I issued a scouting report on the restructured RF Capital Group (TSX – RCG) on Feb 15. (https://dtm5.com/2021/02/15/rf-capital-group-scouting-report/)

What a difference a few weeks can make! A that time RF was trading at $1.82 in a nice bottom / consolidation pattern. One of my comments was I’d have to see a major share price decline, and a couple other things, to consider taking a position.

Well, it has been revealed that last Tuesday March 9th Canaccord Genuity Group (TSX – CF) made an unsolicited bid to acquire RF for a price of $2.30 a share, a 31% premium to market on that day. RF Capital rejected the offer outright with the comment that they are not for sale.

This is really interesting, and not altogether unexpected. The timing and strategy being deployed merit some thought.

My hope was that a market downturn would impact RF’s SP and push it down substantially (say 25-50%), making the price more attractive for me to acquire and totally de-risking the investment. Hence, at a valuation of $2.30, this kind of offer would deliver a meaningful ROR (50-70%) even if a deal didn’t go through, with very limited downside.

Alas, I the price didn’t come off and I didn’t acquire. But lets talk about the offer.

My opinion is that $2.30 is a fair price for RF capital as it stands right now; However it fails to take into account the potential of the company to grow over a 3-5 year period, as well as the synergistic scale value a company of this size would deliver to another large entity. Also, there is the question of paying enough to satisfy a firm in which every advisory team and all the management are shareholders with a vested interest in obtaining the highest price possible over a moderate to longer time frame. Who are bought into a new, fresh strategy.

So, in short the offer was an unsolicited cheapskate low ball. Strange. Considering everyone knows each other in the Canadian wealth management universe, you’d kinda figure someone would pick up the phone and scope this out before launching an offer, particularly one so mis-priced. This kind of deal needs to be done on a very high priced aggressive basis or on a co-operative, all parties are represented and satisfied basis.

Now I’m no genius. I’m trying to figure out what Canaccord was trying to do. Surely they knew that there was no chance their offer as it stands would be entertained. Didn’t they? Are they trying to put the company in play to encourage someone else to acquire their only independent competitor? Is it the opening bid in a potential negotiation? Is it just a ham-fisted waste of time?

In any case, it is verification that wealth managers with assets under administration are still highly coveted as acquisition targets. As i stated in my original scouting report The valuation of wealth management firms is fairly straightforward – and independent firms are always targets for consolidation. RF capital is, and will remain a target.

I figure an investment has been significantly de-risked by this development; There is still management and execution risk – but aren’t there always? Its very easy to model this being a $3-5 stock in a couple years given decent markets and continued acquisition interest. Or even $3-4 near term if someone wants to get serious about acquiring them. So, I’ve started building a position. Its not going to be a big position and it won’t make the ‘official’ DTM5 – It is going into a side account for now. Kind of the Junior League. But the feet are wet!

GLTA!