Brookfield

From Trams, Power Generation and Telephones and Back Again

Some business stories jump right off the page.

For example, consider the Brookfield Infrastructure Fund making  a 1.7 billion dollar investment in a Brazilian toll road.  The irony is that the roots of Brookfield include Brascan which was a successor to Brazilian Traction. Brazilian Traction evolved into a conglomerate in the 1900s, started by Canadian investors to build facilities  in Brazil. The company provided capital and expertise for power generation, transportation and communication systems. In today’s terms, infrastructure.

Brazilian Traction was successful,  generating a very satisfactory return on capital, and widely  followed on the Toronto Stock Exchange. Alas politics intervened as the Brazilians eventually wanted  control of what they considered businesses vital to their economy. The takeover was negotiated with at least one caveat. While the price was workable, one part of the deal was that some of the consideration  had to be reinvested in Brazil. The out flow of capital was thereby limited, providing monies for internal reinvestment, protecting the Brazilian currency and acceptable politically.

Nevertheless, after more than a century, the Brazilian economy warrants  Brookfield’s  investment in a business sector similar to Brazilian Tractions.

There is a world wide stampede into all manner of infrastructure investments. Pension plans love them, fund developers love them, the investment bankers love them and the individual investors love them. With all of this love there is bound to be over paying for good deals and an increasing number of bad projects. Acquiring businesses that are basic to a countries well being has proven to have political risks. Long memories are sometimes useful.

 

Margaret Thatcher, Columbia Pictures, Mark Zuckerberg, and Groupon have what in common?

They all have a relationship to the wacky world of Initial Public Offerings

All systems are in high alert as lawyers, financial advisors, underwriters regulators and sellers convene. A strike price is the finale, followed by an official closing and celebration.

Many are the stuff of legend. In the 1970s and 1980s  the Conservative Government in the United Kingdom privatized publicly owned corporations including British Gas. This issue was the hottest game in town. The organizing and marketing syndicate was well organized and global. It was a bought deal, buyers were on allocation and pound signs were in everyone’s eyes. Alas the market crash of 1987 left much of the shares in the banker’s inventory. Save us they cried to which Margaret Thatcher replied, save yourselves.

Now we have Groupon and Facebook; both examples of financings gone terribly wrong. Facebook is a dazzling display of chicanery.

This social network star was aligned with the IPO gods from the beginning. Millions of friends and a hit movie provided an international persona. No amount of marketing money could have duplicated the exposure. A continuous stream of a public issue announcements, years in advance whetted appetites further. No wonder the launch garnered so much enthusiasm.  We know by now the results fell far short of expectations. Contrived? Unlikely, but certainly a rare combination of greed, manipulation and favorable circumstances for Facebook’s treasury.

British Gas, Groupon and Facebook are three new stock issues that failed. In contrast billions of dollars and hundreds of transactions are successful every year. The capital markets do work most of the time. If the story is too good to be true it often is not. Buyers beware.

The Gildan Story: small, medium and large

The story starts out routinely enough.  In June, 1998 a new initial public offering memorandum came across an analyst’s desk at Bissett and Associates. Founded by Dave Bissett in the 1970s the firm was fast emerging as one of Canada’s premium independent investment counselors. This particular financing was Textiles Gildan, a small Quebec based casual clothing manufacturer. The intention was to raise 50 million dollars (U S) with the sale of 3 .85 million shares at 13 dollars. Alas the plans of mice and men oft go aria and Texties Gildan eventually sold 3 million shares at 7 dollars totaling 21 million dollars for the firm’s coffers.

The company controller said that the results of the actual IPO were due to a “crappy market week”  In support of this view the Dow Jones Industrial Average did experience a turbulent week from June 15 to 19, 1998 hitting a high of 8,890 before closing at 8680. Such are the vagaries of equity markets.

Reflecting on the deal, Fred Pynn was very skeptical. Currently he discusses the opportunity, saying “a T Shirt manufacturer”?  Fred is one of Canada’s premium equity analysts. Good fortune was on the investor’s side because Bissett soon founded a micro fund designed to pool small capitalization companies such as Textiles Gildan.  This allows for participation by all types of investors. Bissett’s entry price is not known but the shares of Textiles Gildan traded initially at $ 1.70 adjusted for splits and so on.

Time passed and the company, now called Gildan Activewear, prospered, as did the shareholders. The market capitalization increased many times and eventually the stock was incorporated into Bissett’s Mid Cap fund as a second home for the Gildan shares. Once too large to occupy a place in this investment vehicle, the Bissett Canadian Equity Fund was available to facilitate ownership. To be sure the ride has always been exciting as the share price has fluctuated, and at one time dropped to beloe ten dollars.

So what is the lesson here?  A quote by Jack Bogle, an investment veteran is a good reminder “Investors spend so much time chasing hot asset classes and hot fund managers that they end up buying high and selling low, all the while incurring transaction costs. Investors need to understand not only the magic of compound long-term returns but the tyranny of compound costs.”

Give it up for an investment counselor that accommodated company size and stayed the course to everyone’s benefit.

What are yabuts, whoonoos and shooduvs?

Yabuts, whoonoos and shooduvs are all members of the same species that thrive in the dark confines of the investment industry. These creatures are found in all kinds of literature and conversation associated with wealth management. They are ubiquitous and pervasive. They are particularly annoying because they are useless and at the same time can be very destructive. In terms of human anatomy yabuts, whoonoos, and shooduvs are akin to the appendix.

Yabuts are usually found at the start of a conversation such as this: “ Yabut if we had kept the stock another month we would have tripled our money instead of a mere double”. Whoonoos occupy the knowledge space as in, ” Whoonoo about this”? Shooduvs have a particular destructive nature as in, “We shooduv sold that stock six weeks ago”.

A famous play during the 1962 World Series saw a line drive by Willie McCovey snared by Yankee’s second baseman Bobby Richardson. The play ended the series and was immortalized in a quote by Linus of Peanuts fame “If only McCovey cooduv hit the ball three feet higher”. Cooduv is a close relative to shooduv and only slightly less obnoxious.

Antidotes are readily available. Yabuts are easily displaced by expressions such as ” We seemed  to have done our best under the circumstances”. Instead of whoonoo we can suggest “New avenues of research will help”. Shooduvs have no life after “There were several avenues of approach, so the next time we will try an alternative”.

Any value of replaying yesterday’s game is a learning experience and not for recriminations.

Long term investments and other fables

News that the Chinese National Oil Company wants to buy Nexen is causing great debate. Other oil sand assets are receiving investor interest from national oil companies, pseudo private companies, many with political agendas. Justifying statements appear such as “these prospective buyers think long term; they have deep pockets; take greater risks and so on”.

These concepts lack substance. For example prospective investors that think long term are compared to whom? By inference they must be short term thinkers, a label applied to North American businesses that have a quarter over quarter comparative mentality. The timed value of money tells us that the quicker the return the better the investment. A longer period implies a lower rate of return and therefore a lower quality investment.

 Having deep pockets is not germane to the argument either. Simply because the funds are available has nothing to do with the quality of the investment. An analyst recently justified a deal by Shell Oil with the explanation that the dollars involved were small compared to the company’s capacity to invest and OK as a result. While the impact may be limited the economics remain the driver. A similar argument tries to explain the proposal to buy Nexen. CANOOC’s capacity provides opportunities that make economic sense. Just because they can does not mean they should.

 Taking greater risks begs for additional analysis. Deals will be done because of a desire to fill out a product line, secure a source of supply, for hedging and reduce competition. You count them up.

 The point is to call any deal for what it is. If truly an investment, then spell out the metrics; if other wise then say so. Remember the excessive valuations  as the Government of Canada assembled PetroCanada. Whatever the motivation, return on investment was not one of them. To chastise competitive inaction because of lack of long-term thinking, or deep pockets or differing risk parameters simplifies the rationale to where the analysis is inadequate

 

Margaret Thatcher, Columbia Pictures, Mark Zuckerberg, and Groupon have what in common?

They all have a relationship to the wacky world of Initial Public Offerings

All systems are in high alert as lawyers, financial advisors, underwriters regulators and sellers convene. A strike price is the finale, followed by an official closing and celebration.

Many are the stuff of legend. In the 1970s and 1980s  the Conservative Government in the United Kingdom privatized publicly owned corporations including British Gas. This issue was the hottest game in town. The organizing and marketing syndicate was well organized and global. It was a bought deal, buyers were on allocation and pound signs were in everyone’s eyes. Alas the market crash of 1987 left much of the shares in the banker’s inventory. Save us they cried to which Margaret Thatcher replied, save yourselves.

Now we have Groupon and Face book; both examples of financings gone terribly wrong. Facebook is a dazzling display of chicanery.

This social network star was aligned with the IPO gods from the beginning. Millions of friends and a hit movie provided an international persona. No amount of marketing money could have duplicated the exposure. A continuous stream of a public issue announcements, years in advance whetted appetites further. No wonder the launch garnered so much enthusiasm.  We know by now the results fell far short of expectations. Contrived? Unlikely, but certainly a rare combination of greed, manipulation and favorable circumstances for Facebook’s treasury.

British Gas, Groupon and Facebook are three new stock issues that failed. In contrast billions of dollars and hundreds of transactions are successful every year. The capital markets do work most of the time. If the story is too good to be true it often is not. Buyers beware.

What are yabuts, whoonoos and shooduvs

Yabuts, whoonoos and shooduvs are all members of the same species that thrive in the dark confines of the investment industry. These creatures are found in all kinds of literature and conversation associated with wealth management. They are ubiquitous and pervasive. They are particularly annoying because they are useless and at the same time can be very destructive. In terms of human anatomy yabuts, whoonoos, and shooduvs are akin to the appendix.

Yabuts are usually found at the start of a conversation such as this: “ Yabut if we had kept the stock another month we would have tripled our money instead of a mere double”. Whoonoos occupy the knowledge space as in, ” Whoonoo about this”? Shooduvs have a particular destructive nature as in, “We shooduv sold that stock six weeks ago”.

A famous play during the 1962 World Series saw a line drive by Willie McCovey snared by Yankee’s second baseman Bobby Richardson. The play ended the series and was immortalized in a quote by Linus of Peanuts fame “If only McCovey cooduv hit the ball three feet higher”. Cooduv is a close relative to shooduv and only slightly less obnoxious.

Antidotes are readily available. Yabuts are easily displaced by expressions such as ” We seemed to have to have done our best under the circumstances”. Instead of whoonoo we can suggest “New avenues of research will help”. Shooduvs have no life after “There were several avenues of approach, so the next time we will try an alternative”.

Any value of replaying yesterday’s game is a learning experience and not for recriminations.

Originally published in January, 2012

When it is not broken why fix it?

Petr Cundhill earned an excellent  reputation as an investment manager. His well-deserved renown was partly for his pioneering search for companies from around the world, at a time when North American companies dominated investment portfolios. His investment philosophy is captured by the title of his well-read book:  There’s always something to do. We recently asked a student of Mr Cundill how this relates to current thinking calling for a plan and then staying with it.

It was agreed that one should absolutely avoid knee-jerk reactions. Still, there is little doubt that the investment industry thrives on action. Equity trading inspired by new information, and revised interpretation of existing information, abounds. Our concern is that new isolated data points are often out of context,  and thus insufficient reason to deviate from an investment plan. 

We steadfastly stick to a carefully crafted set of criteria and a planned implementation process. At every turn we resist changes for the sake of changes. We establish key items at the outset, and do not stray when a new opinion is tabled, a trendy theme emerges, or flimsy evidence is uncovered.

You will find that this approach works, especially in the long run. From time to time paradigm shifts will be talked about in publications and conversation. Take them with a grain of salt.

Previously published in July, 2011

Often Heard but Never Totally Understood

News casts frequently shout: “  markets do not like uncertainty” or “ uncertainty is causing market fluctuations”. These are strange comments  considering uncertainty is the only reason that markets exist at  all. A market is a summation of transactions.  For each transaction the buyer thinks the value will increase whereas each seller thinks the value will drop compared to other opportunities.  Both parties are actually uncertain of the outcome.

Consider these anecdotes.

An upward move in oil prices results in many conversations about hedging and reducing risk.  Is s this an opportune time to lock in a price now for future sales or purchases? If future oil prices were certain  there would be no hedging and an entire service industry would not exist. Imagine a world without hedge funds.

A potential Italian loan default rings in our ears.  Once again the cry goes out “ the market hates uncertainty”. This potential default pushes up bond yields. The bond buyers with guts will be rewarded with high yields that will reflect the greater uncertainty. They do not hate this uncertainty, they thrive on the opportunity provided by  it. The greater the uncertainty, the greater the opportunity. Imagine the financing of huge projects without a bond market.

Very recently the owners of Groupon sold a portion of their company via a public offering. By any standards, it was certainly a very successful transaction for the founders, the investment bankers and the lawyers.  In stark contrast, the subscribers bought the stock without the benefit of a value being set by the market. They bought it in the face of uncertainty. The value was yet to be set by the ruthless market. Their willingness in the face of uncertainty made the deal work. Imagine the financing of economic growth without a stock market.

Markets of any nature exist because transaction prices are fixed only when a deal is done. Perhaps “the market hates uncertainty” can become ” uncertainty drives markets”. Imagine capital markets without uncertainty. Boiled down further:  The essence of running any business, large or small, is the ability to make decisions in the face of uncertainty.

Originally published on November 13th, 2011

Chicken Big Says ” the Sky is Rising, the Sky is Rising “

A cousin of Chicken Little, Chicken Big has long been annoyed by the family’s reputation for spreading bad news. This practice has kept the Chicken family in a low income bracket. More often than not bad news trumps good news everywhere including the business community.

So Chicken Big has gathered a series of good news stories to improve the families fortunes, keeping in mind that good news are in the eyes of the beholder.

He starts by recalling the 2007 maelstrom concerning the default of certain asset-backed commercial paper. Now penalties of sixty million dollars that were levied against five financial institutions will be paid to investors who bought the paper.

Chicken Big relates a very good news story about Honeywell International and how the company went from one of America’s most messed-up firms to one of the best. Strikingly, many of its main competitors are American-firms such as United Technologies, Johnson Controls and Emerson-reflecting the country’s strength in high-end manufacturing.

He follows with Iceland’s story.  Only three years ago it was in a bigger mess than Greece appears to be now. Yet Iceland is back in business. It has emerged as a result of the International Monetary Fund’s assistance program and realized a 2.7% Gross Domestic Product growth in 2011.

He applies a very stringent set of performance criteria to global corporations. Presently 161 companies pass the screen. Over a twelve year period this same screen has yielded a range of 140 to 200 companies or an average of 160. The corporate world is doing OK.

He finds recovery in Ireland.  Investors who purchased the country’s sovereign bonds are rewarded.  The rescue by the European Union and the International Monetary Fund has stimulated the economy and lowered bond yields.

He points out that The Ford Motor Company has achieved remarkable milestones including an increasing presence in emerging markets, a balanced product mix, and significantly reduced labor costs. The company now enjoys consistently high levels of profitability

The United Kingdom car and van mileage has fallen over the past four years, partly because of a slower economy, and partly a long-run trend. People are traveling less often. This is not restricted to Britain.  Concurrently trips in the United States have also declined. Since 2002 motor vehicle miles driven have remained flat.

Chicken Big and Chicken Little were talking at a recent family beef barbeque in an effort to reconcile their differences. Philosophically Cousin Little relies on forecasting while Cousin Big relies on current hard evidence in making prognostications. For now at least no reconciliation seems likely.

By the way, the answer to last week’s quiz, Name this Company is Molson Coors.