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SPAC'd out: Everything you need to know about the next hyped-up investment fad – CBC.ca

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From house prices to tech stocks to digital art, the COVID-19 pandemic has had a counterintuitive impact on the prices of a variety of assets, driving many to record highs at a time when the economy is still reeling.

Now, some experts are warning about a niche type of investment vehicle that’s veering into bubble territory and in danger of bursting.

The investment in question is known as a SPAC, a special purpose acquisition company. While SPACs have been around for more than a decade, 2020 has proven to be a record year for them as investors explore more and more arcane fields in search of stratospheric returns.

Conventionally, a company would start out by slowly building out its operations to the point where it became profitable or showed enough growth to attract investor attention. The company may then choose to go public in an initial public offering (IPO), selling its shares to raise money to grow and expand further.

SPACs turn that process on its head, because they are essentially just a pool of money that already trades on the stock market, looking to buy up promising companies. SPACs are also known as blank cheque companies — they don’t do anything besides buy up companies that are either functioning businesses, or sometimes little more than an idea for one.

Celebs get in on the action

And business is booming. Almost 500 SPACs have gone public since the start of 2020, and they’re flush with more than $150 billion US in investor cash, data compiled by Bloomberg suggests.

The trend has gone mainstream, with celebrities from outside the world of finance jumping in. Former NFL quarterback Colin Kaepernick heads up one with the stated goal of investing in companies “that currently have or have the potential to generate a positive social impact.” Hip-hop mogul Jay-Z‘s SPAC is focused on cannabis. Retired baseball player Alex Rodriguez is the frontman for one worth $500 million US. The former slugger says his braggadocious goal is to build “the Yankees of SPACs.”

Some members of the investment community are now saying the SPAC hype has gotten way ahead of itself.

“I think it’s no different from any other asset bubbles right now,” said Genevieve Roch-Decter, CEO of Toronto-based investment firm Grit Capital, in an interview. “It’s all the phenomenon of cheap money being printed, and people at home with nothing to do playing the stock market.”

The more ephemeral and weird the SPAC’s focus, the more appealing. Anything to do with technology or “ridiculous ideas” like flying cars are de rigueur, she said, but “if you can value the company like boring old real estate, those don’t do well.”

Big upside for founders

Regardless of whether a SPAC ends up finding a good business to buy, its appeal is obvious for the people building it and then trying to curry favour from stock market investors. Many SPACs offer up to 20 per cent of the shares to sponsors and founders when they are set up as a way to generate attention and hype from mainstream investors.

A recent JP Morgan analysis suggests SPAC founders saw returns of almost 1,000 per cent on average, regardless of how the SPAC itself performs once it makes an acquisition. As Roch-Decter puts it, “they don’t have that much downside and tons of upside.”

The same can’t be said of retail investors buying in. Of roughly 100 SPACs tracked up to the middle of 2020, the analysis found less than a third of them saw their share price go up.

Those founder shares usually have far more lenient lockup periods, too. When companies go public via an IPO, there are normally stipulations that require insiders to hold their shares for several years, which conveys confidence in the business but also prevents them from flooding the market by cashing out, and pushing down the price for everyone else.

Most SPACs don’t have the same stringent requirements.

And that’s just wrong, according to Anthony Scilipoti, president and CEO of Toronto-based Veritas Investment Research.

“I buy the stock thinking the insiders are locked up for months and now I find out they can sell?”

Anthony Scilipoti, president and CEO of Toronto-based Veritas Investment Research, says the hype around SPACs suggests to him the bull market may be nearing its end. (Veritas)

While good businesses will always attract investment, Scilipoti says he thinks a lot of the SPACs coming to market today “will end in tears.”

He says SPACs have been around for a while, but have become overhyped during the pandemic, partly because there is a lot of stimulus money floating around the markets, looking for a place to go. “People have short memories,” he said.

The SPAC boom is primarily a U.S. phenomenon, but there are a handful of ex-SPACs on the Toronto Stock Exchange’s main index. One of them, Apollo Healthcare, raised $1 billion to much fanfare in 2015, and ended up deploying that money into three health-related acquisitions. The early returns were not good: from an initial stock price of $10 a share in 2017, Apollo was trading as low as 31 cents a share at one point last year.

The shares have since jumped to about $5 because of the frenzy over hand sanitizer, one of the products that Apollo makes, but Scilipoti says he thinks the shares “will probably fall 80 per cent again once the pandemic is over.”

A bubble ready to burst?

Roch-Decter says she worries about what happens to the stock frenzy once markets turn, which they seem to be doing. A Bloomberg index of SPACs has fallen by 10 per cent since the start of March, far more than the broader market.

Genevieve Roch-Decter, CEO of Toronto-based investment firm Grit Capital, says many retail investors have never seen a bear market, and she worries what happens once the SPAC hype dies down. (Genevieve Roch-Decter)

She says the same generation that made a fortune by holding firm with GameStop may be in for a rude awakening if the SPAC appetite weakens. While some high-profile, successful businesses got their start via SPACs, “a lot of these businesses don’t have revenue and the valuations are ridiculous,” she said. 

“Some will be successful like Draft Kings,” she said, citing the fantasy sports and gambling company that merged with a SPAC last year and has seen its value soar by more than 600 per cent since the pandemic began. “But there’s going to be a bunch of them that are just going to die.

“As long as everyone knows what game they’re playing, I’m fine with it, but I don’t think a lot of retail understands this.”

Scilipoti says the SPAC frenzy is being driven by the same forces pumping up many asset bubbles — and he’s seen first-hand just how intense the market frenzy has become.

“My 62-year-old physiotherapist is asking me what’s happening in bitcoin and what’s happening in GameStop, or if I’ve heard of some of these other … startup penny stocks,” he said.

“These are not things that happen at the bottom, [so] I know we are near the end.”

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Telus prioritizing ‘most important customers,’ avoiding ‘unprofitable’ offers: CFO

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Telus Corp. says it is avoiding offering “unprofitable” discounts as fierce competition in the Canadian telecommunications sector shows no sign of slowing down.

The company said Friday it had fewer net new customers during its third quarter compared with the same time last year, as it copes with increasingly “aggressive marketing and promotional pricing” that is prompting more customers to switch providers.

Telus said it added 347,000 net new customers, down around 14.5 per cent compared with last year. The figure includes 130,000 mobile phone subscribers and 34,000 internet customers, down 30,000 and 3,000, respectively, year-over-year.

The company reported its mobile phone churn rate — a metric measuring subscribers who cancelled their services — was 1.09 per cent in the third quarter, up from 1.03 per cent in the third quarter of 2023. That included a postpaid mobile phone churn rate of 0.90 per cent in its latest quarter.

Telus said its focus is on customer retention through its “industry-leading service and network quality, along with successful promotions and bundled offerings.”

“The customers we have are the most important customers we can get,” said chief financial officer Doug French in an interview.

“We’ve, again, just continued to focus on what matters most to our customers, from a product and customer service perspective, while not loading unprofitable customers.”

Meanwhile, Telus reported its net income attributable to common shares more than doubled during its third quarter.

The telecommunications company said it earned $280 million, up 105.9 per cent from the same three-month period in 2023. Earnings per diluted share for the quarter ended Sept. 30 was 19 cents compared with nine cents a year earlier.

It reported adjusted net income was $413 million, up 10.7 per cent year-over-year from $373 million in the same quarter last year. Operating revenue and other income for the quarter was $5.1 billion, up 1.8 per cent from the previous year.

Mobile phone average revenue per user was $58.85 in the third quarter, a decrease of $2.09 or 3.4 per cent from a year ago. Telus said the drop was attributable to customers signing up for base rate plans with lower prices, along with a decline in overage and roaming revenues.

It said customers are increasingly adopting unlimited data and Canada-U.S. plans which provide higher and more stable ARPU on a monthly basis.

“In a tough operating environment and relative to peers, we view Q3 results that were in line to slightly better than forecast as the best of the bunch,” said RBC analyst Drew McReynolds in a note.

Scotiabank analyst Maher Yaghi added that “the telecom industry in Canada remains very challenging for all players, however, Telus has been able to face these pressures” and still deliver growth.

The Big 3 telecom providers — which also include Rogers Communications Inc. and BCE Inc. — have frequently stressed that the market has grown more competitive in recent years, especially after the closing of Quebecor Inc.’s purchase of Freedom Mobile in April 2023.

Hailed as a fourth national carrier, Quebecor has invested in enhancements to Freedom’s network while offering more affordable plans as part of a set of commitments it was mandated by Ottawa to agree to.

The cost of telephone services in September was down eight per cent compared with a year earlier, according to Statistics Canada’s most recent inflation report last month.

“I think competition has been and continues to be, I’d say, quite intense in Canada, and we’ve obviously had to just manage our business the way we see fit,” said French.

Asked how long that environment could last, he said that’s out of Telus’ hands.

“What I can control, though, is how we go to market and how we lead with our products,” he said.

“I think the conditions within the market will have to adjust accordingly over time. We’ve continued to focus on digitization, continued to bring our cost structure down to compete, irrespective of the price and the current market conditions.”

Still, Canada’s telecom regulator continues to warn providers about customers facing more charges on their cellphone and internet bills.

On Tuesday, CRTC vice-president of consumer, analytics and strategy Scott Hutton called on providers to ensure they clearly inform their customers of charges such as early cancellation fees.

That followed statements from the regulator in recent weeks cautioning against rising international roaming fees and “surprise” price increases being found on their bills.

Hutton said the CRTC plans to launch public consultations in the coming weeks that will focus “on ensuring that information is clear and consistent, making it easier to compare offers and switch services or providers.”

“The CRTC is concerned with recent trends, which suggest that Canadians may not be benefiting from the full protections of our codes,” he said.

“We will continue to monitor developments and will take further action if our codes are not being followed.”

French said any initiative to boost transparency is a step in the right direction.

“I can’t say we are perfect across the board, but what I can say is we are absolutely taking it under consideration and trying to be the best at communicating with our customers,” he said.

“I think everyone looking in the mirror would say there’s room for improvement.”

This report by The Canadian Press was first published Nov. 8, 2024.

Companies in this story: (TSX:T)

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TC Energy cuts cost estimate for Southeast Gateway pipeline project in Mexico

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CALGARY – TC Energy Corp. has lowered the estimated cost of its Southeast Gateway pipeline project in Mexico.

It says it now expects the project to cost between US$3.9 billion and US$4.1 billion compared with its original estimate of US$4.5 billion.

The change came as the company reported a third-quarter profit attributable to common shareholders of C$1.46 billion or $1.40 per share compared with a loss of C$197 million or 19 cents per share in the same quarter last year.

Revenue for the quarter ended Sept. 30 totalled C$4.08 billion, up from C$3.94 billion in the third quarter of 2023.

TC Energy says its comparable earnings for its latest quarter amounted to C$1.03 per share compared with C$1.00 per share a year earlier.

The average analyst estimate had been for a profit of 95 cents per share, according to LSEG Data & Analytics.

This report by The Canadian Press was first published Nov. 7, 2024.

Companies in this story: (TSX:TRP)

The Canadian Press. All rights reserved.

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BCE reports Q3 loss on asset impairment charge, cuts revenue guidance

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BCE Inc. reported a loss in its latest quarter as it recorded $2.11 billion in asset impairment charges, mainly related to Bell Media’s TV and radio properties.

The company says its net loss attributable to common shareholders amounted to $1.24 billion or $1.36 per share for the quarter ended Sept. 30 compared with a profit of $640 million or 70 cents per share a year earlier.

On an adjusted basis, BCE says it earned 75 cents per share in its latest quarter compared with an adjusted profit of 81 cents per share in the same quarter last year.

“Bell’s results for the third quarter demonstrate that we are disciplined in our pursuit of profitable growth in an intensely competitive environment,” BCE chief executive Mirko Bibic said in a statement.

“Our focus this quarter, and throughout 2024, has been to attract higher-margin subscribers and reduce costs to help offset short-term revenue impacts from sustained competitive pricing pressures, slow economic growth and a media advertising market that is in transition.”

Operating revenue for the quarter totalled $5.97 billion, down from $6.08 billion in its third quarter of 2023.

BCE also said it now expects its revenue for 2024 to fall about 1.5 per cent compared with earlier guidance for an increase of zero to four per cent.

The company says the change comes as it faces lower-than-anticipated wireless product revenue and sustained pressure on wireless prices.

BCE added 33,111 net postpaid mobile phone subscribers, down 76.8 per cent from the same period last year, which was the company’s second-best performance on the metric since 2010.

It says the drop was driven by higher customer churn — a measure of subscribers who cancelled their service — amid greater competitive activity and promotional offer intensity. BCE’s monthly churn rate for the category was 1.28 per cent, up from 1.1 per cent during its previous third quarter.

The company also saw 11.6 per cent fewer gross subscriber activations “due to more targeted promotional offers and mobile device discounting compared to last year.”

Bell’s wireless mobile phone average revenue per user was $58.26, down 3.4 per cent from $60.28 in the third quarter of the prior year.

This report by The Canadian Press was first published Nov. 7, 2024.

Companies in this story: (TSX:BCE)

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