By Anthony Macdonald
Dollarama’s cash bid for the ASX minnow resulted in a big premium from a strategic buyer with no regulator risk – shut up and take shareholders’ money.
After limping along on the ASX for 20 years and getting less and less relevant to investors’ portfolios, the discount retailer has been hit on the backside by a giant Canadian rainbow. Dollarama, a Toronto-listed discount retailer with a $41 billion market capitalisation, wants to buy The Reject Shop for $6.68 a share, which is more than double the last close and 2½ times its share price at the start of the year.
As far as M&A deals go, this one is a gift.
It is all-cash, at a 112 per cent premium, releases franking credits to current shareholders, is funded, has zero regulatory risk, came together after only six weeks of due diligence and confidential talks, and is from a large strategic player that sounds genuinely excited to own and expand it.
You can fully understand why The Reject Shop’s board and its biggest shareholder, Ruffy Geminder’s Kin Group, have thrown their support behind it. Ten per cent shareholder Wilson Asset Management only found out about the bid on Thursday morning and loves the offer, too. Credit to the board and management team for attracting such an offer.
The deal means the discount retailer, unloved in public markets for most of the past decade, can exit the ASX gracefully. Management can hold their heads high, knowing their turnaround plan did more for shareholder value creation than investors expected, even if it was crystallised by a takeover bid.
Can we complain about the shrinking ASX? Not really.
The Reject Shop wasn’t big enough or exciting enough to attract widespread investor interest. It was illiquid, with nearly half of its shares locked up in the hands of three big investors, and stuck in a competitive Australian retail market. Its shares last traded at a miserable 2-times forecast EBITDA and 15-times expected earnings per share; most institutional investors will not even notice it is gone.
If the world was full of cashed-up Dollaramas, there would be no room for a listed Australian microcaps sector; the highest price wins and Dollarama is offering to pay more than anyone else has for The Reject Shop in three years and the sort of price that even bulls saw as unreachable for the next few years at least.
Did it happen accidentally? The Reject Shop CEO Clinton Cahn, a former UBS and TPG Capital operative from Melbourne, says his management team “fostered the relationship”.
He said he and chief operating officer Amy Eshuys went to Canada to see Dollarama’s industry-best operations in November, spending time in its head office, distribution centres, stores and with Dollarama management. Its stores sell nothing above $C5 ($5.56) in Canada, and it is a knockout success (with customersand investors).
Dollarama returned some time soon after with a bid – and the pair entered confidential talks and due diligence on February 7, according to documents lodged on Thursday morning. “Project Lennox” climaxed with the $6.68 a share bid, valuing The Reject Shop’s equity at $260 million. UBS advised The Reject Shop. Cahn didn’t want to talk about how the price got to $6.68 a share – he hopes to keep running The Reject Shop for its new owner and is smart enough not to rub their noses in it.
Dollarama says it wants to expand The Reject Shop. Its boss Neil Rossy, Canada’s reigning CEO of the year according to the country’s most widely read newspapertold investors he was attracted to The Reject Shop’s scale, market position and store footprint. He wants to grow its store count, work on its product offering, store layout and technology infrastructure, and try to replicate Dollarama’s success back home in Canada.
Will it work? Dollarama has done very well in Canada and has had success since buying its way into Latin America. The Reject Shop is a relatively small bet for Dollarama in financial terms, but offers the chance to take a sizeable toehold position in a new market.
Whether it works or not, The Reject Shop shareholders are happy to be on the selling side of the deal. Its shares were not getting to $6.68 each any time soon any other way, Geminder’s Kin had its foot on The Reject Shop’s throat, and the business was splashing around at the bottom of the ASX, which is not a nice place to be.
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