Another rough day for Roots

Market thinks IPO price was too lofty

Day Two of trading in shares of newly public Roots Corp. wasn’t as bad as Day One. However it was another down day with the shares, sold in the IPO at $12, closing at $9.60. With 1.25 million shares being traded, activity also wasn’t as frenetic as on Day One, when five times that amount was turned over.

But negative reaction to the offering, which one month back was set to be priced in the $14-$16 a share range, continued.

One criticism focused on the relatively short period of time majority shareholder Searchlight Capital Partners, has been an owner: The New York based private equity buyer entered the frame two years back and now it’s selling a big part of its stake. By contrast, Aritzia Inc., which went public last fall, had been backed by Berkshire Partners for almost a dozen years before the public was invited to participate.

Another concern has focused on the offering’s seemingly inherent contradiction: it was pitched as a growth IPO (the marketing materials provided considerable information on growth strategies and three-year financial targets) yet all the shares being sold came from the selling shareholders. Accordingly none of the proceeds went to the company to implement that strategy. Or is it a strategy that doesn’t need cash?

Noted one wag: “Why on Earth do people assume that investors in general should be excited at the prospect of taking a PE guy out of his position at a big multiple or a huge profit, especially only after a couple years?” His answer was “maybe” at certain points in the market cycle, “but not now.”

Another concern has focused on the general decline in the use of road shows and branch visits, which used to be the preferred way to build a book of interest among retail investors ahead of an IPO. That process would generally take place outside the meetings with institutional investors. A call to Roots seeking comment on the issue was not returned.

The final reaction concerned the lack of information on comparable companies. While Roots did file a 41-page marketing materials document, investors were not made aware of how Roots was valued by the underwriters. We do know the market determined it wasn’t worth $12 a share.

M&A IN THE THIRD QUARTER The headline number — Canadian M&A deal value plummeted in by more than 50 per cent in the third quarter of 2017 to $63.5 billion — is one way to assess the situation. Another way is to note for the three months ended Sept. 30, 2017, there were 745 transactions compared with 742 for the corresponding period of 2016.

The link between these two statements is that, by definition, the mergers and acquisition business is lumpy, meaning the numbers for any one quarter can be affected on the basis of one large mega deal or a series of healthy-sized deals.

And the Q3 2017 numbers seemed lower because the Q3 2016 numbers were high: in that quarter Enbridge’s $61 billion acquisition of U.S. based Spectra Energy was announced. Without that deal, activity in Q3 2017 was about the same as it was one year earlier. For the recent quarter, there was a reduction — from 14 to 8 — in the number of deals above $1 billion, according to information prepared by Valitas Capital Markets.

Instead the bulk of the action has been in the midmarket, or deals of less than $1 billion. “Mid-market deal activity is robust,” said Jake Bullen, a partner at Cassels Brock.

The evidence: 326 transactions worth $23.9 billion compared with 367 transactions valued at $20 billion for the comparable period of 2016. For the first nine months deal volume is up (to 2,314 from 2,167) while deal value is down (to $214.3 billion from $266.6 billion.)