Associated Capital (AC) – Split-off – 7%-8% expected upside

Current Price – $34.15

Exchange Price –  TBD

Upside – 7%-8% (expected)

Expiration Date – TBD

SEC Filling

This idea was shared by Paul.


Associated Capital (AC) will be offering shareholders the opportunity to exchange their shares in the company for shares in GAMCO Investors (GBL) at a discount to the market price. While they haven’t announced the exchange ratio and will not adjust for changes in market prices, I believe they will offer a standard 7% discount implying a 7.5% return to the current price of $34.10 per AC share. Insiders do not intend to participate. Given the discount to economic book value, I believe that even in the event of proration, shareholder will do well buying AC stock.

AC has a dual class share structure. There are 4.5M outstanding A shares and 19.2M supervoting B shares mostly held by insiders. Only the A shares are eligible for exchange.

AC holds 4.4M shares of GBL, which if exchanged at current market prices would represent 78.5% of all A shares outstanding (adjusting for a 7% discount). AC does not intend to exchange all of their GBL shares, but does reserve the right to exchange for an additional 2% of AC A class shares if the offer is oversubscribed. My guess is they will redeem 20-40% of A class shares -high enough to materially reduce the float, but low enough to ensure full participation.

In October they decided after a corporate review to monetize their GAMCO stake by 1) exchange offer 2) issuance of a mandatory exchangeable note 3) GBL stock dividend or 4) outright sale of their stake. I believe they chose option 1 because it simultaneously reduces the float of AC at a discount to economic book value.

AC has been consistently and aggressively repurchasing shares since it was spun out of GBL in 2015 to highlight the value of their alternative investment platform. In addition GBL has repaid $200M of its $250M PIK note ahead of schedule, increasing GAAP book value. (The note was accounted for as a reduction in equity, actually decreasing book value). Despite this the stock hasn’t appreciated much. Given the small float (A class shares have a market cap of only $154M) and limited liquidity, the exchange offer offers a chance to aggressively and accretively accelerate their repurchases. I estimate economic book value at $40.84/share (GAAP book plus the value of the GBL note) vs a $34.10 market price, which implies a 17% market price discount. This is where your downside is protected. In the event of proration, the value of the remaining shares will increase.

Shares Redeemed Remaining shares New BV per share
             1,000,000           22,701,615         42.65
             2,000,000           21,701,615         44.61
             3,000,000           20,701,615         46.77
             4,000,000           19,701,615         49.14

This has the hallmarks of a slow motion takeunder by Gabelli. If the stock price of AC remains at current levels, I wouldn’t be surprised if all minority interests are taken out in a few years.


14 thoughts on “Associated Capital (AC) – Split-off – 7%-8% expected upside”

  1. Thanks for this idea. Couple questions:
    1) Any ideas on the timing? Once the exchange ratio is announced, I would expect majority of the spread to be eliminated right away, so guessing the timing correctly seems to be key in here.
    2) I struggle to understand the real purpose of the tender. Both entities are similarly sized and are controlled by Gabelli, so he is reducing float and minority holding in one the entities but increasing it in the other.
    3) How do you play this before the exchange ratio is announced? Simply long AC? Hedged trade can easily backfire in only 7%-8% expected differential.

  2. 1) The exchange offer should be forthcoming very soon. The pricing was fixed in 2017 (subject to amendment). Given the price action of AC in 2017 expected downside volatility is low.

    “Based on the closing price of the GAMCO Class A common stock on the New York Stock Exchange (the “NYSE”) on [______], 2017, the last full trading day prior to the commencement of the offer…”

    2) AC has a smaller non-supervoting float. GBL has 10.1M A shares and 19.1M B shares. Also GBL does not own a similar proportion of AC shares. Finally the undervaluation of AC is more obvious. The combination makes squeezing out minority shareholders and value creation for the remaining B shares easier..

    3) I am simply long AC (without hedging). Given the limited downside volatility, the possibility of proration, and the accretive nature of the exchange, I don’t believe hedging is necessary. Especially since AC will not suspend proration for odd lots.

  3. Hi,
    I think that your calculation of new BV pre share is wrong.
    If holders that will tendere AC shares get GBL shares owned by AC, the BV is also going to decrease together with AC share count, thus BV per share will increase only because BV is less than market value.
    It’s like buyback, but instead of using cash they use GBL owned by AC.

    • HI

      Yonatan nice reply!

      Are you from Israel?

      If so I would be happy to connect with you on Linkedin

      Yoav Zelikovic

      • I’m from Israel, my Linkedin account is not very active…

  4. Yonatan,

    Thanks for pointing that out. I’ve recalculated and the accretion is much lower. For 1M, 2M, 3M, 4M shares redeemed I get new book values of $41.25, $41.68, $42.16, and $42.69. Still an improvement, but lower than originally calculated.

  5. The price has spiked to about $36, what limit order would you suggest?

  6. Hard to say. I think selling into the tender announcement once the terms and ratios are set probably makes the most sense.

  7. Wonder why the shares of AC have not moved up? As pointed out, the tender offer should be a positive even for shareholders not tendering, given the reduction in shares of AC and increasing book value?

  8. Now the shares of GBL drops to 27.26, not much arbitrage. However I am thinking, should we wait and see whether there will be strong selling pressure after the exchange and see if it will become a good chance to buy GBL?

  9. Actually current spread is about 4.69%; 1.35*27.26=36.8/35.15=1.0469


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