BRP Inc. announced that two of its biggest institutional shareholders will sell a substantial stake in their multiple-voting shares, raising questions about the price of the offering and whether the maker of Ski-Doo snowmobiles and Sea-Doo watercraft can sustain the remarkable run-up in its share price since 2017.
The price of the subordinate common shares fell more than 8 per cent in Toronto, halting a recent rally that had made the stock one of the hottest names in the S&P/TSX Composite Index this year.
Beaudier Group and Bain Capital, which own a combined 58 million multiple-voting shares in BRP, will convert some of their holdings through a secondary offering of 8.7 million subordinate voting shares.
At the same time, BRP has filed an application to list its shares on the Nasdaq Global Select Market in the United States, under the ticker symbol DOOO. (BRP currently trades on the TSX under the symbol DOO.)
BRP shares had gained about 150 per cent from the start of 2017 to a fresh record high on Monday. The sudden reversal on Tuesday, though steep, merely erases the most recent uptick and takes the stock back to late-August levels. The stock is up about 40 per cent in 2018 alone.
Nonetheless, Tuesday’s retreat suggests that investors could be nervous about key stakeholders selling out at the top of the market, and at a time when some observers are concerned about the aging business cycle and the impact of rising interest rates on consumer spending.
Both Bain Capital and Beaudier have been active sellers earlier this year, too. The investors sold a combined 14.8 million shares prior to an April 20 regulatory filing, when BRP shares traded at about $53 in Toronto. The shares subsequently rallied another 34 per cent.
BRP was spun out of the transportation and aerospace company Bombardier Inc. in 2003, initially as Bombardier Recreational Products Inc., and then conducted an initial public offering in 2013 at $21.50 a share.
While its former parent has struggled with cost overruns associated with the development of its C Series aircraft, government financial help and, eventually, the controversial rescue by Airbus, BRP has exceeded expectations. It has expanded its product lineup and brand leadership, and reported impressive financial performance.
In its second-quarter results ended July 31, BRP reported that its sales rose 18 per cent from last year, to $1.2-billion, beating analysts' estimates. Gross profit, or revenues minus the cost of sales, increased 29.7 per cent, to $280-million.
The shares surged 7.8 per cent on Aug. 30, after the results were released, and a number of analysts upgraded their target prices on the stock.
CIBC World Markets analyst Mark Petrie raised his target price to $79 from $69 previously, arguing that the stock deserved a higher valuation, given the strong execution.
“Retail sales growth exceeds the industry in all categories, the macro environment is favourable, competitive dynamics calm, and manufacturing risks have subsided with the U.S.-Mexico trade agreement,” Mr. Petrie said in a note on Aug. 30.
Jaime Katz, an analyst at Morningstar Equity Research in Chicago, said that the downturn in BRP’s share price on Tuesday could be reflecting concerns the offering by Bain Capital and Beaudier Group will be discounted in order to attract investors to what is a thinly traded stock.
“If you look at the average daily trading volume, it’s like 220,000 shares. You’re putting 8.7 million shares into the market. There’s going to be a complete oversupply relative to demand on the shares that are out there,” Ms. Katz said.
After the secondary offering, Bain and Beaudier will still own nearly 50 million BRP multiple voting shares, combined. However, additional sales are likely, particularly by Bain.
“There’s no benefit for a private equity firm to keep holding the business if they think they’ve turned a nice profit on it,” Ms Katz said.
She added: “Their business is investing in struggling businesses and turning them around and taking the profit. It’s not about staying invested in really good businesses closer to the peak of the cycle.”
– With files from reporter Nicolas Van Praet