RF Capital hasn't been performing well ' but there's still some hope

Benj Gallander, Ben Stadelmann, and Philip MacKellar
March 29, 2022

Though the results were stellar for Benj’s portfolio in 2021, notching a gain of 41 per cent, he likes to remind himself that great overall returns can mask the regrets, mistakes and missed opportunities that prevented the sun from shining even brighter. They are not easy to overcome, and owning up and then letting go can be a difficult process.

Benj has one holding in his portfolio that has blocked out some of those nourishing solar rays. RF Capital Group Inc. was purchased in 2017 at $3.32 when it was known as GMP Capital. It looked to be a decent addition with an experienced chief executive officer who could lead the company higher. But the road in between these two corporate entities has been bumpier than expected.

In 2016, a lacklustre takeover of FirstEnergy Capital Corp. at $98.6-million turned out to be too generous and early. The prolonged slump in oil and gas – FirstEnergy’s bread and butter – was hitting them hard as resource prices fell. GMP was front and centre at the beginning of the new cannabis and crypto industry, playing host to conferences for the rush of new entrants. But those areas have been very volatile, and investors have yet to see the huge gains anticipated.

Then in 2019, GMP Capital agreed to a takeover of its capital markets operation by U.S.-based Stifel Financial Corp. This meant the capital markets business that focused on energy and commodities was gone, along with the U.S. cannabis arm. What was left was the Richardson GMP wealth business, of which GMP owned one-third. There was now a clear focus on expanding the assets managed for ultrahigh-net-worth clients. Unfortunately for RF Capital owners, the stock is down more than one-third since the deal was announced, while Stifel’s stock is up more than 50 per cent, riding the commodity wave higher. Buy high, sell low is not a recipe for success.

This transaction gave GMP about $198-million in cash to invest in expanding wealth management. That is a nice piece of change, if used correctly. But that remained, and remains, uncertain. Meanwhile, there was one immediate return in the shareholder swag bag: a special dividend of 27.5 cents a share. Benj appreciated that gift, but alas, it has not been repeated since, with not even a teeny, tiny dividend.

Then in February, 2020, a deal was announced to consolidate ownership of Richardson GMP and form RF Capital Group. It was revised in August owing to dissension from former executives but was completed in October. It worked out richly for Richardson GMP advisers and majority shareholder Richardson Financial Group. They received 30.7 per cent and 43.8 per cent of the shares, respectively. GMP minority shareholders such as Benj received about 25.6 per cent. But key to the deal was a $40-million share buyback of shares at $2.42. Benj jumped to sell, but alas, the offer was oversubscribed and subject to prorating. Only 22 per cent left our chip stack as shareholders raced to the sidelines. Yes, a loss but not as big as if the shares were sold now, with the stock sitting at around $1.70.

But the soap opera was not finished. One year ago, Canaccord Genuity Group Inc. made a $367-million, or $2.30 a share, cash offer for RF Capital Group. Canaccord CEO Dan Daviau said combining the two companies would create “the pre-eminent independent wealth business in Canada.” That is an exaggeration, but the combo would have had about $60-billion in assets under administration. That would have made it more of a player, to be sure. RF Capital “unanimously concluded” not to engage with Canaccord, stating the takeover proposal was not in the best interests of RF Capital shareholders, advisers and clients “in light of the considerable opportunities for Richardson Wealth in the fast-growing growth management industry.” Those opportunities have still not become visible.

Canaccord complained they were dismissed out of hand, without any engagement from the board. From Benj’s viewpoint, RF Capital – once again – made a poor decision and the board may have ignored its fiduciary duty to shareholders. Instead, it seemed to cater mostly, as he sees it, to the interests of the controlling Richardson family.

RF Capital is not exactly thriving as the March quarterly showed a loss of $2.4-million. More positively, revenue jumped 42 per cent from the same quarter last year. Assets under management sit at $36.6-billion, miles from management’s stated goal – “ambitious” they called it – to grow them to $100-billion. Does the top brass imagine they have a unicorn here?

Certainly, the share price will increase in the near future. How certain are we? This one is easy, as there will be a one-to-10 share consolidation. Management feels this will attract additional investors, and perhaps it is true as some institutions cannot invest in stocks trading at this lowly penny stock level. All other things being equal, the price should jump 10 times, but our experience shows that in the vast majority of circumstances, soon after a reverse stock split occurs, the share price sinks. There is little reason to think that will not be the case here.

This is a situation that no small investor really wants to be in. Minor league stockholders’ interests do not appear to align with the major shareholder, management and employees. It would be much easier to just click a few buttons and slink away with the hurt, moving on from this money-losing debacle. But there does seem to be some potential here. The best is that a competitor swoops in with a hunky takeover bid at a significant premium to the current price and the executives would be forced to negotiate. For Benj, the stock appears worthwhile to continue to hold for this possibility, more so than holding on for management’s vision.