March 5, 2014 Comments

On Wednesday, the S&P 500 was flat while Toronto was up 0.1%.

Element Financial was up 5.5%. Bank of America was up 3.2%.

Melcor will release its earnings next week, Wednesday March 12, probably after the close of trading.

I notice that Canadian Tire’s voting shares CTC rose 3.2% today to $135.50. This is a 36% premium to the non-voting shares CTC.A on Toronto. As far as I can see there is no justification for the premium. The voting shares are very thinly traded. My understanding is that for decades now there has been a provision whereby if someone were to take control of Canadian Tire by buying up the voting shares (which would have to be bought from the Billes family to get control) then the non-voting shares would become voting shares.

At last check the ownership of the voting shares was as follows: Martha Billes and her son Owen have 61.5% of the voting shares. The Dealers association owns 20.5% and the the profit sharing plan owns 12.2% of the voting shares. This left about 6% for the trading public.

There was no insider trading in these voting shares since at least 2008. Strangely the Dealers association has bought 1700 of these shares in late February. That’s a tiny amount considering that they own 702,000 such shares.

I don’t think the Dealer’s Association purchase explains the large premium which I believe has persisted for some years.

While it’s always possible that the scarcity of these voting shares will continue to cause a price premium, I would not hold the voting shares. I would be quite surprised if the premium persists in the long term. It may persist for years or it may collapse or be reduced at any time. Both the voting and the non-voting shares pay the same dividend, except it is one cent per year higher on the non-voting shares and the common share dividend is non-cumulative (it would not be made up later if it were ever skipped), while the non-voting dividend is cumulative.

The same situation existed, although to a much smaller extent, with Telus for years. It had a non-voting share that traded at a small discount. I had said buy the cheaper share the non-voting. Ultimately those were converted to voting and so buying the cheaper shares in the case of Telus was the right move. In addition to the cheaper price the trading liquidly was much better.

In Canada we have quite a few cases where both voting and non-voting shares trade. Generally the voting shares have low trading volumes and trade at only a very small premium. Each case may be company-specific. It surprises me that Canadian Tire has this large premium since its non-voting shares become voting on a take-over and since both types of shares are equal if the company is ever wound up (per note 28 of the 2013 financial statements). But, for whatever reason the difference has in fact persisted for quite some years.

“Scarcity” of the voting shares in my opinion provides absolutely no rational support for the premium. But I suspect scarcity has something to do with what appears to be an irrational premium.

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