From today's (Oct. 30) Globe and Mail... Canada’s best-performing stocks are finding it’s better to buy growth abroad than expand at home.
Nine of the 10 top gainers in the Standard & Poor’s/TSX composite index in the past two years have used deals to help propel growth, including drug maker Concordia Healthcare Corp., technology company Constellation Software Inc. and convenience-store operator Alimentation Couche-Tard Inc.Returns have ranged from more than double to almost sevenfold, outstripping the 5.4-per-cent advance of the S&P/TSX composite, which came in 17th out of 24 developed equity markets over that time.
The number of companies that do deals to advance growth is expected to increase, spurred in part by Canada’s low corporate tax rate, said Ian de Verteuil, portfolio strategist at Canadian Imperial Bank of Commerce.
“They want to be based in Canada and they are not just selling out to the next guy who comes along at a higher price,” Mr. de Verteuil said recently. “They would say: ‘There’s no reason we can’t be predator rather than prey.’”
“[The growth-by-acquisition model] works until it doesn’t,” said Som Seif, chief executive officer at Purpose Investments Inc. in Toronto, which manages about $1.4-billion. “You don’t have a sustainable business model if you can’t grow the assets themselves.”
Jamal Baksh, chief financial officer at Constellation Software, declined to comment on the Toronto-based company’s business strategy. Mark Thompson, CEO of Concordia, said in an e-mail the company’s mergers and acquisitions model is tried and true, and stands the test of time. Couche-Tard CEO Brian Hannasch said his company is happy to be known for doing “smart” acquisitions.
A top example of the growth-by-acquisition model is Valeant Pharmaceuticals International Inc., which briefly eclipsed RBC to become the biggest stock in the country earlier this year.
Valeant’s stock has slumped 56 per cent in Toronto from an Aug. 5 high amid increasing scrutiny by lawmakers on the industry’s pricing practices and after stock-commentary site Citron Research accused it of using its relationship with Philidor RX Services, a mail-order pharmacy, to falsify prescription drug sales in the United States. Valeant has called the allegations “erroneous.”
CIBC’s Mr. de Verteuil counts 14 growth-by-acquisition firms in the S&P/TSX, including tech company CGI Group Inc.
Buttressed by a corporate tax rate of about 26.5 per cent compared with 40 per cent for the U.S., growth by acquisition firms have looked outside Canada for growth. In the process, they’ve returned 14 per cent on average this year, compared with a decline of 2.8 per cent for the S&P/TSX composite, according to a note dated Oct. 22.
On a three-year basis, the companies averaged a 33-per-cent gain versus 7 per cent on the S&P/TSX and a 15-per-cent advance for the S&P 500.
“Growth is in our DNA,” Couche-Tard’s Mr. Hannasch said in an e-mail.
“We are happy to be known for making smart acquisitions and for being an effective integrator, but we are never going to favour store count over profitability.”
Couche-Tard’s recent M&A includes a $860-million (U.S.) deal for The Pantry Inc., closed in March, that added about 1,500 stores in the United States. Including debt, the transaction had an enterprise value of $1.7-billion.
Both organic growth and acquisitions are important, Lorne Gorber, a Montreal-based spokesman at CGI Group said. “It’s not one or the other. The reason you do M&A is to make a broader, deeper platform you continue to grow organically, so they work hand-in-hand.”
Returns at Concordia, whose shares have come under pressure amid lawmakers’ focus on drug pricing, have still surged 584 per cent in the two years ending Oct. 23, making it Canada’s top-performing stock, according to Bloomberg data. The company completed five deals worth $5.6-billion including its purchase of Amdipharm Mercury Ltd. on Oct. 21.
Brandon Osten, chief executive officer at Venator Capital Management Ltd., said the issue with some of the acquirers, which are sometimes called roll-ups, is valuations.
“I can buy roll-ups in the U.S. for half the valuation of ones in Canada,” said Mr. Osten earlier this month.
His firm manages about $300-million (Canadian). “What happens if Constellation goes two years they can’t find anything they want to buy? Will it go to $260 because it should only trade 10 times earnings?’”
Constellation Software trades at about 69 times earnings, compared with about 20 times earnings for Spectrum Brands Holdings Inc., a consumer products company Mr. Osten owns and considers an example of a U.S. roll-up. He’s shorting Constellation.
Dany Assaf, co-chairman of the competition and foreign-investment group at law firm Torys LLP, said there’s nothing inherently wrong with roll-ups. “If your home market isn’t growing, you have to get creative,” Mr. Assaf said.
“It’s a strategy that’s been long overdue for Canadian companies, not only to be strong in your home market, but to also grow your geographic footprint.”