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It has been a while since I posted a site-wide update, so this one is quite long. Going forward these updates will be more frequent.
CURRENTLY ACTIVE IDEAS
After under-subscribed tender offer (3.5m shares out of 12m) company hardly has any other options besides continuing with the widely promoted recapitalization (debt raised to purchase equity) by launching another tender offer or doing open market buybacks. Company's reputation as an investment bank boutique is on the line if management is not able to carry out their own recapitalization plan. Shares currently trade only slightly above the previous tender price ($17.5/share vs $17.25/share). Company is likely to announce its plan re recapitalization shortly and I would expect this to lift the share price.
The MVC Capital approved tender offer to repurchase $25m of stock (approximately 11% of outstanding). Pricing and other details of the tender are still to be announced and tender is expected to commence in November. Activist's proposal for the company to concentrate on returning cash to shareholders in order to close NAV discount has been narrowly voted down. Announcement of tender details is expected to have a positive impact on the share price.
Valuation dates for this split-off transaction are approaching (10-14 Nov). Exchange ratio is currently close to the upper limit (5.66 vs 5.75). Over the last few days IB seems to have borrow available for shorting ETM.
CNTE tender has been extended twice (now till 15th of Dec) without providing any explanations, despite the initial tender ending up oversubscribed (however, not clear at which price point it was oversubscribed). I can think of two potential reasons for this: (1) management wants to attract more tendering shareholders in order to lower the tender price or (2) company is legally obliged to announce Q3 results (or any other pending news) before finalizing the tender so that shareholders have the same info as non-tendering management.
The spread for Yume/RTHM merger has widened from 6% to 10%. The borrow rate on RTHM stock has also increased from 1% to 10% (on IB) making this trade uneconomical and forcing me to close the position couple days after the write-up. Shares of both companies saw significant declines (-20%) over the last month without any negative news. Merger is still due to close in Q1 2018 based on the latest comments from RTHM.
The only development with regards to ZAIS going private transaction has been postponement of the annual shareholder meeting (no date set yet). Spread has narrowed significantly since posting, however all the risks outlined in the write-up still remain. Due to this, I will be looking to exit/reduce position in ZAIS.
Shareholder votes on the merger are set for the 17th of Nov. Proxy firms support the merger. If approved, merger spread is likely to be eliminated.
Tejoori has finally (after more than half a year of radio silence) announced that it will be cancelling shares and returning cash to shareholders. NAV works out at $0.63/share. Shareholder vote on resolution has been set for 22nd of Nov and requires 75% approval to go forward. I am not sure how easy it is to obtain 75% approval for microcap on AIM, which is probably the key reason why the spread to NAV is still at 20%.
The company is steadily continuing with its liquidation plan and over the last half a year disposed smaller properties for a total value of GBP10.4m (vs. remaining portfolio of GBP55m). On average all recent disposals have been done at 7.5% discount (taking account any sales related expenses) and based on my calculation NAV/share has declined from 0.43p to 0.42p. Assuming the same discount to NAV for the remaining portfolio, eventual liquidation proceeds would stand at 37p, which is still material upside relative to the current price of 31p. Company is expected to announce annual results in the beginning of December.
This has been a disaster since the new management has started on liquidation - every subsequent announcement has been a disappointment. The story has been widely document on other channels (see latest comments on the thread) and I do not have any special to add. Company should issue Q3 results shortly which will include the latest estimate of liquidation value. It will definitely be below the previous $9.21/share, but with shares now trading at $7.33 there is plenty of leeway. The only positive is that liquidation is progressing steady with large part of portfolio already disposed.
CLOSED TRADES (since the last update on May 2017)
GHL has launched tender for 40% of the outstanding stock. The shares of the company were trading at all time lows and management indicated that they will not participate in the tender. On top of that chairman and CEO both pledged to invest additional $10m each into newly issued shares at the same price as the tender. I reasoned that the tender is very likely to be under-subscribed and as a result of that the share price might jump after the tender results are announced. Even before the expiration shares traded above the tender price. The tender was only 30% subscribed and right after this was announced GHL shares jumped 10% resulting in 12% return over two week holding period
This was a bet that NAV discount for the closed end fund will return to historical levels after the issuance of new shares is finalized. After 1.5month the discount is still stuck at the same 6.5% level and therefore I have closed the position.
The technical sell-off after the failed merger made DEST very cheap even for a struggling retailer. Bankruptcy was clearly not on the table and the company was priced as if the bankruptcy is imminent. Despite declining sales and store closures over the last year company managed to produce positive FCF and reduce debt balance. My expectation was that DEST stock was under strong selling pressure from arbitrageurs unwinding their pre-merger positions rather than actual reflection of company’s valuation. Couple months later DEST reported somewhat positive results with lower decline in sales, continued cash generation and debt pay-down. Also it turned out that the acquirer from the failed merger still seemed to be interested in the company or it’s parts and started carrying out proxy fight. With this background DEST share price recovered resulting in 90% gain over 3 months.
Essex Rental was a struggling and over-leveraged crane equipment rental company. Over the last year the company had liquidated/agreed to sell both of its operating divisions and shareholders approved plan of dissolution. The proceeds for equity holders were expected to be in the range of $0.17 – $0.35 per share. As ESSX shares were trading close to the bottom of the expected distribution range, there was 67% potential upside with only 20% downside. Since then company made distributions of $0.2/share and a further amount of up to $0.08/share will be released over the next two years. At the write-up price ($0.21) shareholders already recouped almost all of the initial investment and stand to gain materially on the remaining stub.
Carl Icahn launched dutch tender offer to acquire TPCA at $38-$45 per share (likely a step towards taking the company fully private). Shares were trading at $42.5 at the time. A number of factors pointed that the tender has a very high likelihood of being under-subscribed and therefore priced at $45/share. As expected, tendered shares were accepted for $45/share, resulting in 5.5% return in month. Subsequently TPCA share price shot up to $47+ in expectation of higher upcoming offer from IEP Thus non-tendering shareholders received an even higher return of 10.5%.
Ferronordic was a non-listed company with a publicly traded preferred stock. Recently the company has initiated the process of launching an IPO, which would allow the preferred shares to get converted to common at 1300 SEK price. At the same time preferred shares could be redeemed by the company at 1200 SEK. The preferreds were trading at 1070 SEK at the time of write-up, offering 12% upside to redemption price and even higher upside to conversion price. Company successfully launched an IPO in Oct and preferred shareholders who opted for conversion will receive ordinary shares at 1300SEK valuation. Currently Ferronordic is trading 15% above it's IPO price, for a combined return of 40%. I closed the position prematurely (as I was expecting forced redemption), so my return is much more modest 10%.
OCB Bancorp was due to be acquired by BSRR – a far larger banking institution in Southern California – at $14/share. OJCB was at the time trading at $12.75, implying 10% spread. I attributed wide spread mostly low liquidity, low visibility and nano-cap nature of the deal. I saw limited risks of this deal falling apart – it made sense from business economics perspective and both sides seemed to be winning if the deal happens as planned. The largest question mark was OJCB shareholder approval, but with insiders owning 25% of the stock getting 1/3 of the remaining votes to approve the deal seemed very likely. As expected OJCB shareholder approved the transaction and as a result of that the share price shot up to more than $14, generating a nice 10% return in 3 months.
ADES is quite a complicated micro cap where the main value (and cash) is generated from tax credits of refined coal (RC) facilities. I argued that contractual cash payments from the tax credits part of the business are significantly higher than the current market cap. Management estimated these payments alone (almost fully FCF) to be worth $13/share undiscounted vs $9.8 share price. Big part of this cash flow was planned to be distributed to shareholders, including already announced tender offer, planned recurring dividend as well as any additional or incremental dividends. Further significant upside remained from unleased RC facilities and other parts of business. Thus we had a situation with a strong downside protection as well as material upside optionality. As expected management initiated recurring dividends, returned cash through tender offer and announced new leases for RC facilities. Within 5 months share price approched my target generating 23% return.
Third party (and existing shareholder) announced tender offer to purchase more than half of QIWI (Russian company operating in FinTech industry). Shares traded at 13% spread to the tender price and QIWI management did not object to the tender. Surprisingly the minimum condition for the tender was not met (only 25% of shareholders tendered) and the tender was terminated. QIWI shares started sliding down and there was no subsequent offer from the third parry. I waited too long before closing down the position, eventually realizing 25% loss on it.
This was an all stock M&A deal with a large 45%-75% spread. The biggest risk was the market price of the acquirer's (related Japanese holding company) shares as there no possibilities to hedge. Nevertheless, acquirer's share price seemed to be supported by the recently initiated dividend. Half a year later the merger happened at the initially announced exchange rate (which meant 70% upside at the time of the write-up), however the share price of the acquiring company has declined materially in the meantime, resulting in only 10% gain for PJF shareholders who liquidated newly received shares right-away.
China Digital TV has sold its core business and announced special dividend of $1.5/share. Due to confusion on the ex-dividend date the shares have traded below this special dividend level on a number of occasion (as low as $1.33/share). I reasoned that after the dividend distribution the remaining stub would still have c. $0.55/share in cash. On top of that the remaining business which has showed very high growth rates in the past and operated around break-even in the latest quarter should also have some residual value. With all of that I assumed that the stub is unlikely to trade below $0.35/share (same discount to cash as before the distribution announcement). $1.5 dividend has been paid out 2 weeks later (with no withholding taxes) and the stub traded in the range of $0.3-$0.4/share by the end of the ex-dividend day. Any investors that held out the position till the dividend payment realized generous 27% return in two weeks.