Callidus Capital Update

Callidus Capital Corp. (CBL) released earnings for the first quarter of 2017, and the market hated it. Among the important metrics that were down year over year:

  • Revenue
  • Net income
  • Net interest margin
  • Earnings per share
  • Return on equity
  • Loans receivable
  • Assets
  • Cash flow from operations

I can’t pretend any of these numbers are good. I will say that they aren’t exactly unexpected though. We knew the largest loan was paid off in full, reducing loans receivable. We knew revenues were going down (based o loans receivable going down and previous quarters).

But as with my last update, there is some good news that can be found if you’re looking for it. In the result Callidus reiterated that the privatization process is on track, “The Company remains optimistic that it will announce a transaction on or about the end of the second quarter of 2017”, and the number of interested parties has been whittled down to six. ¬†Listening to the conference call Newton Glassman would not say that they still expected to receive $18-$22 per share, but he strongly implied it. I’m still betting on a takeout price of $18.

During the quarter Callidus returned significant cash to shareholders – mostly through debt reduction. Percentages below are calculated as: Dollars divided by market cap (50,210,000 shares outstanding x $14.83 May 4 closing price). And keep in mind these are yields in a quarter. I won’t extrapolate these over a whole year but you’ll definitely get the picture.

  • Dividends – Dividends on shares owned by Catalyst and Braslyn are paid out in shares, so the cash number looks off. But the 8% yield for a quarter works out to be 2% yield for the month.
  • Share buybacks – Share buybacks were nil for the quarter. Due to the above mentioned dividends paid with shares, outstanding shares increased. -1.6%
  • Debt reduction – Callidus reduced their debt by over $100 million.¬†13.5%

That works out to a shareholder yield of 13.9% in one quarter. I know reducing that much debt is an anomaly, which is the reason I won’t annualize this shareholder’s yield number. But I will point to this as another example of Callidus continuing to provide value to shareholders even in a down quarter. While assets and profitability went down, Callidus made sure to mitigate the negative effects by returning everything they could to shareholders.

Callidus remains an arbitrage play, but there should now be a reversion to the mean to somewhere around $16-$16.50 to reflect the likely takeover price and the discount to reflect risk a deal isn’t completed.

Disclosure: Long CBL.

12 thoughts on “Callidus Capital Update”

  1. you need to realize that just because the ceo *wants* a privatization to happen at $18-22, doesn’t mean it will…

    do the math – why would anyone pay that price? the NBF valuation was based on positive net income, a growing loan book and minimal loan losses. fast fwd 13 months and you have no net income, a loan book that has halved, and loan losses ~20-30% of gross loans. anyone who’d be willing to spend $300 mil is going to do some math on the current business and i’d be surprised if it comes out to $18-$22 share.

    it seems like you put more effort into your posts than actually *analyzing* your companies. the extent of your work is basically “the ceo said it would happen so it will”

    1. Fair criticism – perhaps I am putting too much faith in what management says.

      But again, I’m of the belief that new loans aren’t being made because they are going through this big restructuring, I have no doubts that new loans can and will be made, once the first goal of privatization is accomplished. As I replied to your last comment, I don’t consider all the loan loss provisions as lost money, the way you seem to. The company is still generating cash. The loan book may be smaller (a lot smaller than National Bank banked on), but the business itself is not substantially different.

      I don’t think that just because Newton Glassman has said Callidus will be bought out at more than $18, that it will. But I do believe that shareholders have a right to refuse offers they deem too low, and I think any offer under $18 will be rejected. Braslyn owns 40% of shares that will be bought out (not held by Catalyst), and was buying at prices over $18 as recently as March.

      Why would anyone pay that price? 17 different groups stepped up right away as soon as it was brought up that Callidus was up for grabs. Now there are six. Maybe the other 11 dropped out because they agree with you that this business is over priced. Maybe they were culled as part of the bidding process. The fact remains there are six groups that know more than you or I that are still bidding on this. Even just a takeout premium over the current share price would be close to $18.

      I intended this to be a quick update regarding a big drop in a stock about which I had written. That included summing up the conference call and earnings news release. It was not meant to include an in depth discussion of my thoughts on the buyout price. I wrote a longer piece on Callidus the first time I wrote about it, please read it if you want some proof that I actually analyze companies.

      Thanks for reading and sharing your thoughts, even if I disagree.

  2. There is likely not going to be a privatization at all. The financial metrics of this business don’t indicate only a down quarter but systemic risks. The company is mired in litigation with borrowers, fraud with a former senior officer, restatement of financials. Give it a break. It is is not happening. I would be surprised if this business lasts another year.

    1. What do you think of the fact that Joseph Lewis controls about 43% of the shares not owned by Catalyst and Glassman?

      Lewis is a multi-billionaire and I don’t think will easily accept a low offer. In fact, locking up his vote and shares would have to be a pre-condition to any take private announcement.

    2. Over 80% of shares are held by two groups, both of whom want privatization. I don’t see anyway that the company does not go private. Perhaps it doesn’t get bought for a price high enough to justify my investment, or perhaps there isn’t an offer by June 30th, but privatization not happening is not a worry of mine.

      The issues you bring up are real, but that is the cost of distressed lending, that’s why these loans are made at 20+%. Systemic to the business model, sure, but nothing that hasn’t been considered by management.

  3. Callidus elicites very polarized views when it comes to investing. People appear to be in opposing camps. It is either a good business that could be taken private shortly, or it is a terrible company that should be put out of its misery.

    The latter camp is no doubt the reason behind Newton’s strong desire to take this private. He has said as much in many articles, and in depth during the most recent conference calls. The lack of understanding by the investing public of IFRS rules, the time required to work with borrowers and build the company in a world that demands instantaneous success, and the risks that come with leveraged balance sheets does not make Callidus popular.

    To date, they have executed on 3 of the 4 steps to maximize shareholder value. Due to this polarization, for certain individuals, there is a very strongly held belief that the final step is not possible. The recent price drop has provided fuel to this position.

    Given the above, do you think that this will harden Newton’s resolve to secure a good deal for shareholders with the remaining, 6 or less, partners?

    Or do you think his desire to get out of the public domain will make him more amenable to a lower offer?

    Thanks.

    1. The aim of privatizing a public company does not translate into a premium. This is a story about lack of disclosure about loan losses, frauds that are blamed on a senior officer, frauds complained of by borrowers in almost every case , problems with financials, and many other reasons.Who cares who this guy Newton is? He is some litigation persona with a rough past who threatens to sue everyone under the sun who challenges a debate about his business. What does he have to hide? Why the aggression? If he has nothing to hide, there have an open debate. This business with all its troubles is not a business. My prediction is that it will be out of business in a year or two..

    2. I admit that listening to the call I thought that Glassman’s frustration might lead him to accept any old offer. But my original thesis this whole time was that the point of getting a partner, and not just Catalyst taking Callidus private, was to get a validation of the value of the business. If a company comes and pays $18/share for 33% of the company, Glassman can rightfully claim that Catalyst’s portion is worth $600 million +. I might be wrong to trust that Newton Glassman, a billionaire I have never met, has my best interest at heart and will do right by me. I do think that though. Between Braslyn and Catalyst holding so much of the company, I don’t see any way an offer I’m unsatisfied with is accepted, or even considered.

      And worst case scenario is privatization falls through, shares plummet, and I’m left holding a profitable lender yielding over 8% that will restart growing it’s loan book and is committed to buying back shares hand over fist. I won’t be mad at that outcome either.

      1. My thesis is based on the same premise. In about two months we should know the outcome.

        Thanks for sharing your analysis and commentary.

      2. Any analyst worth his salt knows that the dividend is not sustainable. It will be cut. Where is it coming from to pay shareholders when it is bleeding hand over fist. Poor underwriting and mess of fraud claims that remain undisclosed. The portfolio companies are in a mess. Instead of relying on someone’s word, do your own due diligence. It’s an outright tinderbox and Mr Boyer has lit the match.

  4. So now there is a supposed whistleblower Duane Morrison against his own firm. Sit back and enjoy the popcorn. This is only going to get more exciting.

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