In a deal that should press hot buttons with income-hungry investors, Eric Sprott is taking the reins at a company that's focused on generating yield.
An elegant piece of financing will see an arm of Sprott Inc., the $5-billion money manager, enter the lending business by taking a minority stake in Vancouver-based financing company Quest Capital.
If that name rings a bell, it may reflect the fact that Quest made headlines by providing Conrad Black with a $32-million mortgage in 2004, when the former press baron's legal woes were mounting. (The loan was repaid.) Quest is an active player in real estate lending, with a $216-million loan portfolio, but chairman Murray Sinclair said in an interview "our roots are in resources."
Mr. Sprott will take Quest back to its roots.
In a friendly union, an arm of Sprott will invest up to $25-million in Quest through a private placement, and Quest will change its named to Sprott Resource Lending Corp. That new company, which will keep Quest's listings on the TSX and NYSE Amex exchanges, will lend to mining and oil and gas companies. Mr. Sprott and his colleagues enjoy unmatched access to deal flow in the resource sector, and being able to lend alongside making equity investments is a powerful one-two financing punch.
Here's where income-seekers will get excited: Sprott Resource Lending will pay a dividend on the profits it earns from bridge loans, mezzanine loans and other forms of credit. And along interest payments, resource companies will pay back this lender with warrants, equity kickers and even bullion. The reborn Quest melds Mr. Sprott's touch with resource stocks to a steady income stream.
This is all part of a quiet but steady transformation of Sprott Inc. from one-man hedge fund into a diverse money management platform, home to multiple strategies and a deep management team. Along with lending, the company recently launched Sprott Power Corp., a renewable energy development company.
That bench strength will be deepened in coming months, as Mr. Sinclair and Quest CEO Brian Bayley have agreed to step down and become directors and consultants at the new company, with a new CEO to be named. Along with expertise in lending - the real estate financier has a dozen professional employees - and the stock listing, Sprott picks up $93.4-million in tax losses as it taken the reins at Quest.
The elegance in this deal is a mechanism that allows existing Quest shareholder to exit, at a premium price, if they don't want to own a company that's morphing from real estate to resource lender.
Quest plans to buy back up to $60-million of its own stock at up to $1.60 each through what's known as a Dutch auction that will play out after a shareholder meeting to approve this deal. Quest has 139 million shares outstanding and a $207-million market capitalization. Mr. Sinclair said the buyback "will accommodate the needs of shareholders who are focused on real estate; whereas shareholders who favour resource lending will be able to take advantage of renewed growth and the reinstated dividend."
Sprott will charge a standard 2-and-20 management fee for running the lending fund, if the transformation is approved. The performance fees only kick in if the company turns in better results than Government of Canada bonds. Quest has agreed to pay the money manager a $1.5-million break free if a rival bid for the company is accepted.
Dundee Corp. is Quest's single largest shareholder, with a 12 per cent stake. Quest management are substantial shareholders, and the owners of 24 per cent of the company's stock are supporting the alliance with Sprott.
If the deal is approved, Cormark president Peter Grosskopf and Sprott chief investment strategist John Embry will join the board at Sprott Resource Lending.