Wilks running out of appeals to stop Calfrac debt plan
U.S. shareholder introduced counter bid to restructure Calgary fracking company
U.S. investor Wilks Bros LLC lost its cases in Canadian and U.S. courts this week to halt Calfrac Well Services Ltd.'s controversial debt-restructuring plan floated by its management and backed by Alberta's pension fund manager.
Wilks, a Cisco, Texas-based holding company that was Calfrac's second-largest shareholder with almost 20 per cent of the company's shares, had launched a counter proposal in August to restructure the company's debt and offered to buy the equity. The company has indicated it will appeal the U.S. court decision but it is likely out of legal options in Canada to push for its own restructuring plan for Calfrac.
Calgary- based Calfrac announced Wednesday that the Alberta Court of Appeal dismissed an application by Wilks to stay final approvals for a restructuring deal that will allow the heavily indebted fracking company to reduce its debt by converting bonds into billions of new shares. Calfrac also announced Wednesday it won a case asking a U.S. court to recognize its Canadian Business Corporations Act restructuring, despite Wilks's objections.
Wilks had argued in court that portions of Calfrac's convertible debt amounted to a “criminal rate of interest.” But the judge rejected that characterization and instead described Wilks proposal as “an attempt to obtain control of the Calfrac Group for an improper purpose.”
Wilks did not respond to a request for comment. But the company, owned by billionaire brothers Dan and Farris Wilks, had proposed an alternative recapitalization transaction that some shareholders and advisory firm Glass Lewis and Institutional Shareholder Services said was superior.
Wilks contested Calfrac's plan and made a series of alternative proposals, including a proposal to buy the company for up to 25 cents cash per share. Calfrac's proposal included a cash offer of 15-cents per share for investors who wanted to cash out during the restructuring.
Canoe Financial director and senior portfolio manager Rafi Tahmazian, who invested in Calfac, said he was “disappointed” with the outcome of the vote given the Wilks proposal “was a better offer.”
Canoe Financial owned roughly 2.5 per cent of Calfrac shares and a portion of its debt before the restructuring deal.
Shares in Calfrac have traded up since the vote and were trading at 32 cents each on Friday, but analysts say the company's equity is about to be diluted.
Investment bank Raymond James has an eight-cents-pershare target on the stock as there are 3 billion “deep-in-the-money dilutive shares” that have yet to be issued as a result of the restructuring, analyst Andrew Bradford wrote in a Nov. 12 research note.
“We're chiefly concerned that investors haven't fully internalized the degree of dilution embedded in the restructuring plan,” Bradford wrote.
Alberta Investment Management Corp. (AIMCO), which manages $119 billion in Alberta's public sector pension money, confirmed to the Financial Post that it voted in favour of the Calfrac management's proposal over the Wilks's offer.
AIMCO was Calfrac's third-largest shareholder at the time of the vote with 16.5 per cent of the company's shares and ended up swinging the acrimonious proxy fight away from Wilks and in favour of Calfrac management.
Calfrac's largest shareholder is the company's executive chairman Ronald Mathison, who controls 25 million shares through MATCO Investments Ltd. and a numbered company, according to company disclosures.
As new shares in Calfrac are issued, AIMCO'S existing equity stake will be diluted sharply. But AIMCO also owned $30 million of Calfrac's senior unsecured notes and may be able to offset the dilution by exercising its options on new shares.
AIMCO spokesperson Dénes Németh said in an email the firm would be able to convert its debt into shares but did not specify exactly how many shares it's entitled to or how its equity stake in the company would change as a result of the transaction.
AIMCO is also the co-owner of Glass Lewis, which had recommended the Wilks's offer.