Current Price – $34.15
Exchange Price – TBD
Upside – 7%-8% (expected)
Expiration Date – TBD
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|
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.