Asta Funding (ASFI) – Going Private – 7.5% Upside

Current price: $10.02

Offer Price: $10.75

Upside: 7.5%

Expiration Date: TBD

Press Release

This idea was shared by Paul.

 

CEO of Asta Funding Gary Stern submitted non-binding proposal to take the company private at $10.75. Sterns have been running ASFI since 1994 and own 60% of it. The offer represents 55% premium to unaffected price and is subject to approval by Special Committee as well as minority shareholders. Spread to the offer price stands at 7%, however timing is uncertain at the moment.

I think the likelihood of transaction closing as announced is very high. The spread probably exists due to non-binding nature of the offer as well as uncertainty regarding timing, both of which are expected to be addressed in the coming weeks. Seemingly large downside (-30% to unaffected price) also adds to this. Special Committee and minority shareholder approvals should pass without issues. Stern family's previous capital allocation decisions paint them as smart capital allocators who have tried to close the valuation gap and are unlikely to walk back on the current offer. Cash-out price of $10.75 appears to be a fair offer from minority shareholder perspective and makes financial sense for the acquirer.

Some background first. ASFI has three business lines:

  • Consumer receivables (70%) - purchasing and then collecting distressed consumer debt, mainly in South and Central America.
  • Social security disability advocacy (20%) - services helping people obtain disability benefits from Social Security Administration. ASFI earns 25% of claimants back money.
  • Personal injury claims (10%) - funding litigation for personal injury claims and receiving part of proceeds/recoveries if litigation is successful.

Company has no debt and operates profitably. Book value of equity stands at $89m (or $13.57/share) mostly comprised of:

  • Cash and investments ($60m);
  • Deferred taxes ($10.5m);
  • Investment in personal injury claims ($6m);
  • Prepaid and income tax receivable ($4.5m);
  • Investments in consumer receivables at cost ($2m, but with $27m fair value);
  • Settlement receivable ($2m).

As ASFI has been mostly balance sheet business, looking at the current offer from the BV perspective makes most sense. Gary Stern is acquiring the company at 0.8xBV multiple, which is basically the highest valuation this company has achieved in the market over the last 10 years.

BV history

With this in mind I do not think Special Committee or minority shareholders will object to the offer, especially if Special Committee will manage to push for a few more incremental cents.

From Stern family perspective the proposal makes sense as well - at $10.75/share they are only paying for relatively liquid parts of the balance sheet (cash+investments+income tax receivable+settlement receivable) and get other investments (consumer receivables + personal injury claims) as well as operating businesses for free. So there is definitely some room for an improved offer (but I am not counting on this).

Market has long been skeptical of Stern family using the company as its own piggy bank (the main concern on VIC discussion), but looking back Sterns have managed ASFI really well and created material shareholder value over the last few years. They have also returned $125m of cash to shareholders through dividends and buybacks compared to current $65m market cap.

Dividends and buybacks

This adds confidence that the current offer is real and that Sterns will proceeds with it. It seems that management has tried everything (large dividends / large tenders) to close the valuation gap, but market nevertheless remains skeptical. Then taking the company private at significant premium to market prices and extracting any remaining value for themselves seems to be the next logical step.

The main risk is obviously the offer getting cancelled or voted down by shareholders. I do not think shares will trade down all the way to $7 (unaffected price), especially in the case of shareholder rejection. Stern family is clearly signaling that business + balance sheet is worth more than $10.75. Also if current proposal fails to reach conclusion, I would expect either large special dividend or tender offer - in line with piles of cash returned to shareholders over the last few years.

16 COMMENTS

  1. Michael Lax

    This stock has pretty low volume and appears to be moving up a bit, probably due to this writeup. I decided to play it with options, wrote the January 2020 10 puts for .75, so as long as the deal does not fall apart by then, the trade should be profitable.

  2. Austin

    I think the odds this goes through are relatively high. Gary Stern knows exactly what he is buying. Both the Stern family and outside shareholders benefit here. The Stern family benefit via gaining full control of the company @ somewhat less than TBV. Outside shareholders benefit via being cashed out at a large premium to the price the stock was trading at before the deal was announced.

    This is a very small company that largely consists of cash and short term investments. Everyone benefits by Stern taking it private at a fair price (and I think this is a fair price) and turning it into a family wealth vehicle. This is a much, much better outcome for shareholders than the Stern family giving themselves raises and/or blowing lots of money on speculative joint ventures in South America.

  3. Slow

    According to the Company, there have been no public releases as to when this might close. Does anyone have any thoughts as to when that might be. (Obviously assuming the deal goes thru).

  4. dt

    Fantastic news – in the current environment I would have expected the offer to be revised lower, but here we even get a bump.

    4% spread still left with closing expected within 3 months.

    1. Fa

      Is there still a probability for the deal to break given the current environment ?

  5. dt

    Given the fact that the increased offer was announced already after the sell-off / market panic, I am tempted to think that it is unlikely the transaction will get derailed specific due to covid-19 issues. Buyer is CEO of the company and he knows the business intimately and most probably can project where it is going further better than outsiders. Also, at the moment ASFI is somewhat of a cash shell with consumer receivables and litigation financing businesses attached to it, so risk of BV erosion is small. And the buyer is paying only a small premium to cash on the balance sheet, so still very attractive from his perspective.

    Having said that, the spread now narrowed to 2%, and I do not think it is worth the wait.

    So I am marking this one as closed with 12% return.

    1. dt

      I am guessing Stern family will need far higher price than $13/share to agree to sell (however, RBF gives Sterns an option to maintain equity ownership)
      So not sure this will change anything, but if it does, I think it is more likely that Stern’s proposal is boosted again, rather than Stern selling to RBF Capital.

  6. dt

    Did some more digging on RBF offer but it did not help me to get any more clarity on how the current situation is going to play out. Judging by after-hours trading on Friday (only 5k shares), market is leaving less than 5% spread to RBF offer, which at the moment is far from certain.

    Firstly, on RBF:
    I think RBF’s offer is genuine. According to their website it is supposed to be ‘private family office’ focused on niche financial and insurance-related entities, however, at least their public portfolio of 363 holdings ($764m value) looks more like well-diversified index fund. RBF’s founder and CEO Richard Fullerton runs the company since 1996. But, this seems to be RBF’s first activist campaign (I haven’t been able to find any other case and this is the first 13D fillings), which doesn’t inspire much confidence.

    RBF’s Offer:
    Their proposal of $13/share comes after their April’s letter expressing discontent with Sterns’ $11.47/share offer, saying that ASFIs intrinsic value (which is based on conservatively calculated adjusted book value) clearly exceeds $17.17/share. And this figure does not even take into account the potential of ASFI to generate excess returns going forward. However, this value is largely based on Sterns’ continuing stewardship of the company. And from the way the letter is worded it seems that RBF is more interested in maintaining its equity position alongside Sterns rather than take the company private on its own. And they also know that Stern’s will not sell at $13/share. So it’s a bluff either to extract a slightly better price or to jump of Sterns train in taking the company private.

    Position of Stern Family:
    In the initial proposal Gary Stern has specifically emphasized that they won’t consider selling to any third-party buyer: “Additionally, in his initial proposal, Gary Stern stated that he was not interested in selling his shares in the Company to a third party or participating in any merger or other strategic transaction involving any third party, and did not intend to vote in his capacity as a stockholder in favor of any such alternative transaction.”
    Moreover, from the background provided in the proxy it seems that Stern family was really reluctant on increasing their initial offer – over the period of negotiations the price went up from the initial $10.75/share to $11/share, $11.05/share $11.25/share and then finally special committee asked for $11.64/share (I still have doubts on how conflicted/genuine the whole process with special committee was). After Gary Stern refused, both parties finally agreed to $11.47/share. Interestingly, even after the price was decided Gary Stern still expressed his dissatisfaction outlining impact from COVID-19 outbreak (although I think it is likely to be very positive for ASFI in the long term), but eventually still agreed to keep the offer: “On March 19, 2020, Mr. Stern called Mr. Slackman to discuss the impact of COVID-19 on the Company’s collection efforts with respect to several categories of receivables and Mr. Stern’s belief that an $11.47 per share offer price was not justified by the current operating and economic environment. Over the next several days, Mr. Stern’s counsel and lawyers from Tannenbaum had several teleconferences to discuss COVID-19, the merger process and the offer price. In the last of those discussions, Mr. Stern agreed that he would not withdraw his $11.47 offer or try to negotiate a lower price.”
    So overall, the chances of Stern Family bumping their offer above RBF Capital seems low. However, the previously mentioned option to retain their stake in the combined company together with RBF could come into play here (I am not sure how likely this possibility is).

    I think the most likely scenario is that Special Committee will reject RBFs offer simply saying that Stern Family is unwilling to sell, RBF knows that and therefore RBF’s offer can not be considered as a real proposal. Or something along those lines.

    I also do not think Sterns want to take RBF along for a ride in privatizing ASFI. RBF has been the second largest ASFI shareholder for some time (and invested in the company since 2011). So I am guessing Gary Stern and Richard Fullerton known each other already and any potential cooperation possibilities have already been considered (especially after RBF’s April letter).

    Now with RBF voting against $11.47/share offer the chances of the proposal passing are somewhat diminished (65% of remaining minority shareholders need to in favour), but I think the vote would still pass the threshold.

    Do others see this differently?

    1. Writser

      I more or less agree. Though I guess there is a chance that the Stern family ups their bid to placate minority holders. Also something to consider is that the RBF bid, even though it will very likely fail, might be a valuable asset in court when RBF exercises their dissenters’ right.

      1. Zulu Investor

        Nice update DT, appreciate it. My question is, what are the legal ramifications for “squeezing out” a minority shareholder. I mean what can RBF do? The Sterns own majority (60%) of the company and there is likely a lot of “related” owners to it (close family and friends). That part is more speculation. Fair. But it has an overwhelming control of ownership by insiders, regardless.

        I personally think its more of a bluff. RBF capital has 364 holdings with a 760m portfolio. So their average public holding is 2%. This buyout would make ASFI about 11-12% of their portfolio, which will make them very heavily concentrated in ASFI. They have 583,198 shares of ASFI, which is about 6.99m or a little less than 1% of their AUM. It seems to be a bit of a stretch to buy out the whole company given their tendency to diversify a quite a bit (and with mainly large caps which many can consider to be indices in their own rights.)

        1. Writser

          This buyout would make ASFI about 11% of their portfolio? I think you confuse market cap with company size. If they succeed in buying the company they can of course extract ~$10 / share in excess cash from the company.

        2. Zulu Investor

          You’re right. I was still thinking of them in terms of a stocks with partial interests and not full control over the company.

        3. dt

          I believe RBF also has private un-listed investments that are not part of 13F disclosures and therefore ASFI buyout might not be something out of the ordinary (but I have no info on RBFs private portfolio or how large it is)

          From their website:
          “RBF now has the flexibility and permanent capital to pursue private equity co-investments and whole ownership opportunities. ”
          “We ALSO continue to actively invest in public equity and debt markets”

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