion in 2017
- Investing nearly $9 billion in capital expenditures from 2013 to 2017
- Hiking the dividend nearly 40%
Of course, it’s not all sunshine and blowjobs for Canada’s second-largest utility. 2017’s results were weighed down by a charge associated with one of the company’s big new growth projects. But normalized earnings were $2.23 per share, putting the company at just 15 times earnings.
Free cash flow was even better. CU generated $1.3 billion in cash from operations. It spent $1.2 billion on capital expenditures, but the vast majority of those expenses were for growth projects. I estimate true free cash flow (which would be cash from operations minus maintenance capex) to be approximately $1 billion. Shares today have a current market cap of $9.1 billion.
Oh, and shares yield 4.7% today. They haven’t yielded this much since Nortel was very much a thing.
Let’s wrap this up
There you have it, kids. These are the three stocks I bought with this year’s RRSP contribution. All are expected to be core holdings for a long period of time. As dividends accumulate in my account I’ll put those back to work. It’s all pretty simple.
Let me know what you think of these buys. Am I a genius? A maroon? Or something in between? The comment section awaits. I might even respond.
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:
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.
That’s not even clickbait, either. I really did that well.
Let me take you kids back to a special time in my life, last week. Ah, last week. What a time to be alive. We weren’t at war with North Korea and the UTTER HORROR of the Fyre Festival was yet to be upon us.
And your BOY Nelly was buying himself a stock.
That stock was Canam Group Inc. (TSX:CAM), which might be in the most boring business in the history of the world. The company is the largest fabricator of steel components in North America. These steel structures are then used in buildings, stadiums, bridges, and so on.
Canam has also historically been in the stadium roof business. If you know a stadium with a retractable roof, chances are Canam was involved in it. The roof business isn’t as steady as the steel structures business, since these roofs are complex. In 2011, Canam posted big losses because the new roof for Vancouver’s B.C. Place ended up costing much more than anticipated. The same thing happened in 2016 with some unnamed roof project that was probably the new Atlanta Falcons stadium. So management officially announced they are getting out of the stadium business.
Canam shares ended up reaching a low of $3.19 in late 2011 before recovering to more than $15 in 2014. A similar decline just happened, shares fell from a peak of $15 to below $6 before recovering a bit.
There was more to like about Canam, too. Earnings came in at $1.08 per share in 2015, $0.70 in 2014 and $0.74 in 2013. The company was clearly capable of posting decent earnings when things went right. Shares also traded approximately 50% lower than their stated book value. And I was paid a decent dividend of around 2.5% to wait.
So I jumped in on Tuesday and bought shares at $6.30 each. I set a target price of between $13 and $14, expecting the stock to trade at that level in 2-3 years.
It didn’t take nearly that long. On Thursday morning I woke up to news the founding family (along with a private equity firm) were taking the company private with a bid of $12.30 per share. Shares immediately opened at $12.15 each, and I sold into the strength. I got $12.17 each for my shares.
That translates into a 93.2% return in just two days. If we want to get frisky (or if I just want to brag), that works out to a 17,009% return annualized. Hot diggity daffodils!
And it was in my TFSA account, so that bad boy was all tax free. Now I just need to figure out where to put my new cash. I’m thinking all on red, baby!
Other stocks I bought
I won’t spend too much time on these, mostly because I have other crap to do. What? Video games count.
The first stock I bought was Yellow Media (TSX:Y). Yes, I’m well aware the Yellow Pages are no longer a thing. Approximately 70% of the company’s revenue in 2017 will be from its digital business, which is growing well and has plenty of potential for consolidation.
Free cash flow in 2016 was $97 million. Shares have a current market cap of $207 million. That puts shares at just a little over 2x free cash flow. Yellow Media might really be the cheapest stock in Canada.
Debt is a bit of a concern, with approximately $400 million outstanding. There are about $300 million worth of secured notes with a 9.25% interest rate that mature on Nov 30th, 2018. If free cash flow doesn’t fall off a cliff, I think $150 million of additional debt could be paid off by the maturity date. They also have the right to refinance starting May 31st.
I paid $7.95 each for my Yellow Media shares, so I’m down a little today. My target price is $18.
The other stock I picked up in the last month was Canaccord Genuity (TSX:CF). Now that I think about it, it’s a lot like Canam. Canaccord has a decent niche in the investment banking world, as well as an active wealth management business. Investment banking in Canada was the shits in 2016, but has recovered somewhat this year.
Canaccord also has a mountain of cash on its balance sheet and only a tiny bit of debt. Shares were just a little above tangible book value when I bought (I paid $4.83) and the company had posted earnings of $0.39 per share as recently as 2014. Management also bought back shares when the price was low.
Canaccord shares get crushed every time the capital markets part of the business falls into the toilet. It happened in 2008, 2011-12, and 2014-15. Each time Canaccord shares either doubled or tripled off their lows in a couple of years. I’m hoping to do the same. My target price is $12.