PointNorth’s equity interest in Liquor Stores N.A. a moving target

Of the hundreds of pages of documents filed in the proxy battle at Liquor Stores N.A. – the Alberta-based company is under attack from Toronto-based PointNorth – one matter stands out: a dispute about the ownership held by PointNorth, a private equity fund.

On the surface it should be simple: Go to the information circular prepared by PointNorth and look it up. On page 48 this was said: “As of the record date, PointNorth owned 2.75 million shares,” or 9.91 per cent of the shares outstanding. In a proxy contest, the record date has significance because a shareholder, as of that date, can vote. (The record date also comes into play when dividends are being paid.) For the target’s June 20 meeting the record date has been set as April 21.

So far so good.

But that percentage doesn’t square with what Liquor Stores — which operates 252 retail liquor stores in two Canadian provinces and in four U.S. states — is saying. In a May 18 release, for instance, it referred to PointNorth, as “a recent 9.7 per cent shareholder of the company.”

While the difference may seem marginal, it could be significant if the proxy vote is close. (This week two institutional shareholders, LOGiQ Institutional Partners, and JC Clark Ltd., which own about 9 per cent, indicated their intent to support of the dissidents.)

So we placed a call to the company and asked them to square the circle. In return, we received an 18-page letter it had received from PointNorth. The letter was dated May 15 and was sent to the company to meet its advance by-law provisions. (In effect PointNorth had to file documentation before Friday indicating its intention to launch a proxy contest.)

In that letter, PointNorth confirmed that as of April 21 (the record date) it “beneficially owned or controlled or directed, directly or indirectly,” 2.75 million shares, or 9.91 per cent of the outstanding.

PointNorth also indicated that as of May 15, it beneficially owns or controls or directs, directly or indirectly, 2,679,800 shares – or 9.66 per cent of the outstanding.

Accordingly, PointNorth’s share ownership fell by 70,200 shares over the period April 21 to May 15.

So what gives? In an email response, PointNorth said that as the largest shareholder of Liquor Stores, its “position is outlined in its circular. PointNorth will continue to hold shares until the company earns the long-term returns it should.”  

While that response may not have answered the question, it’s not known how typical it is for a company to reduce its ownership — but not necessarily the amount of shares it voted. One possible explanation is that PointNorth sold some stock to cover the costs of the proxy battle.

PointNorth’s equity stake in Liquor Stores has been something of a moving target. According to SEDAR, the world first heard of its investment on Nov. 15 when it filed an early warning report and issued a release. In the release, PointNorth said it had increased its equity interest to above 10 per cent through the purchase of 15,000 shares. As a result it owned 2.767 million shares, or 10.01 per cent of the outstanding shares.

In the same release, PointNorth announced that it had also sold 17,000 shares, a transaction that reduced its stake to 2.75 million shares – enough to take its stake to 9.95 per cent.

A number of advantages apply to being a less than 10 per cent shareholder, one of which is that there is no need to file early warning reports

Financial Post
bcritchley@postmedia.com

Alignvest Acquisition II shows there is life in the SPAC market, closes $350 million IPO with more to come 

For those who thought that the market for special purpose acquisition companies, or SPACs, was dead, a little rethink is required given the fundraising efforts of Alignvest Acquisition II Corporation.

The issuer, which is sponsored by the same people who unveiled the original SPAC, Alignvest Acquisition Corp., has priced its initial public offering. It ended up with $350 million with the possibility of another $52.5 million being raised if the underwriters exercise the 15 per cent over-allotment option. They have 30 days to decide whether to exercise – or not.

If it is exercised then Alignvest II will have equaled the record for the largest ever SPAC in the public markets. It will share that record with Acasta Enterprises, which completed its IPO in the summer of 2015. When it started in its road show, Alignvest II had hoped to raise $250 million.

But on another measure, total deal size, Alignvest II is in a league of its own: prior to doing a public financing, it raised $113 million on a private placement basis. That capital will be employed when a qualifying transaction is announced. It was raised to help ensure that Alignvest II had enough capital on hand in the event that shareholders exercised their right to request the return of their original investment (plus some interest).

By another measure, Alignvest II has set another record: it holds the mark for the largest IPO year to date.

Financial Post

bcritchley@postmedia.com

HSBC saved a small Canadian bank once, but it won’t be coming to Home Capital’s rescue

One of the last times a Canadian bank ran into trouble, HSBC Holdings Plc came to the rescue. Don’t expect history to repeat itself in the case of Home Capital Group Inc.

HSBC Canada, which leapfrogged small Canadian competitors by acquiring failing Bank of British Columbia in 1986, wouldn’t be interested in Home Capital if the embattled mortgage lender put itself up for sale or sold off assets such as its mortgage portfolio.

“This isn’t something for us right now,” Sandra Stuart, chief executive officer of HSBC’s Canadian unit said Thursday in an interview in her Vancouver office. “We were in the subprime business and we had a subprime portfolio that performed very well, and we took a decision to exit it. We understand deeply what it takes to run a subprime book, and at this stage I would say we’re not interested.”

Home Capital has been seeking to stabilize itself after losing almost $1.9 billion in high-interest deposits since the end of March, forcing it to secure a costly $2 billion rescue loan from a pension fund. The company also hired investment banks to advise on financing and “strategic options” that may include a sale of the company or assets.

Other Canadian financial firms earlier this month ruled out an outright purchase of Home Capital, including Canadian Western Bank and alternative lender Equitable Group Inc. HSBC’s case is noteworthy because of the bank’s history in Canada.

Bank Fails

Stuart has first-hand experience with a bank failure. She was a teller of Bank of British Columbia in Vancouver’s suburb of Burnaby when the lender ran into trouble. She became a part of HSBC when the Bank of British Columbia was acquired by the London-based lender in November 1986.

“Reflecting on it, it happened so quickly,” Stuart said. “I remember when HSBC made the purchase and how exhilarating that was to have a foreign bank take over a little British Columbia bank and absolutely overnight the prospect for the whole business changed. It was really exiting.”

Bank of British Columbia’s woes followed the failures of Canadian Commercial Bank and Northland Bank of Canada in 1985, when rising interest rates and a slumping dollar caused their real estate and energy-heavy loan books to deteriorate, according to a Bank of Canada report. The failure of two small Western Canadian lenders eroded the confidence of other banks that relied on wholesale deposit funding, leaving Bank of British Columbia unable to weather the storm.

The B.C. bank was run at the time by Edgar Kaiser Jr., an industrialist whose holdings included Canada’s biggest coal company, and the Denver Broncos of the National Football League, according to a New York Times obituary published when he died in 2012.

Expansion Plan

The B.C. purchase bolstered HSBC’s Canadian presence five years after entering the country, and the deal became the first of a string of purchases over 22 years in the bank’s strategy to expand across the nation.

HSBC Canada hasn’t seen much impact from Home Capital’s woes, Stuart said.

“If anything, we’ve seen our deposits increase over the last little while,” Stuart said, adding that she doesn’t expect Home Capital’s troubles will spread to other financial firms. “It’s a $20 billion book, it’s going to play out as it’s going to play out. We don’t feel any contagion to us, so I’m suspecting it’s probably going to be isolated.”

Home Capital rose a second straight day, adding 5.9 per cent to $9.39 in Toronto. The stock is still down 70 per cent on the year.

Bloomberg.com

Home Capital sees rise in savings accounts as bleeding of funds eases

TORONTO — Canada’s biggest non-bank lender Home Capital Group Inc on Thursday published data showing that its high interest savings account balances had risen on Wednesday but its cashable guaranteed income certificate deposits (GICs) continued to fall.

Home Capital has been struggling to finance its assets as its high interest deposit accounts have fallen by more than 90 per cent since March 27, when the company terminated the employment of former Chief Executive Martin Reid.

The withdrawals accelerated after April 19, when Canada’s biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business. The company has said the accusations are without merit.

Home Capital said its high-interest rate savings deposit balances stood at $120.2 million on Thursday, compared with $116.8 million the day before.

Its cashable GIC deposits, which holders can redeem before their maturity date, fell to $146 million on Thursday, compared with $153 million on Wednesday.

The company last Friday said uncertainty around future funding had cast doubt about whether it could continue as a going concern.

Home Capital relies on deposits from savers and GICs to fund its lending to borrowers, such as self-employed workers or newcomers to Canada, who may not meet the strict criteria of the country’s biggest banks.

The company said it had access to $1.47 billion in available liquidity and credit capacity on Wednesday, compared with $1.48 billion a day earlier.

© Thomson Reuters 2017

A nasty battle at Alberta-based Liquor Stores is winning the hearts of its retail investors

Put it down to the amount of time the preyer, the private equity firm, PointNorth Capital Inc., has had its eye on the prey, Alberta-based Liquor Stores N.A.

So this week when PointNorth, which started discussions more than seven months back and which filed a 54-page information circular for the June 20 annual meeting — the time-line was dictated by the public company’s advance notice by-law policy — the target was more than ready.

In next to no time, it had issued a five-pager that focused on two main themes: the track record of the two key principals behind PointNorth, which claimed “have a track record of value destruction;” and the golden leashes (which it defined as “short‐term incentive compensation provided directly by PointNorth),” that two of the six director nominees stand to receive. Of the six, only two have an equity interest in Liquor Stores.

Putting those two themes together, the prey concluded that “rather than make a compelling case for change … PointNorth has demonstrated that it has a superficial understanding of our business and a short‐term agenda.”

Thursday, the prey continued that fight when it released another missive detailing “serious flaws” in both PointNorth’s analysis and strategy and advised, again, on “the track records of PointNorth’s principals to see the value destruction that occurs from a defective strategy.”

They then pointed out the fate of four such companies: SiriusXM, Priszm, KEYreit and Mobilicity.

For its part, PointNorth, a shareholder with about a 10-per-cent stake, and which has been badgering for board representation for many months, has stayed relatively silent, but points out that its two key executives aren’t on the list of nominees.

It has however, received support from two existing Liquor Stores shareholders: LOGiQ Institutional Partners, a unit of a business of publicly-listed LOGiQ Asset Management Inc., which has a 7.5-per-cent interest, is on board, as is JC Clark Ltd., with its 1.5-per-cent stake. Support from holders of about 20 per cent of the shares is a plus, given that the proxy agents have barely started their work rounding up support for either side.

That work is more difficult than normal, given that retail investors own most of the shares in the company, which operates 252 retail liquor stores in Alberta, B.C. and four U.S. states. And, for whatever reason, it’s generally difficult to get retail investors to engage, preferring, as they do, to concentrate on the capital gains and dividends.

On that basis, the company has underperformed: according to Bloomberg, over the five years ended April 28 2017, shareholders have received a total return of -20.39 per cent – compared with 47.21 per cent for the S&P/TSX composite.

So what’s the long game? As expected, there is no agreement. Liquor Stores said it has been working on a seven-point plan for almost four years and the plan – which included investments in the store network and people and reducing same-store inventory levels — “is working.”

NorthPoint, which invokes a Reagan 1980 slogan – Are you better off than you were four years ago — argues change starts at the top with a new majority board. (Officially it requests shareholders ask themselves: Am I happy with the performance of my investment or is it time for a change?)

Once in charge, that board will implement change designed to generate annual cost savings of $10-$20 million; to bring in more efficient management; to invest in the “core” Canadian market and to re-evaluate its U.S. strategy.

Financial Post

bcritchley@postmedia.com

CPPIB reaps almost 12% investment return as opportunities beckon in the U.S.

The CPP Fund, which houses investments for the Canada Pension Plan, rose to $316.7 billion at the end of March on the back of an 11.8 per cent net annual investment return.

The $37.8 billion increase in assets consisted of $33.5 billion in net income after all CPPIB-related costs, and $4.3 billion in net Canada Pension Plan contributions.

Despite the double-digit results for fiscal 2017 — which far outstripped a 3.4 per cent return a year earlier — soaring stock markets caused the investment fund to underperform the 14.9 per cent return of its benchmark reference portfolio, a passive portfolio of public market indexes.

“Given our deliberate choice to build a prudently diversified portfolio beyond just public equities and bonds, we expect to see swings in performance relative to this benchmark, either positive or negative, in any single year,” said Mark Machin, chief executive of the Canada Pension Plan Investment Board, which invests funds not needed to pay current benefits of the Canada Pension Plan.

“Over the longer term, the investment portfolio has outperformed the Reference Portfolio over both the past five- and 10-year periods,” Machin said, noting that the investment portfolio is being built to be “resilient during periods of economic stress” and to add value over the long term.

Four investment departments completed 182 global transactions in fiscal 2017, which Machin said was among the fund’s busiest years. Nineteen of those investment were more than $500 million.

Current stock market volatility and political uncertainty could create opportunities for the fund in the coming year, Machin said, adding that CPPIB continues to hunt for alternative investments such as infrastructure and real estate, despite high prices caused by stiff competition.

While being outbid by other investors in many instances, CPPIB has found success in emerging markets and complex situations that draw fewer bidders, he said. But he added that there would be more opportunities in the United States if U.S. policymakers are able to advance their agenda to increase investment in infrastructure.

“If the U.S. comes on stream, that would be really interesting because it’s such a massive market and there are pools of capital that are getting ready to invest in it,” Machin said. “If policy (makers) in the U.S. got their act together, then it would be, that would produce a good home for a lot of capital.”

He declined to weigh in on what current controversies surrounding U.S. President Donald Trump will mean in terms of the likelihood of investment-friendly policies on taxes and infrastructure being adopted. But he told the Financial Post he is optimistic there will be “interesting, sizeable” investment opportunities in the “not-too-distant” future.”

“It’s a bipartisan view that the U.S. needs… more investment in infrastructure,” Machin said, adding that Canada’s largest pension would be interested in everything from roads, to airports, to energy transmission.

“We would find it interesting and I think other people would as well. At the moment there is much more demand than supply.”

Machin and CPPIB’s chief investment strategist Ed Cass said they would like to find a way to make more infrastructure investments in Canada, even if it means divesting of Canadian stocks or other investments here in order to rebalance the fund’s portfolio.

However, details of how such investments would work under the federal government’s new Infrastructure Bank still need to be worked out, they said. Among the challenges is that many of the projects rolled out are expected to be new “greenfield” infrastructure, which carries more risk than the operating assets CPPIB prefers.

“All other things being equal, we prefer to invest in Canada. We understand it better than anywhere else,” Machin said. “It is our home turf.”

 

Home Capital shakeup continues as troubled lender names new director; initial investor to step down

Canada’s biggest non-bank lender Home Capital Group Inc named a new director and said one of its initial investors would step down from the board.

Home Capital named James Lisson, who has worked with law firms and with the Canadian Department of Justice as a consultant on commercial law, to its board of directors.

The company said John Marsh would step down from the board.

Home Capital has been struggling to finance its assets as its high interest deposit accounts have fallen by about 94 per cent since March 27, when the company terminated the employment of former Chief Executive Martin Reid.

The withdrawals accelerated after April 19, when Canada’s biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business. The company has said the accusations are without merit.

Last week, the company said uncertainty around future funding had cast doubt about whether it could continue as a going concern.

Home Capital provides loans to borrowers, such as self-employed workers or newcomers to Canada, who may not meet the strict criteria of the country’s biggest banks.

Its problems have coincided with the introduction of measures to cool Toronto’s red-hot housing market, including a tax on speculative buyers, and sparked worries it could trigger a broader housing market collapse.

© Thomson Reuters 2017

Canadian provincial borrowers receive friendly welcome in Britain

Britain in May is great for a sports fan, for garden enthusiasts and for theatre goers — though speaking personally, July is even better.

Canadian borrowers have found attractions in other areas and through those efforts have located a group of willing fixed-income investors interested in buying well-rated paper.

This week, two Canadian provincial borrowers joined the parade. On Wednesday, Manitoba priced a GBP250 million offering that came with a 0.875 per cent coupon and a 4 and ½ year term. Earlier in the week, the province of Quebec priced a GBP 300 million five-year benchmark offering.

Those two were following the lead set by Ontario which earlier in May raised GBP 400 million via a deal with a 3-1/2 year term and which pays a floating rate coupon based on British Libor. That deal was also a benchmark offering.

Alberta was the first province to borrow in that market this year: in February it raised 650 million pounds of senior unsecured bonds maturing in November 2021. That offering was the first in that market by Alberta, which at the time indicated its interest in returning. The province said it has a goal of raising 30 per cent to 40 per cent of its borrowing needs outside of Canada, with the bulk of that presumably coming from the U.S.

Here’s one way to put those GBP 1.95 billion of provincial borrowings into perspective: in 2016 no Canadian province raised debt capital in sterling. But the Export Development Corp., a federal agency, was in the market on four occasions raising GBP700 million. It also raised GBP250 million (for 4-1/2 years) in January 2017. (Two banks, CIBC and Royal as well as EDC, have also borrowed GBP this year.)

So what’s at work? Bradley Meiers, head of debt capital markets at HSBC Securities (Canada) said the issuance by Canadian provinces is an overall reflection of how things have rebounded in the sterling market since it became largely off limits following last June’s Brexit vote.

“After that vote it was not the best place to issue,” noted Meiers, whose firm played has played lead manager and book running roles on three of the four provincial issues, those by Manitoba, Quebec and Alberta.

But over the last few months, Meiers said “things have definitely turned around.” That opening up of the market meant borrowers could tap into a new group of investors — meaning they achieve the benefits of diversification — as well as raising capital on an cost-effective basis.

For the provincial borrowers the goal is to achieve an all-in cost of capital (in C$ terms once the proceeds are swapped) that is lower than what a similar issue in their home market would cost.

Welcoming $500 million of client assets

A combination of push and pull factors has meant that Raymond James Ltd., the local arm of the U.S. based investment dealer Raymond James Financial has landed its largest investment adviser recruit.

This week the firm indicated that Webber, Brodlieb & Associates, had joined. That team, which spent many years at BMO Nesbitt Burns — Webber has been around for 35 years, having worked with his father — oversees the management of more than $500 million of client assets.

As for the move, the team noted the new employer’s “unique culture that celebrates and nurtures independent advice and personalized solutions for clients,” that was also non bureaucratic.

Of late, some bank-owned brokerage firms have reduced the pay-out grid, have cut staff who don’t reach a certain level of production and encouraged more client sales at the bank branch level.

Financial Post
bcritchley@postmedia.com