Good luck being short a thinly-traded, fairly-tightly-held stock simultaneously as the issuer is starting your substantial issuer bid.
But this is the situation at Mainstreet Equity Corp., which “could be setup for a short squeeze,” based on one market participant.
Mainstreet intends to purchase up to 1.2 million of their shares at $36 a share – a cost that represents a 14.3% premium over the closing price at the time the program was announced.
If fully taken up, Mainstreet will expend $43.Two million and reduce its share outstanding by 11.8 percent based on 10.961 million shares outstanding by March 3.
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Mainstreet, whose rental revenues are split between Alberta (64.1 percent); BC (26.3 per cent) and Saskatchewan (9.6 per cent) is one thing of a rarity among public companies: Its current substantial issuer bid, which started now and is slated to end on April 12, is the second it’s made. In 2009 it bought back 4.132 million shares at $6.35 a share – which reduced its shares outstanding to 10.356 million.
Around the time Mainstreet announced its substantial issuer bid, the TSX released its consolidated short position report: that Feb 29 report showed Mainstreet’s short position had risen to 772,283 shares. 8 weeks earlier the short position was 683,468 shares. One year earlier (December 2014) the short position was 431,178 shares: in effect the short position has almost doubled over the past 14 months. At the end of 2013 the short position was a mere 194,874 shares.
So far that strategy has tended to paid off: since January 2015 the stock has tended – although not uniformly – to drift lower until news of the substantial issuer bid caused the stock to pop. It closed Tuesday at XX.
According to seasoned market professionals, reality can arise when the short seller – or perhaps a number of short sellers – decides to take their hoped-for-profits and canopy their positions. For example:
The stock is tightly held with four shareholders owning about two-thirds of the outstanding shares. The four are: Bob Dhillon, the founder and chief executive (who personally owns 37.66 percent; other insiders own 2.68 per cent); Calgary’s Mawer Investment Management (10.48 per cent); and Toronto’s Vision Capital and Vancouver’s Vertex One holding about 15 percent. That group are all long-term owners and are presumably not interested in selling their stock to help a short seller cover the position;The stock is thinly traded. Based on Bloomberg in the last 6 months the typical trading volume was 10,518 share – meaning it might take 74 days to cover the short position;It’s expensive for borrow stock to cover. One participant made calls concerning the price of borrowing 10,000 Mainstreet shares and was told it could be 11 per cent;The shares being bought represent a large percentage (about 24 per cent) from the float.
What does Dhillon, Mainstreet’s founder, have to say? Rather than berate rapid seller for having lost faith in the company, he thanked them. ‘I would like to thank rapid sellers for giving us a chance to do a substantial issuer bid so that we can create more quality for the shareholders.”
And that will occur because Mainstreet trades at a large discount to the net asset value.
bcritchley@nationalpost.com
