If there is an embodiment of business achievement in this county, it may be Jim Balsillie. Yet the creator of the Blackberry, showered with wealth, seems still unfulfilled in his ambition. That he appears obsessed with acquiring an NHL hockey team can come as no surprise to most Canadians. Becoming a billionaire is nothing to sneeze at. But in Canada, real success stories require pucks and ice.
For this reason, it is curious to find Canlan Ice Sports trading at about one-quarter of the estimated replacement value of its 63 ice rink network. Home to over 60,000 adult hockey nuts and used at least occasionally by most of Canada’s half million juvenile players, Canlan’s ice rinks are amongst our nation’s trophy assets. But, tripped up by competition from civic arenas that price below full cost, and bearing a debt burden from a building spree that ended more than a decade ago, Canlan struggles for investor attention. Weak on a net income basis, but strong in assets and free cash flow, this business appears substantially undervalued.
Figure 1: In Canada, Real Success Stories Require Pucks and Ice
Company Background
Canlan Ice Sports emerged as a focused ice rink business in the wake of a commercial real estate bust in the late 1990’s. Its properties were carved out from a broader real estate portfolio controlled by Vancouver’s Barker family, who had been one of the early developers of the Whistler ski resort.
The company expanded aggressively in the mid-1990’s building six multi-rink facilities in British Columbia, Ontario and Quebec. However, the rinks never returned the anticipated profits. With a heavy debt burden, and highly seasonal cash flows, the company required frequent bailouts from the Barkers. Ultimately, the business has survived, but has never been an economic success.
The main difficulty in the business model of Canlan Ice Sports is the existence of hundreds of competing community-owned rinks. Operating on a cost recovery basis, which does not take into account the cost of arena capital, community rinks undercut the price levels which would support a reasonable return. A recently announced $500 Million Canadian government program to upgrade recreational facilities across the country seems likely to put further pressure on Canlan.
Figure 2: Stock Price Chart – Canlan Ice Sports (ICE.TO)
In reality, for the past fifteen years, Canlan Ice Sports has been a mechanism through which the controlling shareholders have subsidized the hockey playing public of Canada. As a father with three hockey playing kids, I offer no complaint. The Order of Canada has been awarded for less important public service.
Business Overview
Company revenues were $65 Million dollars in the recently completed fiscal year, which equates to about $1 Million per ice pad. Seventy percent of revenue comes from ice rental with the balance resulting from restaurant sales, pro-shop and other sources. About half of Canlan revenue comes from Ontario rinks with the rest distributed across Canada and a few American centres.
The company appears to be competently managed. Costs which can be controlled appear to be so. Canlan management have segmented their market well and built a successful offering for a middle-aged clientele. The Adult Safe Hockey League, a well-organized city-league with referees and online statistics, provides the business with most of its ice rental revenue.
With 13.3 Million shares outstanding and a $1.20 recent share price, Canlan has a miniscule $16M market cap. Adding in $50M of mortgage debt yields an enterprise value of $66 Million. Chief Financial Officer, Mike Gellard estimates the replacement value of owned facilities to be in the neighborhood of $250 Million.
Profit margins are relatively slim for a business with so much fixed asset base. Earnings before interest and taxes amounted to $7 Million in 2008. Net income, including a $1.7 Million tax recovery was $3.8 Million, putting a trailing 4X earnings multiple on the business.
Investment Thesis – Value in Earnings and Value in Assets
Even given its high degree of financial leverage and risks in the broader economy, Canlan’s 4X trailing earnings multiple looks low. However, when viewed as asset play, Canlan looks even more interesting. With 11 multi-pad ice facilities owned freehold, Canlan Ice Sports possesses 1.2 million square feet of serviced real estate in major metropolitan centres across Canada and in the Northern US. Were this real-estate deployed in the more mundane applications of merchandise warehousing, or refrigerated storage, on the surface it would appear to be worth considerably more.
Figure 3: Comparison of Canlan Real Estate Value vs. Other Uses
|
|
Price per Sq. Foot |
Sample Transaction |
Sample Price |
|
Serviced Warehouse (Canadian Metro) |
$75-150 |
Keuhne & Nagel ( |
$105/sq. foot |
|
Cold Storage Facility (Canadian Metro) |
$120-180 |
Kingsett Capital ( |
$156/sq. foot |
|
Canlan Ice Sports Portfolio |
$55 (EV at market) |
Vineland Arena (NJ – option) |
$57/sq. foot |
Sources: Avison & Young 2008/2009, Marketdepth analysis
If we capitalize the real estate at $100 per square foot, far below its apparent value as storage space for frozen meat, enterprise value for Canlan would soar to $120 Million and the equity might be worth more than $5.00 per share. It seems preposterous to consider converting these assets to cold storage, and no doubt in the short term such an option would be impractical. But somehow, whether it comes in the form of ice rink condos, frozen food storage or something else, Canlan’s real estate should eventually attract a much higher valuation.
Another potential avenue for monetizing Canlan’s asset base may well be in the area of naming rights or sponsorships. Canlan’s customers are a large and attractive demographic. As participants in a nation-defining pastime famous for inspiring intense emotions, perhaps Canlan’s clientele is open to the subtle influence of brand-based advertising. Would memories of a winning goal scored at age 11 in an Ice Sports rink last just as long if that rink were named the Tim Horton’s Centre…or the Nike Bauer IceHouse? Highly likely, in my view.
Figure 4: Selected Facility Naming Rights Deals
|
Facility |
Owner |
Sponsor |
Value |
|
Magna Centre (multi-purpose arena complex) |
Town of Newmarket, ON |
Magna International (& 6 others) |
$5.6M over 10 years (2006) |
|
WFCU Centre (arena) |
City of Windsor, ON |
Windsor Family Credit Union |
$1.62M over 10 years |
|
Telus Calgary Science Centre |
Calgary Science Centre Society |
Telus Inc. |
$9M over 20 years |
Source: Company websites
As Figure 4 shows, companies have paid large prices for Canadian naming rights well below the level of professional sports venues. One suspects a valuable corporate tie-up could exist for Canlan. The only question is whether the partner would be more interested in outright acquisition compared to a naming deal of similar dollar magnitude.
Summary and Target
Even on a status quo discounted cash flow basis, the current $16M equity value seems far too cheap for this business. A more reasonable cash flow value might be over $50 Million or $4 per share. See the attached simple valuation model for more detail.
However, adding even $5-10 Million for untapped alternative real estate uses and $4-6 Million for a corporate sponsorship or naming rights deal would bring fair value in the $60-70 Million range or $5 per share. Beyond this level, a much higher price might exist were Canlan to attract the attention of a less price sensitive buyer such as Mr. Balsillie.
On the downside, the presence of the Barker family’s 75% stake provides some hope of support for equity if operating income declines sharply due to the recession. Having propped up the business this long, one doubts the Barkers would let their stake go to zero on a covenant breach. With a very plausible tripling scenario and not much risk of a permanent loss of capital, Canlan presents an investment opportunity with odds stacked in favour of a worthwhile return.
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