Macro Enterprises, a Western Canadian pipeline construction company, was privatized by management on April 22nd at $4 per share. There is no shortage of bad behaviour in the world of finance, especially in Canada. I would generally avoid writing a story of the “can you believe management did x?”-variety because there are, unfortunately, so many of them. I prefer to look for situations with some spice, like the CEO of a company taunting activists in her stock by mailing them a children’s fairy tale or a short seller nearly destroying a sound Canadian bank only for it to be rescued by Berkshire Hathaway. The Macro buyout does not have the sizzle of those stories. It is remarkable only for the flagrancy with which minority shareholder wealth was confiscated by CEO Frank Miles and CFO Jeff Redmond.
The take-private transaction was announced on Valentine’s Day. The stock, which had been stuck in the low-to-mid $2 per share range for the prior two years, was to be acquired by the CEO and CFO
for $4 per share. The offer would be rushed to a vote on April 4th with the record date for the vote set at February 23rd, just over a week after the deal was announced, providing shareholders a limited window to mount opposition to the deal. The compressed timeline also meant that Macro could avoid reporting blowout Q4 results and robust guidance for 2022, instead burying this information in the 334-page circular. The Board did not run a process for the sale of the company; they did not explore whether other bidders were interested. Aside from the CEO, the largest shareholder was Gate City Capital Management out of Chicago holding 15%.
At the $4 acquisition price, the market cap of the company was $125 million. According to the March 4th circular, cash generation for Macro in the fourth quarter of 2021 was very strong, leaving the company with net cash of $40 million on December 31st, up from zero at the end of Q3. The circular also disclosed that Macro expected EBITDA of $71 million in 2022 on the back of several large pipeline construction projects meaning the purchase was occurring at an EV to projected 2022 EBITDA multiple of just 1.2x. No surprise management timed the deal to obscure this information.
The management group also wasn’t committing any additional equity to finance the acquisition. In fact, CEO Frank Miles would receive a cash dividend on close of roughly $30 million equal to $2.50 per share based on his 30% ownership. Net, the buyers would only be rolling about $15 million of equity into the purchase, financing the remainder with debt. In other words, if the financing being used for the privatization was put in place for the public vehicle, shareholders could have received a $3.60 per share cash dividend and continued to own the business (with about $75 million of net debt). As a reminder, the offer price was $4 per share.
Significant hard asset value in the form of equipment and real estate supported the acquisition borrowings. At the end of Q3, Macro’s tangible book value per share was $3.82 and CFO Jeff Redmond stated at the 2021 annual general meeting that valuing the company’s assets at market would increase per share book value by about $1. The valuation report prepared by Deloitte estimated fair value for the company of $3.75 to $4.65 per share, so the offer was at a 5% discount to the midpoint of this range.
Macro management made its initial offer to the Board on October 8th, 2021. On November 3rd, Director Wayne Albo resigned without explanation. Albo was one of only five Directors, leaving just CEO Frank Miles, former SVP of Macro Mike Nielsen, William McFetridge, a partner at Norton Rose Fulbright, legal counsel to Macro and Bob Fedderly, owner of Fedderly Transport, a supplier to Macro. None of the remaining Directors were considered independent. Albo’s resignation is especially troubling in light of his resume. The company’s 2021 management information circular describes him as, “…chairman of CCC Investment Banking…He is one of Canada’s foremost experts in valuation and transaction pricing…Mr. Albo is a lecturer and columnist on business valuations and mergers and acquisitions, and appears as an expert witness in these matters.”
On February 9th, mere days before the take-private agreement was announced to investors, Macro press released the signing of a new $160 million pipeline construction contract. The circular reveals that the takeout price was not adjusted for the signing of this deal, even though at the company’s average EBITDA margin of about 10%, the profits from this contract would likely add $10-$15 million of near-term cash generation relative to the $125 million acquisition price. The takeout also did not reflect the improved Canadian energy backdrop coming from higher oil prices and the invasion of Ukraine which occurred after the deal was announced.
Many disgruntled retail shareholders that I spoke with were looking to 15% holder Gate City to lead the pushback against the deal. Gate City did not make any public comments about the bid and the acquisition was approved on April 4th. As a TSX venture-listed stock, Macro was not required to disclose the vote totals from the special meeting as is standard for any TSX-listed company. I heard from someone close to the situation that the final tally excluding shares held by insiders was 57% in favour with only 62% of the minority casting a ballot
. That is not exactly a ringing endorsement of the deal and it’s not difficult to understand management’s reluctance to share this result.
Shareholders in a Canadian company can exercise dissent rights by appealing to the court for fair compensation in the event of an acquisition at an inadequate valuation. I considered pursuing this avenue, but decided against it because the process can be long and expensive, lasting years and potentially leaving the dissenter liable for as much as $1 million in legal and valuation expenses if unsuccessful. Though I believe the case would have been strong given the Board did not run a process and there was meaningful shareholder opposition to the deal, the potential upside through a dissent process did not justify the investment of time and capital that might be required.
So there we have it. Through a process that can only be described as a disgrace to good corporate governance and reasonable valuation standards, Frank Miles and Jeff Redmond have lined their pockets at the expense of minority shareholders. Miles was already worth tens of millions through his holdings in the public company. But Redmond, the apparent architect of the deal
, may actually be able to turn an equity investment of less than $500,000 into $10 million or more in the span of 2-3 years. Next time, maybe I’ll try the dissent rights…