P.S. I’ve now updated this comment in bold below
Canadian Tire’s shares CTC.A are down 3.2% after they announced they will buy back the 20% of their bank division that they sold to Scotia Bank some years ago. They are paying $895 million.
To me this could be quite a positive signal. Canadian Tire must not be experiencing or expecting a lot of credit card losses if they are buying back the 20% they don’t own. And they claim this will help them in their marketing . They will have more freedom.
The fact that they can come up with $895 million cash (some of it borrowed including at least $400 million) is also a reflection of management’s confidence and the company’s financial strength in my view.
Reading the press release I see Canadian tire will take a $328 million “charge” or $5.88 per share in its upcoming Q3 earnings report related to this transaction.
So would that be? My first thought was that it means they are buying this for less than book value. That would not be too surprising as a lot of smaller lending operations are currently trading under book value – for example Canadian Western Bank is.
I am not one to dismiss “non-cash” charges. But I think I can dismiss this one.
My initial theory was that because they (maybe) are buying the 20% at less than book value they have to write-down the value of the remaining 80% to the lower value. I’m not sure though. If this is the case, the more of a bargain they get in this purchase the higher the charge , which does not make sense. P.S. I saw later in the day this theory was wrong, Scotia Bank is recording a gain and it seems clear the sale was definitely above book value.
On the other hand I see that Scotia Bank’s equity in this operation was $533 million at the end of 2022. They are paying $895 million. Or $362million more than book. If that’s the case I would normally expect their assets to increase by $362 million with no loss. P.S. I now see that Scotia recorded a gain on the sale. If this 20% has just been proven to be worth more substantially more than book value, I would think that Canadian Tire’s existing 80% should be similarly worth more than book. I’m reasonably sure that this “Charge” is a meaningless accounting entry. Although it’s possible that the asset was valued much higher on Canadian Tire’s books versus Scotia’s. In the end, I think Canadian Tire should have explained why there was charge or loss on this transaction.
Overall I just don’t know why there is a “charge” with this transaction where they buy something at presumably fair market value.
Canadian Tire shares have been sliding probably based on expectations of weaker sales (slower economy and people struggling with inflation and higher interest rates and I suppose people bought all the bicycles needed during the pandemic) and possible credit card losses. That certainly may continue. But meanwhile the company has been well managed and has a great history and so this may be a chance to buy at a good price.
There was no conference call for this transaction and it may be that the analysts will have some reaction later today if they have not already.
It will be most interesting to see their Q3 results next week and the market reaction.
P.S. I also see that Canadian tire will be exploring strategic initiatives around its bank subsidiary in 2024. I suspect that may mean they could issue shares in it as a subsidiary. I highly doubt that they would be thinking of selling the division after just talking about the need to bring it under full control. If they spun off say 40% of it to the public they would still fully control it.