Colabor Group Inc. (GCL) |
One year chart
As if on cue, Colabor (GCL) last week announced the sale of part of its wholesale division right after we wrote our update (but just before we sent it). The sale of Décarie Meats was in part what we were hoping for.
Sale proceeds are $20 million cash, which will be applied to debt.
The company won’t disclose what Décarie produced in revenues and EBITDA for competitive reasons, which is not uncommon. There will be some interest savings, perhaps $800,000/year, which will flow to the EBITDA line. That improves the equity valuation modestly.
But the improved balance sheet goes much farther in increasing the value of the equity, even though the market barely blinked when the deal was announced (likely because of market turbulence).
Here is what CEO Lionel Ettedgui said: “This sale is aligned with our plan to refocus our activities on our growing core business in the Broadline Distribution market, where we have, in our opinion, significant competitive advantages and important growth opportunities.”
To put that in context, Colabor operates two segments: Distribution and Wholesale.
Here is the breakdown in sales from the two segments for last year:
Distribution means distributing products to retailers or end-users. Most of the products are from third-party wholesalers, but some of it is from Colabor’s wholeasle division.
The Distribution division comprises two sub-segments: Broadline (this means selling general food and related items to restaurants, hotels, institutions like hospitals and food stores) and Specialty, which imports, prepares and processes meats and fish.
Wholesale comprises Décarie and Broadline. The company says Broadline has 25,000 customers, so we assume it’s bigger than Décarie, with a third to two-thirds split. We expect, therefore, that the lost revenue and EBITDA won’t be very big and will be more than offset by the positive effects of lower leverage and interest payments.
Intersegment Sales are those from one segment to another, and are double-counted in the gross number. They’re eliminated to get to the consolidated sales at the bottom. Intersegment sales are not insignificant in wholesale at 21%, and it’s reasonable to assume Colabor will continue to buy products from Décarie and resell them through its Distribution segment.
Given the CEO’s comments, we assume the rest of the Wholesale division will be sold too. Proceeds? Hard to say, but if our math is about right, we figure another $30-50 million, which would put the debt/equity ratios in a much more balanced position, allowing for a higher equity multiple.
It appears that the company’s plan is to expand the Broadline distribution business. The CEO says it’s growing and that the company has competitive advantages. Based on conversations with management we think that means having customer relationships and trucks driving by non-customers who could become customers. In other words, significant efficiencies. If one of its trucks drives by a potential customer the incremental cost of acquiring that customer isn’t very high. We understand the trucks aren’t always full as they make their deliveries, especially in Ontario.
Again, although the stock didn’t move much, it also hasn’t gone down, even as the market plummeted. This is good news and this deal advances the turnaround by a pretty big step. There is still much work to do and risks are still relatively high, but the value of the company has just gone up while its valuation has stayed the same.
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