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Terra Nova Royalty acquisition of Mass Financial

September 28, 2010

OK, the picture is now coming into focus. It looks to me like the game plan from the start was to move ownership of pre-split KHD’s mineral resource rights into Mass Financial. But, Holy Cow! what a complex transaction. I guess there were some advantages, though; 1) Mass Financial gets its shares listed on a US exchange without going through the usual rigmarole, and 2) Mass Financial doesn’t have to put up funds to purchase the Wabash mineral royalty assets – instead they get both the royalty assets and a lot of cash (not only the cash on TTT’s balance sheet at the time of the split-off of the industrial services division in March but also the $50 million raised by the recent rights offering) for being taken over. I’m really alright with this because I was actually considering selling my TTT shares and replacing them with a position in Mass Financial. However, I wouldn’t be so ‘alright’ if I had already made the exchange!  Shares of TTT closed last Friday (10/23) at $7.00, while shares of Mass Financial traded (lightly) at $9.47. It doesn’t look like there was any insider trading here. Remember the offer is for TTT to exchange its shares (I assume newly issued shares as it doesn’t have enough treasury shares) for Mass Financial shares on a 1:1 basis. The offer needs to be approved by TTT shareholders, and a late October shareholder meeting has been scheduled. I don’t see why it shouldn’t be approved, there’s nothing unattractive from a TTT shareholder point of view. Mass Financial just announced that it earned $.48/share in the first 6 months of  2010, while TTT showed a loss for 2Q, with little prospect of earning any return on the mounds of cash on its balance sheet without a significant transaction.

The only thing I’m not clear about is why Mass Financial (MFCAF) shareholders should be overjoyed with the transaction, at least in the short run. They are giving up shares that Mr. Market was buying last Friday for $9.47 to get TTT shares Mr. Market was valuing at only $7.00? Not too attractive in my book. And given the market action yesterday, Mr. Market is still a bit confused. Mass Financial shares dropped $1.72 to $7.75 in yesterday’s trading (ouch!), but there’s still a significant gap between TTT shares at $7.16 and  MFCAF shares at $7.75. Maybe this is the transaction discount, as those like me are questioning why MFCAF shareholders would want to tender? Yes, and let’s remember that even if the offer is approved by TTT shareholders, the transaction is contingent TTT owning or acquiring at least 50.1% of MFCAF shares. And, why, again, will Mass Financial shareholders tender? On the Monday conference call Michael Smith was more than confident that a majority of Mass Financial shareholders will do so, leading me to believe that significant owners have already informally agreed. He also stated that the ’employees’ will own over 14% of the equity of the combined company, a large portion of which is controlled by him. [if we imputed all that ownership to Mass Financial pre-transaction, the ’employees’ just might own upwards of 40% of the equity in Mass Financial  – perhaps this was the reason for his confidence!].

I’m holding my position in TTT as is for the moment. As I said, I like this transaction as I wanted to buy into MFCAF anyway and I wasn’t so enamoured of TTT’s business prospects. I might be upping my position, though, if Mr. Market offers an interesting price over the next couple of weeks. Now I just have to decide what an ‘interesting’ price is!

The saga continues.

  1. Great blog and great series of posts on TTT/MFCAF/KHD. I mentioned your blog on my most recent post at, I hope you don’t mind (if you do, I’ll remove it). All the best!

  2. a canadian permalink

    Here’s how the game works:

    When MFCAF originally spun off, it was loaded with really good deals from the parent company (KHD/TTT).
    MFCAF owned Payment-in-kind debt.
    MFCAF owned call options on businesses that TTT owned.
    All of these great deals were carried on books at a value of 0. Even though they are worth a lot more than that.

    Michael Smith was actively trying to get people to underrate MFCAF and overrate the parent, especially on simple metrics like book value.

    Read MFCAF’s financials carefully. They settled the PIK debt early so that they can report paper profits, even though this doesn’t make economic sense for shareholders. If you had debt that is 4% and you can just let the balance grow and pay 4% interest on that, why would you pay it off early with cash? Invest it in stocks for the long run, collect the spread between stocks and the 4% debt.

    I think the end game will be Michael Smith pulling off the spinoff games for a third time. If MFCAF (now TTT) splits into two companies, buy the really unattractive spinoff.

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