A tipping point for private equity
If global trends hold true, then investors will soon get a chance to buy a whole lot more of Dollarama, one of the best-performing IPOs seen in recent years.
Monday marked a tipping point in capital markets: For the first time in 16 years, global private equity funds are selling more companies than they are buying.
The deal that turned the tide came out of Cerberus Capital, which sold a health care company named Talecris Biotherapeutics to Spain's Grifols. According to data from Thomson Reuters, the $4-billion (U.S.) sale meant that for the first time since 1994, global mergers & acquisitions involving a private equity seller outweigh takeovers involving private equity buyers. On a value basis, funds have sold $67.1-billion of companies, year-to-date, and done $64.2-billion worth of takeovers.
Not too long ago - in 2007, to be precise - private equity funds were the market's black holes, sucking in every public company they encountered. Now, the funds are disgorging investments. What's changed?
Well, first off, the majority of private equity funds look to cash in their investments within seven years. So companies bought from 2003 to 2006 - all busy years for buyouts - are now considered ripe for harvest.
Then there's the sea change in the industry. Credit is no longer easily obtained. Refinancing is needed in many private equity portfolios. And a number of funds simply blew their brains out in the boom years, and are now attempting to liquidate portfolios.
Which brings us to Dollarama, a company that is already part of the trend toward cashing in winning investments.
Bain Capital, a successful Boston-based fund manager, bought Dollarama from the founding family back in 2005 in a $1-billion deal, much of which was debt financed. The buyout belongs in the hall of fame - it's been a huge winner for all concerned.
Dollarama is expected to turn in another strong set of results on Thursday, and that has analysts boosting their target stock price on the discount retailer. First-class performance will also pave the way for more stock sales from Bain Capital.
Dollarama is in the enviable position of boosting sales by both opening new stores and making existing outlets more efficient. The chain also opened the door to a whole new world of merchandise and profits when it began selling items for more than $1. These trends led top-ranked CIBC World Markets analyst Perry Caicco to boost his earnings forecast; he expects the company to post 26 cents a share in quarterly profit when results are published on Thursday, up from his old estimate of 22 cents. The one-year target price on the stock was boosted to $29 from $26 at CIBC. Dollarama closed Monday at $24.63 on the Toronto Stock Exchange.
Dollarama went public in October, 2009, at $17.50 a share, raising $300-million to pay down debt. Existing shareholders - Bain Capital and the management team - did not sell equity in the IPO.
The chain proved a terrific performer, with the stock rising steadily as investors began to take notice. That allowed Bain Capital and its partners to take $287-million off the table in April by selling shares at $24.60 each. This is a textbook example of how private equity can play public markets - first establishing the credentials of a portfolio company, then heading gracefully for the exits, as opposed to simply dumping a holding via an IPO.
Bain Capital still holds 30 per cent of the Montreal-based retailer - a stake worth $540-million. The last equity offering shows the private equity fund is a seller. The only question now is when investors once again get an invitation to step up for Dollarama stock, along with its merchandise.
Moves at Paradigm
Paradigm Capital deepened its coverage of mining companies last week by adding veterans of Falconbridge and Teck to its research team.
Employee-owned Paradigm hired former Versant Partners analyst Santo Ranieri to cover base metal mining stocks, one of the most actively traded sectors in the domestic market. Before working on the Street, Mr. Ranieri spent 15 years at Falconbridge. In addition, former Teck engineer Grant Moenting joined Paradigm as an equity research associate.
The hires at Paradigm continued this week, but in a different sector. Calgary-based energy analyst Mark Heim will also join the firm to cover international energy. Mr. Heim is an industry veteran who previously worked for Macquarie (and originally Orion). Mr. Heim will be Paradigm's fourth energy analyst.
See Andrew Willis's Streetwise Blog at ReportonBusiness.com
