Daily Deals: Media SPAC files for IPO and GMP’s miserable quarter

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DEAL OF THE DAY:

Media SPAC files for IPO

The day after Hydro One Ltd. added some much-needed juice to the down-in-the-dumps Canadian initial public offering (IPO) market, a newly formed Canadian shell company has filed to go public on the Toronto Stock Exchange.

Kew Media Group Inc., a special-purpose acquisition corporation (SPAC), plans to raise $70-million from investors. The IPO is being led by TD Securities Inc., Cantor Fitzgerald & Co. and National Bank Financial Inc. Unlike most of the "generalist" SPACs that are already trading in Canada, Kew Media will target an acquisition in the international media production and distribution sector.

KMG Entertainment LP is the SPAC's sponsor and its founding shareholders include Steven Silver, a television producer and co-founder of Blue Ice Group, Peter Sussman, co-founder of Aver Media Finance, and David Fleck, former chief executive officer of Macquarie Capital Markets Canada.

More than $1-billion has been raised in 2015 in the nascent SPAC market in Canada. Five shell companies have closed their IPOs. A sixth, Avingstone Acquisition Corp., filed for a $110-million offering in September but hasn't made it over the finishing line yet. The biggest one of the year, Acasta Enterprises Inc., raised just over $400-million. If Kew Media closes, it will be the smallest of the bunch. Press release

MERGERS AND ACQUISTIONS

Astrazeneca snaps up ZS Pharma for $2.7-billion

While any near-term deal making from Canada's Valeant Pharmaceuticals International Inc. is in serious doubt, the pace of mergers and acquisitions in the global pharmaceuticals sector shows little sign of slowing.

On Friday, U.K.-based Astrazeneca announced it is buying American drug maker ZS Pharma for $2.7-billion (U.S.) in cash.

Astrazeneca is ponying up $90 a share, which is more than 40 per cent above ZS Pharma's closing price on Thursday. ZS had been in play for some time. Story

INVESTMENT BANKING

Resource revenue craters at GMP

The third quarter of 2015 was nothing short of miserable for GMP Capital Inc., the formerly wildly profitable Bay Street independent brokerage.

On Friday, GMP reported a loss of $11.1-million, versus a profit of $6.1-million in the same period the year before. Revenue fell by one-third. Mergers and acquisitions (M&A) advisory fees – one of the most lucrative undertakings in investment banking – tumbled 42 per cent. Energy sector investment banking revenue cratered a stunning 87 per cent.

"The contribution of the investment banking line from resources this quarter ... may be the lowest number I've ever seen," Sumit Malhotra, an analyst with Scotia Capital Inc., said during GMP's conference call on Friday.

Resources – GMP's raison d'être and the thing that has paid the bills while historically minting long-gone traders such as Michael Wekerle – continue to falter with no end to the miserableness in sight. As Harris Fricker, GMP's long-time CEO, characterized it during the call: "One of the most challenging commodity slumps in a generation."

GMP had some nice offsetting revenue wins in the non-resource sector in the quarter, particularly in technology and health care, which brought in $13-million – versus $2.4-million in the same period of 2014. Mr. Fricker also said he's confident the company will win "more than its fair share of business" in non-resources over the coming quarters. But, oddly, he then played down any notion of GMP becoming anything more than a resources shop.

"We would happily diversify the business more broadly if we felt there were sufficient non-commodity corporate targets to cover. The reality is … there aren't," he said.

Despite cutting 9 per cent of its work force, expenses have risen 6 per cent this year at GMP. Before the resource market came crashing down last year, the company took a big swing by investing in a new investment banking hub in Houston. Reams of staff were hired, salaries are being paid, but nobody is producing.

Mr. Fricker made it clear that the company remains committed to toughing it out in Houston in spite if of the unit producing "no meaningful revenue."

Next year, GMP will see some relief on the expenses front when Houston-based employees transition to GMP's regular commission-only, eat-what-you-kill, compensation structure. What is unclear is whether those employees will have any commissions coming in. Weighing in on how critical the health of the resource sector is to his firm, and others on Bay Street, Mr. Fricker offered the following blunt overview:

"If the commodity cycle is in the trough, independent financial services firms in Canada who by writ operate in the small- to mid-cap sector are going to suffer."

Despite the awfulness, all is not lost. GMP still feels financially solid enough to pay a dividend. The company has no debt. And it has come through great tests before, such as the 2008 financial crisis.

"Over the past 20 years our franchise has demonstrated the ongoing ability to weather and adapt to prolonged periods of market turbulence," Mr. Fricker said in the management discussion and analysis release. Press release

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