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(B)(N) CTC-A Canadian Tire Corporation Limited

May 9, 2013

Deal Book. The Canadian Tire Corporation is planning to REIT-size itself in the fall (Reuters, May 9, 2013, Canadian Tire plans C$3.5 billion REIT, shares soar) in a deal anticipated to be worth $3.5 billion; and the grocery chain, Loblaw Companies Limited, also has one in the works for $7 billion in July (The Financial Post, January 13, 2013, Loblaw shares considered overvalued, appetite for REIT questioned); and names such as The Hudson’s Bay Company and Tim Hortons Incorporated (no, not right now, thank you) are also being bandied about (please see our Posts, (B)(N) THI Tim Hortons Incorporated, April 2013, and (B)(N) HBC Hudson’s Bay Company, November 2012, for more information).

Why not the Shoppers Drug Mart, McDonalds, Sears Canada, Target, the banks and all of their properties, and so on, and one begins to wonder why they own expensive and liability-prone real estate at all when they could be doing a lot more business online, like eBay or Amazon (please see out recent Post, (B)(N) AMZN Amazon.com Incorporated) ; the answer is that some of them do, and the real estate on which they built their businesses could now be thought of as just an investment for which they hope to obtain a non-negative, or even excess, real rate of return, over time, and, in the meantime, live in it, use it, or rent it out while they adjust their business models (or not).

A REIT (Real Estate Investment Trust) is, basically, a “reverse mortgage” – a way to sell the equity in our properties at the market rate, upscale if and when we can get it, and continue to live in or use them for our business until we don’t need them anymore (please see our Post, The Silly Season For Investment Advisers, April 2013).

Nor are the proposed REITs expected to be at arms length; the Canadian Tire Corporation is planning to retain 80% to 90% of the equity in their REIT at issue (ibid, Reuters) in order to maintain their brand and locations; and the Loblaw Companies, 80% of theirs; and the REITs will carry the debt and upkeep required to keep these properties functional for as long as they’re required for the purposes of the parent companies, or until they die for some other business reason (ibid, The Financial Post).

The Canadian Tire Corporation has two classes of stock: the Class A stock which is non-voting and numbers about 78 million shares at $82 today, up $8 and +12% on a volume of 2.5 million shares, which is about 20× the typical daily volume of 100,000 to 200,000 shares; and a controlling block of CTC shares that numbers about 3.4 million and is seldom sold but is also up today at $96 for a gain of $9 or +10% on a volume of 4,000 shares, in contrast to a typical daily volume of zero to several hundred shares (likely, “gifted” shares that the grandchildren don’t want anymore).

Today’s price spike is, of course, a “surprise” and blew away our short June call at $78 against our long position and so, we have to give up the shares that have been in the Perpetual Bond™ since $65 in January 2012, for a $13 or +20% profit. Oh well.

The dividend is $0.35 per share per quarter for a current yield of 1.8%, and the current Risk Price (SF) is $69 and our estimate of the quarterly downside volatility in the stock price is minus ($3); so, we ought to be able to buy them back at lower prices as more information becomes available on the restructuring which will pull almost all of the fixed assets ($3.3 billion net of an accumulated depreciation of $2.1 billion) out of the balance sheet and replace them with an “investment” in the REIT, and a REIT-held mortgage on the properties that the REIT is not able to pay for in cash, and some capital gains on the properties which will now be fairly valued.

Exhibit 1: (B)(N) CTC-A Canadian Tire Corporation Limited – Risk Price Chart

(B)(N) CTC-A Canadian Tire Corporation Limited

(B)(N) CTC-A Canadian Tire Corporation Limited

Canadian Tire Corp is comprised of two main business operations that offer a range of retail goods and services including general merchandise, clothing, sporting goods, petroleum and financial services.

(Please Click on the Chart to make it larger if required.)

From the Company: Canadian Tire Corporation Limited offers a range of products and services through retail brands and banners in Canada. Its Retail segment operates general merchandise retail stores in the living, fixing and playing, and automotive categories under the Canadian Tire banner; a chain of 87 automotive hard parts specialty stores under the PartSource banner; and as a retailer of gasoline with a network of 299 retailer-operated gas bars, including 294 convenience stores, 80 car washes, and 90 propane stations. This segment also operates clothing and footwear retail stores that consist of 347 corporate and 39 franchise stores providing industrial wear, men’s and women’s casual wear, and footwear under the Mark’s, Mark’s Work Wearhouse, and L’Equipeur banners. In addition, it offers e-commerce retailing through its Website; conducts a business-to-business operation under the Imagewear name; and engages in retailing sporting goods through 283 corporate and 212 franchise stores. The company’s Financial Services segment accepts deposits in guaranteed investment certificates and high-interest savings accounts; manages and finances credit cards, personal loans, and line of credit; sells insurance and warranty products; owns and leases real estate properties; and provides home services, such as garage door openers, HVAC, and central vacuum installation services, as well as hot water tank, garden shed, and painting service sales and installation services in pilot markets. As of February 21, 2013, Canadian Tire Corporation operated approximately 1,700 retail and gasoline outlets. The company was founded in 1922 and is based in Toronto, Canada.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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