GMP Capital (GMP.TO) – Odd Lot Tender Offer – C$47 Upside

Current Price: C$1.94

Offer Price: C$2.42

Upside: C$47

Expiration Date: 18th of November

Issuers bid circular

This is a fresh Canadian tender offer with an odd-lot provision. Despite its size (29% of minority shares) the offer is likely to be oversubscribed. Due to large withholding taxes this opportunity is applicable to Canadian residents only.

On the 13th of October, GMP Capital has commenced a substantial issuers bid circular (tender offer) with an odd-lot provision for 16.5m of outstanding shares. Consideration stands at C$2.42/share (C$40m in total). Non-resident shareholders will also be subject to withholding taxes – paid up capital is C$0.72/share, suggesting C$0.25/share tax leakage for non-resident tender participants.

Management (minor stake) and the largest shareholder (24.1%) won’t participate in the tender, so the offer is effectively for 29% of the remaining shares, which usually would indicate rather high chances of undersubscription. However, this does not seem to be the case here as the offer comes as a settlement between the management and a certain dissenting shareholder, which just recently engaged in a proxy fight against value destructing RGMP merger transaction. RGMP deal will still be closed shortly after the offer and will still leave the current shareholders in a difficult situation (the company will end up in control of the potentially self-interested Richardson family). So I believe that many minority owners will follow the dissenting shareholder (4% of minority ownership) and try to cash-out in this tender.

Background of the Tender

GMP Capital is a financial services company that operates in clearing (brokerage), wealth management, and corporate segments. Its wealth management segment comes through the 33.2% stake in Richardson GMP (RGMP) – large independent wealth management firm in Canada with C$28.6bn AUM. Both companies have a significant part of their shares owned by the Richardson family – one of the richest Canadian families with a background in financial services.

• Richardson Family – owns direct 24.1% stake in GMP and 34.3% in RGMP.
• RGMP is owned 33.2% by GMP, 34.3% by Richardson Family, and 32.5% by RGMP’s investment advisors and employees (apparently, Richardson Family affiliates).

On the 12th of August GMP has agreed to acquire the remaining stake in RGMP for 1.76 GMP shares +C$0.15/share special dividend to GMP shareholders prior to the consummation of the offer. On the 4th of September a dissenting shareholder, Mr. Sullivan – who worked for 25 years in GMP in senior positions (President and deputy chair), while also serving as a Chairman of RGMP – started a campaign against the terms of RGMP transaction. Mr. Sullivan (4% ownership) stated that he approves the transaction itself, however, the terms are value-destroying for GMP shareholders. His information circular included some rather solid points and valuation provided to back up such claims. An important point besides the valuation is that overall the transaction seems like a cheap transfer of control of both GMP and RGMP to the Richardson Family (which currently is bound by the investor agreement restricting its control over GMP). The investor agreement termination clause was purposely buried in the agreement, while after the transaction Richardson Family and their affiliates will control 67% of the combined company. The bottom line is that Mr. Sullivan has required that alongside the C$0.15 dividend, GMP would also return capital to shareholders via a C$40m (C$2.42/share) tender offer.

Eventually, both parties agreed to a settlement – the C$2.42/share tender offer will be done not alongside, but instead of the special dividend. It also has to be consummated by the 20th of November and until so, RGMP transaction can’t be closed.