The insider trading report for the Sun Gro lands with a heavy thud. It also reveals one of the most curious trades you'll ever see, one that suggests there's a lot of value in Sun Gro's bludgeoned securities.
The fund produces and sells peat moss and other things for gardeners, greenhouses and landscapers. It's a good business. In the consumer end of the market, it's close to recession-proof.
You'll be fascinated to learn that North American peat moss reserves - the stuff comes from bogs, which are drained and "mined" - are all in Canada.
Sun Gro went public about eight years ago at $10/unit. It never really saw the light of day again. The units started to slide almost immediately and bottomed out under $2 in late 2008.
What happened? The company expanded aggressively, took on debt, distributed freely and, therefore, when the housing and credit crises started to unfold, the fund had to cut its distributions, which sent the units crashing.
What's interesting about this story is that the units were arguably cheap even before they crashed down to earth. I say this because the Belanger family of Rivière-du-Loup, Que., started accumulating the stock in the summer of 2007, when it was only 30 per cent off its IPO price.
The family has been buying ever since and now owns about 23 per cent of the stock. The investment is in the black now.
And why should we care about the Belangers? Because they own Premier Tech Industrial Equipment Group. And we should care about Premier Tech because it's the No. 2 peat moss producer in North America.
In other words, Sun Gro's principal competitor has quietly accumulated almost a quarter of its stock in the open market. It's a fairly safe guess that the Belangers know a lot more about peat moss than we value-hunting investors ever will. So what do they see in Sun Gro?
Creeping takeover imminent?
Jean Belanger, son of the patriarch and Premier Tech president, tells me it's an investment only. "We like management, we like the business, we like the company," he says.
Then why not buy the whole thing? If it made sense to go for the whole thing, he allows, they would. But he says they aren't thinking about it and haven't really. Will they buy more? We might, Mr. Belanger says, or not. Or sell. Or stand pat.
How many synergies would a combined company (with more than 50 per cent of the peat moss market) create?
He hasn't really thought about that, he says, with what sounds like a straight face.
Well, Sun Gro chief financial officer Mitch Weaver is pretty sure there'd be a synergy if Premier Tech made an offer for the rest of the company.
Mr. Weaver is no slouch. He and CEO Brad Wiens run a tight ship. They're executing a healthy turnaround, cutting costs, paying down debt and making the company lean.
Mr. Weaver says business is gradually turning around, although the meltdown in U.S. housing (which affects the landscaping business) has hurt business pretty badly and is still weak.
But the stock is still weak because it lost its shareholder base when it cut the distribution. In fact, this little orphan looks cheap.
Net income almost doubled in the recent quarter. Volume was up 9 per cent and revenues per unit too, but in U.S. dollars. In Canadian they fell sharply. The exchange rate remains a problem.
So might what could be a creeping takeover. A combined company would be a force in the industry, with lean costs and, I would assume, a little more pricing power. A combined company would not require two CEOs or CFOs though, but there's little to stop it should the Belanger family decide to pursue its course.
I should mention that IKO Enterprises, the shingle maker, has also been a big buyer of this stock in the past.
The nice thing about this investment is that even in the absence of a takeover, it appears the stock is a bargain, based on what knowledgeable industry people are doing. The upside might be quick or, more likely, slow to materialize. But it looks like upside there is.