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Activist investors, buoyed by record-breaking year, now looking at cannabis, energy industries, expert says

JEFFREY JONES, MERGERS AND ACQUISITIONS REPORTER

PUBLISHED 18 HOURS SEPTEMBER 15, 2019

Canada’s cannabis and energy industries look to be fertile ground for shareholder activism in the next year as investors agitate for executive and board changes at under-performing companies, says the head of a new proxy advisory firm.

Activist investors have already launched a record number of campaigns across all sectors this year with 30 in total, not including hostile takeover bids, according to a report by Toronto-based Gryphon Advisors Inc. That’s four more than in all of 2018.

Such companies this year as Knight Therapeutics Inc., HudBay Minerals Inc., TransAlta Corp. and Core Gold Inc. have been targeted in campaigns, with varying success rates. Company managements have had the upper hand, winning 58 per cent of the proxy contests. Last year, they won 54 per cent versus activists pushing for corporate changes, according to Gryphon’s statistics.

Cannabis companies, which have struggled to generate profits nearly a year after recreational marijuana was legalized in Canada, are likely to be on the radar of both activists and acquisitors, said Dexter John, Gryphon’s chief executive officer. Mr. John, a veteran of proxy contests, co-founded Gryphon and its sister company FrontLine Advisors Inc. earlier this year after leaving rival firm D.F. King Canada.

Licensed cannabis producers have bulked up with acquisitions in recent years, often funding deals by issuing stock. Investors are becoming impatient for returns in the sector.

“You look at the numbers and only a handful are actually profitable. The ones that are struggling to generate revenue and grow, what happens? They get taken up by the bigger players,” Mr. John said in an interview. “Also, the black market has not really been shut down, in Ontario in particular, so that kills the bottom line for those smaller producers.

“So your top five, top six firms will still be top five, top six, but you’ll see acquisitions beneath them and maybe acquisitions amongst them.”

Meanwhile, the oil-and-gas industry could start to recover after five years of downturn – assuming pipeline projects move closer to fruition and commodity prices improve. That will make under-performing producers vulnerable to activism, he said.

To date, shareholder activists have had a tough go in the oil patch, partly because the industry is so dependent on commodity markets and companies have a tough time selling assets to generate cash when their peers are also under financial pressure.

“But they’ve been beaten up so badly that some people might be welcoming an activist to come in to shake things up and generate some activity,” Mr. John said.

One trend in such investing is a sharp rise in “transactional activism,” or shareholders seeking to disrupt company management plans to acquire or sell assets. This accounted for 37 per cent of campaigns this year, up from 8 per cent in 2018.

Such situations include Catalyst Capital Group Inc.’s bid for the minority shareholding of Hudson’s Bay Co. in opposition to HBC executive chairman Richard Baker’s $1-billion bid to take the retailer private.

Toronto-based Catalyst acquired more than 10 per cent of HBC stock in its tender for $187-million, lifting its total stake to 16 per cent. Its interest in HBC, along with positions held by other dissidents, have made the odds of a successful offer by Mr. Baker and and his allies remote, at least at the $9.45-a-share price proposed. The minority shareholders have said the price is inadequate, based on the value of the company’s real estate.

Also this year, Montreal real estate developer Group Mach Inc. offered to buy 19.5 per cent of Transat A.T. Inc., with the intention of stopping Air Canada’s takeover of the airline. Quebec’s Financial Markets Administrative Tribunal blocked the mini-tender, but Air Canada subsequently raised its bid for Transat by 38 per cent. Despite the regulatory defeat, the move showed how a bidder could be pressured and it remains to be seen if the strategy will gain more traction.

“I think each corporation now has to engage with all shareholders, not just get two or three locked up [in favour of a deal],” Mr. John said. “To go smoothly you have to get those ankle-biters, so to speak, that will try to stop the transaction.”

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