There is a long list of Canadian entrepreneurs who have made private equity fund managers extremely wealthy.
Rather than try to scale up Lululemon Athletica Inc. LULU-Q, founder Chip Wilson sold the West Coast yoga-wear maker to private equity funds, which turned it into a $61-billion global brand. Ron Joyce cashed out at Tim Hortons, pocketing $600-million, and PE managers transformed the iconic chain into the anchor of a $32-billion fast-food empire.
Add Tricon Residential Inc. chief executive officer Gary Berman to the list of domestic CEOs who sold out, rather than scaling up. On Friday, the Toronto-based boss and board at one of North America’s leading rental real estate companies announced plans to sell the business for $3.5-billion to one of the world’s largest private equity funds, Blackstone Inc. BX-N.
Blackstone’s gain is Tricon shareholders’ loss. While Tricon’s performance has stumbled of late, triggering an activist campaign by a U.S. hedge fund, the company is perfectly positioned on a generational investment opportunity. Whoever owns Tricon is going to provide shelter to thousands of millennials who cannot afford to buy homes. Blackstone is poised to win this prize at a bargain price, according to analysts.
Tricon’s board and Mr. Berman – son of David Berman, the company’s co-founder – agreed to sell after Connecticut-based fund manager Land and Buildings Investment Management LLC took a stake in the company and began pushing for a review of “all options to maximize value” last October.
At the time, Tricon shares were trading at around $9. Lands and Buildings said the company was worth 65 per cent above this price.
In a nine-page presentation to an investor conference, Land and Buildings explained both the potential and problems at Tricon. Since its founding in 1988, the company built a portfolio of apartment buildings in Toronto and 38,000 single-family homes in the U.S. Sunbelt. The average age of a Tricon tenant is 39, and the average income is $97,000 annually.
For this demographic, at current interest rates, renting costs $2,300 a month, while owning a starter home costs $3,300. “Demand from outsized population growth of the millennial generation is driving a surge in single-family housing demand,” Land and Buildings said. “Single-family homes are likely to generate strong rent growth over the next several years.”
Tricon’s problems, according to Land and Buildings, started with renting all those U.S. homes for approximately 13 per cent below market rates, which the hedge fund called “poor revenue management.” Land and Buildings also highlighted “a misalignment between CEO pay and shareholder value creation.” Mr. Berman earned a total of US$19.8-million in 2022, making him one of the country’s best-paid CEOs.
Over the past year, Tricon stock significantly underperformed its peers, leaving the company trading at what Land and Buildings called “a steep discount to its net asset value.” That valuation caught Blackstone’s eye, and on Friday, it offered to buy Tricon for $15.17 a share.
“We are proud of the significant and immediate value that this transaction will deliver to our shareholders,” Mr. Berman said in a press release.
The takeover came at a 30-per-cent premium to Tricon’s stock price prior to the announcement Friday. Land and Buildings came out in support of the transaction on the same day.
However, analyst Brad Sturges at Raymond James Ltd. said Monday in a report the Blackstone bid is 15 per cent below Tricon’s net asset value per share. He said the offer is “reasonably fair in the context of the volatile interest rate environment.”
Analysts expect Blackstone will prevail, adding Tricon to its US$1-trillion collection of assets. The sale would confirm what the Business Development Bank of Canada flagged as a national economic issue: entrepreneurs who sell successful companies, and pull back on expansion plans when doing so, rather than trying to turn regional players into global champions.
“A significant proportion of owners who plan to exit their firms may not put enough effort into growing the business, nor be willing to take on enough risk to improve its performance,” BDC economists Tom Corner and Sylvie Ratté said in a 2017 report. “Such a cautious approach often has an unfortunate result, in that the company fails to reach its full potential value.”
Canadians love their Lululemon gear, Tim Hortons double-doubles and Tricon apartments. Private equity firms are consistently the beneficiaries of this brand loyalty.
Editor’s note: A previous version of this article referred Tricon co-founder David Berman by an incorrect first name. This version has been updated.