Difference Capital Financial Inc. has sold its worst-performing investment, booking a huge loss, but gaining some much-needed cash.
On Thursday, the publicly traded merchant bank, co-founded by former ace Bay Street trader and rabble-rouser Michael Wekerle, announced that it had unloaded its majority stake in WG Ltd. (World Gaming) for $6.4-million to Cineplex Entertainment Inc.
As part of the deal, Cineplex will pay $10-million (U.S) to gain 80-per-cent ownership in World Gaming and invest an additional $5-million into the business. The deal is a small one for Cineplex, whose market capitalization is just under $3-billion, but is an important move for Difference, which is worth a mere $27-million.
World Gaming was one of the first investments Difference made upon its founding in 2012, and its biggest by far to date.
The company organizes communities of video-game players online, allowing gamers to duke it out against each other. Mr. Wekerle had a long-standing relationship with Rob Segal, chief executive officer of World Gaming, that preceded his Difference Capital days. Mr. Wekerle helped Mr. Segal raise money in the early days of World Gaming. Over time, Difference funnelled $31-million into the company from the $185-million it had to put to work at the time.
Despite the roughly 80-per-cent loss that Difference is taking on the sale, the price is significantly above the price at which the company last valued World Gaming. In its most recent management discussion and analysis, after the release of its quarterly earnings, Difference valued WG at about $3.6-million.
Shares in Difference Capital surged on the news of the sale, moving from a close of 59 cents on Wednesday into the mid-70s in an uncharacteristically heavy trading session for the company on the Toronto Stock Exchange.
The sale gives Difference the much needed cash to bulk up its balance sheet. A major "overhang" on the firm is a massive loan that is coming due in just under three years. As of June 30, the company had $47.5-million in convertible debentures outstanding. Difference pays its debt holders just under $4-million a year in interest, but the entire principal, or (as one Bay Streeter termed it) the "bullet payment," will come due in mid-2018. Currently, the firm does not have enough cash on its balance sheet to pay down the loan.
Difference has been buying back its debt in the open market and recently sent an offer to debt holders to purchase $12-million of the debentures at a premium to the market price. The lower the firm's debt obligations are in 2018, the less risk there is that the firm will have to sell a huge chunk of its portfolio to make its bondholders whole.
Huge swings on a handful of investments, such as World Gaming, that turned sour over time is one of the main reasons Difference Capital ran into trouble. Early on, the firm also sank $18-million into alternative-energy company Lignol Energy Corp. In August, 2014, Lignol was put into liquidation, with Difference eventually recovering only $5.1-million.
While the firm currently has a much more diversified portfolio, most of its remaining investments are in illiquid private technology, media and health-care companies – some of which the company expects to eventually see go public, including BuildDirect.com Technologies Inc., Vision Critical Communications Inc. and HootSuite Media Inc.
Earlier in the year, Difference saw the first of its privately held investments hit the public markets. In June, online lender Mogo Finance Technology, in which Difference held a $2-million stake, made its debut on the Toronto Stock Exchange. The stock has since bombed – losing more than 40 per cent of its value. Difference did not sell any of its shares on the initial public offering.
A few weeks before Mogo went public, Mr. Wekerle stepped down as CEO, handing the reins to the firm's former chief financial officer, Henry Kneis. Mr. Wekerle remains the firm's biggest stock and bondholder. Since Difference Capital went public in June, 2012, its share price has lost roughly 75 per cent of its value.
Difference did not respond to a request for a comment.