Yarn? Of all the deals that made it to market in 2005, one of the strangest had to be Spinrite Income Fund. Spinrite is but a single factory making yarn in Listowel, Ont., about two hours west of Toronto. But to hear the underwriters' sales pitch, it's on the leading edge of a leisure movement that's sweeping the nation.
Did you know that the number of young women who knit and crochet has doubled in six years? That the post-9/11 "cocooning" phenomenon has lured an entire generation into staying home to make scarves for their friends? Catch the wave, investors, and own a piece of the knitting revolution! And people did. The Spinrite deal attracted more than $200-million, making it one of the year's biggest initial public offerings, and the quick-flip artists did very well. Investors who are still holding on, alas, have lost about 25 per cent of their money, assuming reinvestment of dividends.
Spinrite was not Bay Street's biggest stinker last year. Not even close. That dishonour goes to FMF Capital Group, a U.S. mortgage seller whose well-documented plunge -- it's down 92 per cent since the IPO last March -- has caused BMO Nesbitt Burns executives to wish they'd never let the FMF guys past the receptionist. Unitholders are suing, and Nesbitt's own brokers are angry at the firm's investment bankers for the lack of, er, diligence in their due diligence efforts.
FMF was a fiasco, but here are some less-infamous 2005 deals that would have been better left to die on the boardroom floor:
Entertainment One: In the age of the iPod and video-on-demand, selling music and movies on shiny silver discs seems like such an antiquated business, and it is. Not so antiquated, though, that the trust couldn't persuade investors in May to part with $70-million, with a little help from CIBC World Markets.
Entertainment One used the money to buy Koch Entertainment, a U.S. wholesaler of CDs and DVDs that also owns some its own content. Theory: It would help diversify the company's revenue and make it less reliant on the Christmas season for its cash flow. Reality: Distributions were cut in November, and those who bought the new issue in May have lost 45 per cent.
CanWel Building Materials: If you liked yarn as an income trust, how about glue? And plywood, fibreglass insulation and hardwood flooring, all of which the company distributes.
Perhaps CanWel should also supply heart medication -- for its unitholders, not its customers. No sooner had the Vancouver company finished a trust conversion and a $125-million equity sale (led by GMP Capital) than the business began to slump. Then there was a little technology glitch; the company made a hash of a new IT system and $2-million in operating profit disappeared.
"Not for [the] faint of heart," declared one analyst, and was he right. When government bonds yield 4 per cent and your income trust yields 23.5, you know there are only two possibilities: The distribution's either going to be cut or suspended entirely. Just because it hasn't happened yet hasn't rescued those who bought into the May offering -- even with those juicy dividends, they've lost close to half their money.
Connors Bros.: Fund manager Peter Lynch had a word for it -- "diworseification." It's what happens when a company with a very good business decides to expand into inferior ones, and it may describe Connors.
The company, which boasts a near-monopoly on the production of canned sardines in North America, wins a gold star from investment bankers for its willingness to make deals. Through a series of acquisitions, it's now into tuna, clam juice, canned chicken, beef and "hot dog chili sauce."
On paper, it's very impressive. Connors has gone from a humble $115-million market capitalization to $575-million. But for the investor, the dilution has proved very expensive. Connors turned to CIBC World Markets early last year to lead a $110-million underwriting to help pay for its acquisition spree. The units are down 38 per cent since.
Madacy Entertainment: There's no business like show business, and in case you didn't get your fill of it with Entertainment One, there's Madacy, which fills a niche for low-budget shows and recordings -- or, as the prospectus says, products with "timeless appeal."
Investors would have been better off had they paid attention to these lines: "The recorded music industry is constantly undergoing change . . . the Internet poses a risk . . . Madacy's revenue and expenses are denominated in U.S. dollars . . . Madacy will be exposed to currency-exchange-rate risks."
Total shareholder return since the April IPO: minus 31 per cent. Do they have any mournful pan flute music to sell?
© The Globe and Mail
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