In my recent article AutoCanada: An Easy Short, I demonstrated the overvaluation of AutoCanada (OTC:AOCIF) (TSE:ACQ). This thesis was recently validated when AutoCanada announced it was raising $200 million in equity. Beyond this, Canada One Auto Group (CAG) is selling $150-200 million of ACQ shares in a secondary offering. Both of these offerings are quite intriguing for different reasons, and will be investigated separately.
AutoCanada - Raising $200 Million in Equity
First of all, companies don't typically issue stock unless management feels the stock is overvalued. Since the CEO of AutoCanada is such a large shareholder, it isn't surprising that they are issuing so much stock. Management clearly feels they are getting a fantastic deal.
The amount of equity it is raising is interesting for a few reasons. As per the latest financials, the company had $203 million in equity, $264 million in floorplan financing, and $124 million in long-term debt.
The amount of equity being raised here is absolutely huge, relative to its capital base. $200 million will double the amount of equity capital in the company.
On the debt side, the company wasn't heavily indebted. Total indebtedness was $388 million, and it had total borrowing capacity of $770 million. That meant it had $432 million untapped on its credit lines.
With the proceeds, it will be able to pay off all of the long-term debt and a portion of the floorplan financing debt. This is the interesting part, because the company currently pays 2.37% on its floorplan financing. If this equity is raised at the same rate as last time, the investment bankers will take 4%. That's a cool $8 million in fees.
CAG Secondary Offering - $150-200 million
This is where the press release really gets interesting. CAG, the majority owner of ACQ, is doing a secondary offering of ACQ shares. Here is what the press release says:
CAG, AutoCanada's largest shareholder, is controlled by AutoCanada's Chairman and Chief Executive Officer, Pat Priestner. The proceeds from the Secondary Offering, net of costs and applicable taxes, will be distributed to certain shareholders of CAG, including Mr. Priestner. In addition to accomplishing estate planning objectives, the Secondary Offering will provide Mr. Priestner with funding to continue to support AutoCanada's plans to acquire GM dealerships.
So basically, Mr. Priestner is selling millions of stock. No big deal, as an owner, he has the right to sell, doesn't he? But wait a second, he isn't just selling, he's dumping a boat load of stock.
If one takes the time to calculate the numbers behind the press release, the CEO is selling between $115 million and $150 million worth of stock.
Don't tell me management doesn't agree with my previous assessment of the stock price. They are fully taking advantage of the high price to sell as much as the bankers can push on retail investors.
Not to worry, the press release goes on to smooth things over with investors.
Mr. Priestner remains fully committed to AutoCanada and will continue to have a significant interest in the Company through his ownership interest in CAG.
I sold the company, the CEO is selling the company, and senior management is selling the company.
That leaves the question, who would buy the company at the current price?
What do the bulls have to say now?
Disclosure: The author is short AOCIF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.