ELF.TO - E-L Financial Corp. Ltd.

[SafetyinNumbers]

My understanding is that they might need a liquidity opinion on an SIB but they are easy to get.

 

I would think if they are planning or considering an SIB, the family would not front run it as that would be akin to insider trading. They also bought a lot of stock over the last year so the holdcos might not have much cash left.

 

 

[Rod]

If the capital gains tax rises in Canada from an inclusion rate of 50% to say 75%, it won’t be nice for all the deferred gains the Jackman companies are carrying.

[JPerez]

If the capital gains tax rises in Canada from an inclusion rate of 50% to say 75%, it won’t be nice for all the deferred gains the Jackman companies are carrying.

I'd confess I know little about the Canadian taxation system.

My understanding is that you pay the statutory tax rate to only 50% of the capital gains while the other 50% is exempt.

Is that correct?

In the case of ELF, deferred tax liabilities were 268 million CAD at year end 2019 in my understanding if the inclusion rate goes to 75% that would mean that an additional 134 million would arise immediately if you don't realize the gain before the inclusion rate changes.

There could be an additional impact in the investments in partnerships and EVT as they are not consolidated.

Those investments as far as I can see are valued at around 800 million CAD so even if they would have been purchased at zero  cost the maximum amount of increased liability would be 200 million additional gain at 26% rate so around 50 million CAD. 

Those two items would amount to around 50 CAD per share or 3% of NAV. It is something but hardly earth shattering.

Am I thinking about this correctly?

 

[JPerez]

After today's close I updated my model and my estimation of NAV as of the end of Q3 is 1540 CAD per share. (It is selling at nearly a 60% of a discount to NAV)

As per my previous posts I suspect somebody with a big block is still selling, today they sold over 1000 shares again through the day from the National Bank of Canada brokerage.

There has been no insider purchases for the last 4 months which is somewhat unusual given there is a motivated seller and that the insiders should have cash after the special dividend back in April.

I hope something happens to close the widening gap between NAV and the share price, but realistically this crazy discount could go on for years.

 

[SafetyinNumbers]

After today's close I updated my model and my estimation of NAV as of the end of Q3 is 1540 CAD per share. (It is selling at nearly a 60% of a discount to NAV)

As per my previous posts I suspect somebody with a big block is still selling, today they sold over 1000 shares again through the day from the National Bank of Canada brokerage.

There has been no insider purchases for the last 4 months which is somewhat unusual given there is a motivated seller and that the insiders should have cash after the special dividend back in April.

I hope something happens to close the widening gap between NAV and the share price, but realistically this crazy discount could go on for years.

 

It definitely could.

 

From a timing perspective if they are to announce an SIB, it may be the day after they release Q3 results in early November if it's consistent with the NCIB announcement timing.

 

If that is the plan, it would make sense that the family holdcos aren't buying stock since it could be seen as trading on insider knowledge. The family holdcos also didn't buy the stock between early December and the NCIB announcement in March, FWIW.

 

As I convince myself further, the family holdcos stopped buying stock in June of this year, a few weeks before ELF launched the $200m bond issue.

 

I guess we'll see what happens.

 

 

 

[no_free_lunch]

Jperez, there was the special dividend and significant share repurchases.  I really can't emphasize that strongly enough.  If the stock price languishes it should be to our advantage. I am holding. 

 

It is frustrating but interest rates are against them. That is playing a large role in the discount. There may even be some double discounts as book includes equities.

 

My main concern right now is inflation. I don't pretend to know when but it may creep in and I don't t know how well Insurance companies with fixed income securities do in that scenario. 

 

Safety, thanks as always for your thoughts. Its an intriguing theory.

[JPerez]

Results for empire life are out.

They earned 51 million for the quarter (16.9 % Roe anualized). 67 million earned YTD. ( 5.8% ROE anualized).

Quarterly dividend to elf comes to 22 million.

Pretty good results for the quarter.

Elf results should be out in a couple of weeks.

[SafetyinNumbers]

After today's close I updated my model and my estimation of NAV as of the end of Q3 is 1540 CAD per share. (It is selling at nearly a 60% of a discount to NAV)

As per my previous posts I suspect somebody with a big block is still selling, today they sold over 1000 shares again through the day from the National Bank of Canada brokerage.

There has been no insider purchases for the last 4 months which is somewhat unusual given there is a motivated seller and that the insiders should have cash after the special dividend back in April.

I hope something happens to close the widening gap between NAV and the share price, but realistically this crazy discount could go on for years.

 

Results are probably out today or Monday based on historical reporting patterns.

 

Hoping Jperez’s estimate is bang on like last quarter.

[JPerez]

Results are out NAV up to 1508 cad per share.

I was out by 2% in my model.

The model is based on the disclosures of the annual report so it gets more inaccurate as the year progresses.

Not bad results, they have grown book value year to date by 1.5% and that doesn't take into account the extraordinary dividend paid in march.

[NormR]

https://finance.yahoo.com/news/cansortium-inc-announces-management-agreement-200300423.html

 

"substantial issuer bid .. the Offer would be for approximately 4.0% of the total number of issued and outstanding Shares .. via modified Dutch auction ... (i) auction tenders in which they will specify the number of Shares being tendered at a price of not less than $650.00 and not more than $750.00 per Share in increments of $5.00 per Share, or (ii) purchase price tenders in which they will not specify a price per Share, but will rather agree to have a specified number of Shares purchased at the purchase price to be determined by auction tenders."

[no_free_lunch]

Thanks norm, jperez.  The market can ignore this as long as they want.  Buying back shares at less than half of book is very accretive to NAV.

[bizaro86]

https://finance.yahoo.com/news/cansortium-inc-announces-management-agreement-200300423.html

 

"substantial issuer bid .. the Offer would be for approximately 4.0% of the total number of issued and outstanding Shares .. via modified Dutch auction ... (i) auction tenders in which they will specify the number of Shares being tendered at a price of not less than $650.00 and not more than $750.00 per Share in increments of $5.00 per Share, or (ii) purchase price tenders in which they will not specify a price per Share, but will rather agree to have a specified number of Shares purchased at the purchase price to be determined by auction tenders."

 

Nice! Doubled my position today using sale proceeds from "risk on" names I lightened up (mostly AER). Looking forward to seeing it gap upward tomorrow.

 

I might be willing to take $750 for some of the new shares, but mostly can't see tendering at these prices. I suspect many/most current holders (that have lasted this long!) Will feel similarly. If I'm wrong and they get another big chunk at $6XX I'll be thrilled with the value accretion.

[StubbleJumper]

https://finance.yahoo.com/news/cansortium-inc-announces-management-agreement-200300423.html

 

"substantial issuer bid .. the Offer would be for approximately 4.0% of the total number of issued and outstanding Shares .. via modified Dutch auction ... (i) auction tenders in which they will specify the number of Shares being tendered at a price of not less than $650.00 and not more than $750.00 per Share in increments of $5.00 per Share, or (ii) purchase price tenders in which they will not specify a price per Share, but will rather agree to have a specified number of Shares purchased at the purchase price to be determined by auction tenders."

 

Nice! Doubled my position today using sale proceeds from "risk on" names I lightened up (mostly AER). Looking forward to seeing it gap upward tomorrow.

 

I might be willing to take $750 for some of the new shares, but mostly can't see tendering at these prices. I suspect many/most current holders (that have lasted this long!) Will feel similarly. If I'm wrong and they get another big chunk at $6XX I'll be thrilled with the value accretion.

 

 

Without want to tell you how to suck eggs, Canadian tax filers would need to look very carefully at the SIB circular to understand the income tax consequences.  Usually the tax treatment of a Canadian SIB is that there is a deemed dividend for the difference between the buyback price and the paid-up capital.  I have no idea what the paid up capital per share would be for ELF, but it could be something like $100 or $200 or some other trivial value, which could trigger a ridiculous $500/sh dividend.  Gross that up by 38%, take your dividend tax credit and then shed a few tears in your beer as the CRA gives it to you up the ass.  If you want to play the SIB, it will probably be best to free up some space in one of your registered plans so that the dividend tax becomes irrelevant.

 

What is interesting is that the SIB is effectively for ~25% of the non-Jackman float.  If that deemed dividend is actually ridiculous as I have speculated, there might not be very much uptake from Canadian investors whose holdings are in taxable accounts.  The higher-end of the tender price bracket is a real possibility, which would likely be a quick 10% gain for somebody playing the SIB in a non-taxable account.  I guess we will see the details in the filing in the next few days and will have a better idea of whether is a nice opportunity to make a buck from a one-month hold.

 

 

SJ

[bizaro86]

For sure - I'm a Canadian tax filer but this position is in an RRSP so a big deemed dividend isn't an issue for me. For non Canadian filers its even worse - if there is a big deemed dividend there will be Canadian withholding tax on it.

 

Even in non-reg for Canadians if there is a big deemed dividend there would be an offsetting capital loss. Some neat tax planning possibilities there for people in low tax brackets. Dividends attract very low to zero tax rates in the bottom brackets, because the credit effectively assumes a higher bracket. Someone who is in a low bracket this year (whether because they're in school, lost job due to covid, whatever) could manufacture a big deemed dividend, pay little to no tax, and carry the capital losses forward.

[no_free_lunch]

SJ, I did not realize any of this regarding the SIB.  However how are you coming up with these numbers?  I see them buying ~8% of the shares at most, so wouldn't the dividend be somewhere lower than 8%.

 

Based on this I may sell and repurchase in my tax sheltered account.  Up until now I have held in taxable as the dividend was tiny and it was a long term compounder.  Between this and the dividends I guess that is changing.

[bizaro86]

I think the deemed dividend will be huge - retained earnings is more than 90% of the equity here.

 

@nofreelunch the deemed dividend isn't based on how much of the company they buy back, its based on how much of the buyback is funded with paid-in capital. It's the tax version or WEB's "make your own dividend by selling some shares."

 

Basically they don't want to give capital gains tax treatment on payments that are equivalent to dividends.

 

 

[JPerez]

I don't know anything about the taxation of the SIB, but I am not that optimistic about the price the auction will settle at.

There has been big  blocks of shares offered to the market the last few months which has put pressure on the price.

My guess all along is that actively managed value funds are in liquidation mode due to the flow to passive and the underperformance of value the last few years.

This to me is what is affecting the price dynamics in the stock. Funds that took their time building a position years ago being careful not to push the price up are now dumping just to liquidate and it doesn't look to me that they are very price sensitive.

How long will this dominate the price of the stock is anybody's guess but I would think that ELF management has a good sense for it since more than likely they have been offering them those blocks through brokers the last few months.

[StubbleJumper]

I don't know anything about the taxation of the SIB, but I am not that optimistic about the price the auction will settle at.

There has been big  blocks of shares offered to the market the last few months which has put pressure on the price.

My guess all along is that actively managed value funds are in liquidation mode due to the flow to passive and the underperformance of value the last few years.

This to me is what is affecting the price dynamics in the stock. Funds that took their time building a position years ago being careful not to push the price up are now dumping just to liquidate and it doesn't look to me that they are very price sensitive.

How long will this dominate the price of the stock is anybody's guess but I would think that ELF management has a good sense for it since more than likely they have been offering them those blocks through brokers the last few months.

 

 

It's worth taking a look at past Canadian SIBs.  About half of them are undersubscribed (ie, no pro-rating) and the price is at the upper end of the auction range.  For those where pro-rating has occurred, mostly the proration has been 80%+ which pushes the auction price to the higher end of the range.  But, as always, there are no guarantees. 

 

It is not at all unusual for Paid-up Capital to be 10% or 20% of the buyout price, resulting in a deemed dividend that is 80-90% of your buyout value.  As I suggested, in the case of ELF, that could be a deemed dividend of $500/sh or higher.  Anybody who has bought these shares in the past 7 or so years and holds them in a taxable account would be far better off to simply sell them on the open market and pay a capital gains tax on their modest increase in value.  As an example, if you bought the shares on May 1, 2015 at $660/sh and this SIB pushes the market price up to, say, $710 you'd only pay capital gains tax on 50% x ($710 - $660), which might come out to about $10/sh of income tax.  On the other hand, if there is a deemed dividend of $500/sh, you pay income tax on 138% x $500 minus your dividend tax credit.  If you make decent money, you'll pay 40% tax on the grossed-up dividend and only get a 20% tax credit, which could have you paying $140/sh or more in income tax if you dispose the shares through a tender.  Tax filers who have a decent income and hold the shares in their taxable account would generally be nuts to tender.

 

The people who might tender are those who have a cost basis that is extremely low (ie, they bought the shares decades ago) or people who hold them in non-taxable arrangements.  Usually only a minority of shareholders are in that position.  In the case of ELF, it is proposed that 4% of the 20% non-Jackman float will be re-purchased, or a bit more than 20% of the free float.  Are 20% of the shareholders in a tax situation that enables them to rationally tender their shares?  My guess is that few will subscribe to this tender, and the tender price will be $725+, but there are no guarantees.

 

It will be interesting to see the SIB circular to confirm that the Jackmans will not tender and to see the PUC and deemed dividend.

 

 

SJ

[no_free_lunch]

I see.

 

SJ, if I do not tender my shares there is no dividend for me then, correct?

[StubbleJumper]

I see.

 

SJ, if I do not tender my shares there is no dividend for me then, correct?

 

 

Correct.  The deemed dividend only applies to the shares that are disposed through the tender (assuming that there will be a deemed dividend).

 

 

SJ

[Maple Fun]

proxy out on sedar. paid-up capital only $18 which means a deemed dividend at least $632 or even $700+ per share.

That's HUGE for a taxable account...so unless you are using a registered account or in a very low tax bracket, tender seems unwise.

[no_free_lunch]

proxy out on sedar. paid-up capital only $18 which means a deemed dividend at least $632 or even $700+ per share.

That's HUGE for a taxable account...so unless you are using a registered account or in a very low tax bracket, tender seems unwise.

 

My dream scenario is the price drops for this very reason.  I then pick it up in my tax sheltered and tender.  I have known this one for awhile, it seems a fairly safe arb.  At current prices, it's not that lucrative so I will wait.  Maybe we get a drop.

[Maple Fun]

proxy out on sedar. paid-up capital only $18 which means a deemed dividend at least $632 or even $700+ per share.

That's HUGE for a taxable account...so unless you are using a registered account or in a very low tax bracket, tender seems unwise.

 

My dream scenario is the price drops for this very reason.  I then pick it up in my tax sheltered and tender.  I have known this one for awhile, it seems a fairly safe arb.  At current prices, it's not that lucrative so I will wait.  Maybe we get a drop.

 

I hope so but it may never happen...Taxable investor can simply sell shares on the market if they want to and many institutions (pension, endowment, etc) are tax exempt so they can play the tender arbitrage here.

[JPerez]

I read the proxy, and you were right the deemed dividend issue makes it impossible to tender shares for an individual investor holding the shares in a taxable account.

What the tender will do for the share price is partially or totally eliminate the overhang that active funds selling has had over the shares the last few months.

The price of the tender is not attractive at 50% of NAV at the top of the range but some funds will use the opportunity to get out

[Simba]

For sure - I'm a Canadian tax filer but this position is in an RRSP so a big deemed dividend isn't an issue for me. For non Canadian filers its even worse - if there is a big deemed dividend there will be Canadian withholding tax on it.

 

Even in non-reg for Canadians if there is a big deemed dividend there would be an offsetting capital loss. Some neat tax planning possibilities there for people in low tax brackets. Dividends attract very low to zero tax rates in the bottom brackets, because the credit effectively assumes a higher bracket. Someone who is in a low bracket this year (whether because they're in school, lost job due to covid, whatever) could manufacture a big deemed dividend, pay little to no tax, and carry the capital losses forward.

 

"The amount paid by E-L Financial under the Offer for the Shares less any amount deemed to be received by

the Resident Shareholder as a dividend (after the application of subsection 55(2) of the Tax Act, if applicable, in the

case of a corporate Resident Shareholder) will be treated as proceeds of disposition of the Shares. The Resident

Shareholder will realize a capital gain (or capital loss) on the disposition of the Shares equal to the amount by which

the Resident Shareholder’s proceeds of disposition, net of any costs of disposition, exceed (or are less than) the

adjusted cost base to the Resident Shareholder of the Shares sold to E-L Financial pursuant to the Offer"

 

So the capital loss in a non-registered account is the closure price (say $750) less PIC ($18) = $732 capital loss?

 

I'm assuming this is an eligible Canadian dividend tax which has a lower tax rate?