Quick Pitch: Canaccord Genuity (CF.TO)

Management Takeover – 7% Upside

Management consortium with a combined stake of 21.3% has offered to buy out the other Canaccord Genuity shareholders at C$11.25/share. The largest minority shareholder with a 9% stake signed an irrevocable support agreement. When I highlighted this situation at the end of January, the special committee comprised of independent directors was fighting for an improved bid. That did not pan out as expected – following the board room spat all of the independent directors have resigned. The offer of C$11.25/share has been formally launched and is likely to prevail. Meanwhile, CF shares have drifted lower and there is a 7% spread to the offer price, most likely due to uncertainty of shareholder approval. Closing is scheduled for the 13th of June.

As for boardroom spat, it appears that management (i.e. buyer consortium) has found a way to go around the objections of the independent directors. The special committee considered management’s bid to be inadequate, partially basing this on RBC’s estimated fair value range of $12.75-$15.75/share, and was not ready to recommend the offer to shareholders. Then the above-mentioned minority shareholder (who is in lock-up with the bidders) called for the removal of all directors in the special committee, arguing that the committee hadn’t been caring for minority shareholder interests, even though this committee was fighting for a higher offer. A week later all independent board members resigned (4 in the committee + 1 one more) with the press release saying:

It is the view of the Former Special Committee Directors that they could not satisfy their fiduciary duties to the Company and fulfill their mandate in the circumstances. Further, the Former Special Committee Directors indicated that they believed that the breakdown with management and others through the course of the bid was irreparable.

The new special committee comprised of only two directors, both of whom can hardly be called independent, is likely to recommend the offer to shareholders. Nevertheless, shareholder support is far from certain. The launched offer is subject to acceptance by 75% of shareholders, including the buyer consortium, meaning that 65% of the remaining unaffiliated shareholders need to be in favor. In my previous note on CF, I indicated:

I find investment banking businesses hard to value – these are black-box to me, with volatile levels of revenues and staff bonuses. CF’s investment banking business got hit pretty hard recently, but on pre-COVID earnings, the company is trading at 14x PE vs 9.5x PE for its peer JEF. So at least the undervaluation that the Special Committee is claiming is not plainly obvious.

Since then JEF shares sold off by 20%, the other financial stocks are also down, mostly over the last week, driven by SVB’s ripples across the financial industry. The C$11.25 buyout offer looks much more attractive today and I am tempted to think shareholders will happily support it.