ORIX SELLS RESIDUAL STAKE IN
HOULIHAN LOKEYIn what has become a semi-annual event,
HOULIHAN LOKEYûSURFACEDû-ONDAYûWITHûANû
OVERNIGHTûBLOCKûSALE ûTHEûlNALûSELL
DOWNûBYû
Japanese parent Orix.
This time around, JP MorganûOFmOADEDûITSû
purchase of 3.38m shares at US$45.75, the
low end of a US$45.75-$46.00 range and a 1%
discount to the US$46.20 last sale.
Houlihan Lokey fell 0.7% on Tuesday to
US$45.87.
The sell-down was a clean-up for Orix,
which acquired a 70% stake in Houlihan in
2015 and took it public later that year. The
*APANESEûlNANCIALûMADEûCERTAINûITûWASûAû
clean exit by disposing of its remaining 8.3%
STAKEûONûTHEûBASEûDEAL ûMEANINGû*0-ûDIDûNOTû
HAVEûTHEûBENElTûOFûAûGREENSHOEûTOûHELPû
stabilise trading.
Orix has predictably sold down its stake
over time.
)NûBOTHû-AYûûANDû-AYû û'OLDMANû
Sachs executed block sales on behalf of Orix.
)Nû-ARCHûûITûWASû-ORGANû3TANLEY
*0-SûNETûWASûROUGHLYû53 ûONûTHISû
week’s sell-down, according to regulatory
lLINGS
Notably, aside from Houlihan’s IPO in
2015 and a marketed follow-on in 2017, this
ISû*0-SûlRSTûFORAYûONûAû(OULIHANûBLOCK
Houlihan Lokey is coming off a solid
quarter. Despite the seasonally slow quarter,
THEûlRMûREPORTEDûNETûEARNINGSûOFû53M û
or 65 cents a share, on revenue of
US$250.3m, thrashing both the bottom and
top-line consensus forecast of 52 cents and
US$231.2m.CAPSTEAD MORTGAGE ISSUES EQUITY
BELOW BOOKEmboldened by a dovish Fed, mortgage
REITs are beginning to wade back into
equity capital markets to fund new
investments.
CAPSTEAD MORTGAGE, a REIT focused on
short-duration residential mortgages, made
AûRAREûAPPEARANCEûOVERNIGHTûONû-ONDAYû
WITHûAû53MûBLOCKûSALE ûITSûlRSTûRAISEûINû
nearly a decade.
4HEûlNANCING ûNOTûSURPRISINGLY ûPROVEDûAû
bit more challenging than is typical given a
lack of investor familiarity in the name.
Credit Suisse, Bank of America Merrill Lynch
and JP Morgan shared risk in reoffering 9m
shares, nearly 50 days’ trading volume, at
US$8.60, a 3.8% discount to the US$8.94 last
SALEû-ONDAY
Pricing was below Capstead’s US$8.93
book value per share at June 30.
Capstead fell on the open on Tuesday and
mAT
LINEDûTHROUGHOUTûTHEûSESSIONûTOûCLOSEûATû
US$8.61, a penny above offer.Cannabis grower gets
smoked by dilution
CANADA Sundial Grower plunges 35% on Nasdaq debut
SUNDIAL GROWERS, a rapidly expanding Canadian
cannabis grower, provided a lot of positive signs
leading up to its Nasdaq stock market debut on
Thursday.
Hefty dilution from pre-IPO equity-linked
funding was not among them.
The company was able to increase the size
of the IPO to 11m shares, from 10m, and price at
US$13, the mid-point of the US$12-$14 marketed
talk.
Cowen, BMO Capital Markets, RBC Capital
Markets, Barclays and CIBC Capital Markets
provided all the body language of strength
late in the bookbuild, communicating
oversubscription and high-quality demand that
included anchors.
That the banks upsized, and set mid-point
pricing, seemingly confirmed the strength of
investor demand. A prolonged pre-open also
pointed to investor debate over valuation as a
signpost of an explosive debut.
It turns out, of course, that lengthy openings
can be a signal of hefty selling.
Sundial opened shortly after noon, versus a
10:20am New York slot, at US$13.01, one cent
above offer. It was straight down from there,
with the stock briefly finding support at US$9.35
around 1:00pm before avalanching to close the
session at US$8.48, 34.1% below offer.
Sundial is the third-worst debut of the year,
behind only the 37.2% day-one drop of Chinese
social media influencer Ruhn Holding in April
and the recently minted Wanda Sports (35.5%),
also from China, according to IFR data.
Like Ruhn – and unlike Wanda – Sundial
priced within the marketing range, suggesting
support.
Sundial’s rapid growth through acquisitions
and pre-IPO equity funding were obvious red
flags, in retrospect.
Following a series of acquisitions, Sundial
recapitalised in May by selling a US$93.2m
principal, 8% convertible bond. This is in addition
to the roughly US$30m principal, 12% CB the
company sold late last year.
Pre-IPO CBs are a poor construct to fund
growth, the reason being that holders are
inclined to short-sell the IPO to lock in their
returns.
Sundial’s 8% notes are convertible at share
prices above US$16.95 and its 12% CB at
US$4.08, so there are 5.4m and 7.4m shares
underlying respectively.
Holders of both CBs were given the option
to flush into equity, at least partially, but were
not obligated to do so – in the case of the 8s at
US$13.56, 80% of the conversion price, and the 12s
at US$3.13 as part of a “lock-up incentive offer”.
CB holders have incentive to retain dividend-
enhanced, more secure exposure by choosing
not to convert, and hedge to lock in their gains by
short-selling the common at the IPO price.
Dilution from selling stock so cheaply can
become expensive quickly.
There are 14.3m shares underlying US$122m
of CBs, depending on the extent to which holders
of the 8% CBs convert at the discounted level,
plus warrants also awarded to holders of the
12% CBs. Add the 11m shares, sold at US$11, and
the process has led to substantial dilution of
shareholders.
As an additional kicker, Sundial partially
funded its recent acquisition of UK-based herbs
and floral grower Bridge Farm with US$45m
of unsecured debt that converted into 2.4m
shares on the IPO. If the value of those shares is
less than US$45m in one year, there is a top-up
mechanism to compensate the seller, equating
to another 3.1m shares at US$8.48.A GLOBAL AFFAIR
Sundial currently sells premium cannabis
through distribution agreements in five Canadian
provinces. It plans to enter the Canadian edibles
business in December, after regulators outline
regulations for that market.
Sundial’s recent acquisition of Bridge Farm
Nurseries, a UK-based herb and flower cultivator,
will allow it to expand into cannabidiol (CBD).
The purchase gives it distribution channels with
retailers such as Tesco, Morrisons, Asda, Lidl,
Amazon and Aldi, with some having already
expressed interest in selling its CBD products.
Sundial is growing from an extremely small
base.
In the three months ended March 31, the
grower generated an Ebitda loss of US$5.5m on
net revenue of just US$1.5m. It estimates revenue
grew to US$18–$20m in the June quarter but
cautioned of significant net loss, based on
preliminary results.
There are high expectations, at least on the
part of the underwriting banks.
Sundial’s top-line is projected to grow to
US$500m in the full-year 2020.
The IPO values it at about 4-times EV/sales for
2020, a sharp discount to both Tilray (11.4) and
Canopy Growth (17), based on estimates of the
underwriting banks and Refinitiv data.
Stephen Lacey