ShawCor provides pipeline servicesEwan Nicholson
Shareholders who were betting on a takeover of Canadian pipe-coating maker ShawCor are bailing out Tuesday after the company unveiled a recapitalization instead, but they may be missing a longer term opportunity.
ShawCor is borrowing money to buy out the class of voting shares held by the company's controlling shareholder, Virginia Shaw, for $43.43 a share in cash and stock. The plan is then to pay a special $1 a share dividend. That's after a sale process came to naught, for reasons that aren't entirely clear.
The class of stock that is widely held is slumping, apparently because people are now assuming that the sale process never brought in any offers for more than the $43 price, when there had been speculation that ShawCor could fetch something more like $50. After all, if there was a takeover premium on the table that would pay more, why wouldn't the controlling shareholder take it? We will have to wait for the information circular to find out exactly what happened.
But in the meantime, the recap should provide some support. The proposal should add 11 per cent to earnings per share, based on what management is laying out. That comes from using debt to buy back stock, shrinking the share count.
However, by some investors' calculations, ShawCor could even add as much as 15 per cent to earnings per share. That's because ShawCor has significant cash on its balance sheet and solid cash flow, so it may not have to use the full amount of debt that management said it has the capacity to take on to do the deal.
There's also the reality that it's now much easier for ShawCor to be sold, because the company will be truly widely held. That should be worth something.
The downside is added leverage, but with current earnings forecasts, the company won't be loaded down with debt for long as it should generate cash to pay down loans reasonably quickly. RBC Dominion Securities analyst Dan MacDonals foresees debt to 2013 earnings before interest, taxes, depreciation and amortization at 0.7 times "which remains low" especially with the company's solid order book and the cash flow it generates that could be used to pay back lenders.
"Are the proforma EPS accretion, gain in voting control, and special dividend enough for class A holders to overcome paying a premium for the class B shares that presumably industry players would not pay and adding leverage to the balance sheet? Ultimately this will be answered at the shareholder vote, expected in late March," he wrote in a note.
He seems to think it's a worthwhile trade. Mr. MacDonald kept his outperform rating and maintained his price target at $47.
Still, it's worth keeping in mind even amid bullish forecasts that the risk with ShawCor is always that the order book has peaked, along with the build out of energy pipe infrastructure around the world, and that's what spooked potential buyers.
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)