ECN Capital (ECN.TO) – Tender Offer – 7.5% Upside

Current Price – C$3.49

Tender Price – C$3.35 - C$3.75

Upside – 7.5% (if priced at the upper limit)

Expiration Date – 10th Jan 2019

Issuer Bid Circular

 

This is the second tender offer that ECN Capital launched this year. This time the offer is for 26% of the outstanding shares (vs 8% previously). Company is returning cash to shareholders following another sale of legacy assets. Management indicated they will not participate in the tender albeit their ownership is not significant. Due to the size of the current offer as well as investor participation dynamics in the previous offer, I believe there is a high chance that the tender ends up under-subscribed at the upper limit.

 

Previous Tender

For the background on the company as well as previous tender please refer to this write-up.

Previous tender was for 8% of the shares (32m in total) at the price range of C$3.55 to C$3.90. Final price was set at $3.6. In total 97m shares were submitted for tender, out of which 36.5m were at prices of $3.8+.

Assuming investor sentiment towards ECN has not changed materially (see comments in the section below), there should only 65m shares (97m-32m) that are willing to participate in the current tender - and that is the figure after taking into account all of those that tendered at C$3.8+, which is above the current upper limit of C$3.75.

On top of that, during Q2-Q4 ECN has repurchased c. 25m shares in the open market which likely further reduced the pool of willing seller below C$3.75.

The current tender is for 70m-80m shares and due to figures outlined above I am expecting this tender to be priced at the upper limit, potentially even ending under-subscribed, in which case the company might even raise the tender price.

 

ECN Capital since the last tender

A number of developments took place since the last tender:

  • ECN reported Q1, Q2 and Q3 earnings. Comparing divisional forecast from Dec 2017 and May 2018 (after Kessler transaction) to the guidance in latest Q3 results, it seems Triad Financial Services is performing in line with expectations, guidance for Service Finance has been reduced by 7%, and Kessler's performance is likely to exceed the initial expectations. Growth continued within all divisions. Results are still messy with losses on business disposals and legacy assets still overshadowing operating earnings from the new businesses.
  • In May 2018 ECN announced and closed acquisition of 80% equity interest in Kessler Group - managing and advisory services for credit card portfolios. The transaction was done at 6x EBITDA for 2018. The whole Kessler's management team (including founder and CEO) remained in place with the new incentive plans driven by 5 year ROE targets. Although synergies between the two businesses are not easily evident, acquisition price seems to be reasonable.
  • Worth noting that initial market reaction to all three quarterly earnings as well as Kessler's acquisition has been positive/neutral.
  • ECN closed another sale of$360m of legacy assets at 0.93x book value - this reduced BV/share by $0.16. Cumulative legacy asset sales so far have been carried out at 1.01x book value. Again positive/neutral market reaction to the announcement.
  • Several insiders have been buying shares in the open market at prices slightly above the current one.

All in all, ECN performance so far should not have changed investor sentiment toward the company. Slight under-performance within Service Finance division is counter balanced by the positive results at Kessler Group, continuing legacy asset sales and cash return to shareholders via buybacks and tender offer. The share price sell-off over the last few months was likely driven by broader market conditions rather than company specific performance.

12 COMMENTS

  1. YVRtrader

    This one is very promising. I participated last time, but loaded up early before the selloff down to $3.40, well below the bottom of the tender range. I’d be surprised if it trades below the range again this time. I will be shocked if we get less than $3.50 for these shares, but anything is possible.

  2. FM W

    “……and that is the figure after taking into account all of those that tendered at C$3.8+……”Didn’t really understand this, isn’t that those who tendered at 3.8 didn’t get to tender their shares last time and are still in the pool for this time?

    1. dt

      I mean to say, that in previous tender there were 36.5m shares that tendered at or above C$3.8. In this offer the upper limit is at C$3.75, so it is likely that less shareholders will be willing to take part in the tender than before (assuming their willingness to sell has not changed). I bit of a theoretical exercise, but nevertheless points towards eventual upper limit pricing.

    1. dt

      You should check with your broker regarding this. I do not know how foreign stocks listed on pink sheets are treated when it comes to corporate actions, it might be case by case situation as there are different types of pink sheet listings.

    1. dt

      ECN can cancel the offer at any time at its sole discretion, however so far I do not see any reasons why they should be willing to do that.

  3. FM W

    (i) first, the Corporation will
    purchase all Shares tendered at or below the Purchase Price by Shareholders who own fewer than 100 Shares (the
    “Odd Lot Holders”) at the Purchase Price;

    There IS acutally an odd-lot provision isn’t it? Why is that not mentioned by you DT? Is there anything I missed out? Thank you.

    1. dt

      Yes, there is an odd-lot. I did not mention it as the upside amount is tiny even if the tender are priced at the upper limit (max $25 per account) and because it is not risk-free with shares trading in the middle of the buyout range.

      Ultimately, in this case I do not think it makes any difference here whether one tenders odd-lot amount or more. Estimating the eventual tender price is much more important here.

  4. YVRtrader

    Excellent result.

    “The Company expects to take up and purchase for cancellation approximately 70,666,666 Shares at a purchase price of $3.75 per Share (the “Purchase Price”).

    The Company expects that tendering shareholders subject to pro-ration will have approximately 84.43% of their tendered Shares purchased by the Company under the Offer.”

    1. dt

      Cool! Good to see my deliberations were correct in this case (except for tender being under-subscribed).

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