Rifco (RFC.V) – Going Private – 5% Upside

Current Price: C$1.10

Offer Price: C$1.15

Upside: 5%

Expiration Date: TBD

Press Release

 

Rifco, a small Canadian subprime auto lender, received a non-binding proposal from management to take the company private at C$1.15/share in cash. Management's intentions are firm and even if the deal gets dropped, another bidder is likely to step in as the interest was high in the prior bidding cycle. The deal is also timely as both consolidation in the industry and an increase in retail sales of used cars in Canada have been prominent. This looks like a done deal as the transaction is informally supported by 64% of shareholders, mostly by the current board, and comes in at 5x TTM earnings and 1x book value - a reasonable premium to historical valuations. Shareholder meeting is planned for late September - early October. Downside to the pre-announcement price stands at 18% and trading liquidity is low (only C$25k daily).

The saga of Rifco sale is quite long.

The company was due to be sold pre-covid and a definitive agreement was signed in Feb'20 at C$1.18/share or C$25.5m. The buyer was the peer CanCan Group (parent of AutoCapital Canada). However, a month later the buyer terminated the merger potentially due to COVID-related issues. Eventually, the buyer was forced to pay C$1.5m settlement to Rifco. Worth noting the merger at this price was almost unanimously supported by shareholders at that time.

Then in Autumn of 2020 a “concerned group of shareholders”, then owning 42% of the company, prodded the board to reconsider alternative bids. ~20 previous bidders were contracted. A number of offers were received C$1.18/share. The highest one came from the board/management team at C$1.28/share. The concerned shareholder group then asked for a C$1.5/share price and the bidders agreed. But, apparently, shareholders then changed their minds and were no longer happy with the sweetened C$1.5/share proposal.

Management buy-out of the company instead turned into a proxy fight and at the annual general meeting, the concerned shareholder group got their members elected as directors of the company, and one of them (Jeffrey Newhouse) was appointed as new CEO, replacing William R. Graham, who was one of above mentioned the management-buy-out parties.

Finally, making a full circle in a year, another management buy-out from almost the same team gets announced in Aug'21. Two of the three persons in the group (Warren Van Orman and Doug Decksheimer) were also buyers in the previous attempted MBO. This time the offer is at C$1.15, which in a way is similar to the C$1.5 offer after deducting C$0.35 special dividends paid out in the meantime. Buyers' group owns 6% of the company. It seems that activist shareholders won the proxy fight but still were unable to find anyone else willing to pay more for Rifco.

While the deal still technically requires support from the special committee, board and shareholders, given the 64% shareholder support (mostly shares owned by the board) and background of the case, it seems that these are just formalities. A sign of that is also the announced change of CEO whereby the previously-concerned-shareholder Jeffrey Newhouse is replaced by Roger Saran - the third person in the buyers' group - even before the proposal is approved by the special committee. However, there is always a small risk that the current board will screw up something, as they did with a previous almost equivalent offer a year ago.

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