Performance – June 2021

Our tracking portfolio generated 9.5% return during June 2021 and 46% year-to-date. A detailed performance breakdown is provided below.

We have posted 15 new special situation ideas during this month. A total of 18 ideas were closed during the month with the two key highlights being AMC options trade (+100% in 2 weeks) and BOX expected tender offer with +20% in one month.

33 active ideas are currently active on SSI.

 

TRACKING PORTFOLIO +9.5% IN JUNE AND +46% YTD

Disclaimer: These are not actual trading results. Tracking Portfolio is only an information tool to indicate the aggregate performance of special situation investments published on this website. Quick Ideas are not part of the tracking portfolio. See full disclaimer here.

 

PERFORMANCE SPLIT

The tracking portfolio performance in June was very pleasant generating +9.5% MoM and a total of 508% since 2017. Most of the gains in June were driven by the lucrative AMC options trade (+100% in 2 weeks) as well as 690.D and TCI ideas performance. The two later cases are still active and offer significant remaining upside.

The graph below details the individual MoM performance of all ideas that were active during the month. This chart excludes Quick Ideas.

 

IDEAS CLOSED IN JUNE 2021

AMC Entertainment (AMC) +100% in 2 Weeks
This idea involved selling (far) out-of-the-money options to capitalize on the swelled-up AMC option premiums. At the time of the write-up AMC shares stood at $50 (up from $10 in a fortnight), whereas June options expiring in only two weeks and with $145 exercise price (3x higher!) were trading at $8. At these exercise price levels AMC would have had a market cap of over $75B (double what GME had reached at its spike in February) and an EBITDA multiple of over 77. With most of the stock already in retail investor's hands (i.e. very large float) and availability of plentiful cheap borrow after continuous equity issues, further sharp spikes in AMC price were unlikely. For the next two weeks AMC continued to trade around $50/share levels and the sold options expired worthless. Option sellers pocketed the whole premium - a solid +100% return in 2 weeks.

Box (BOX) +20% in 1 Month
Cloud content management services provider Box announced a $500m investment from KKR with intentions to use the proceeds to buyback shares through a tender offer. The company was placed in a pretty interesting situation - the management was pressured by the prominent activist Starboard, which was getting ready to launch a proxy fight and reshuffle the board, claiming it lacked the ability to create shareholder value. The planned tender offer was clearly aimed to please the current shareholder and the management seemed highly incentivized to place the price range at a premium. At the same time, the recent KKR investment into convertible preferred shares at $27/share (vs market price of $20/share) as well as peer valuation multiples strongly suggested that BOX is undervalued. As expected, the announced tender range was at a premium to market price and we have closed the idea with 20% profit in 1 month.

Sunnyside Bancorp (SNNY) +23% In 3 Months
Nano-cap community bank Sunnyside agreed to be acquired by DLP Real Estate Capital at $15.55/share. Directors supported the merger with their 6.1% stake, while a premium to historical trading levels seemed to be sufficient to satisfy the rest SNNY shareholders. Unexpectedly, another buyer, Rhodium Capital, proposed a competing $18.50/share offer indicating plans to go hostile if management doesn't respond to the offer. Given the downside protection from DLP's offer and seemingly strong Rhodium's intentions to acquire SNNY, the situation seemed very attractive. After two months of silence, SNNY signed a definitive agreement with Rhodium at slightly improved $18.75/share. This idea resulted in 23% return in 3 months. There is a further 3% upside to the take-over price, however closing is expected only in Q4'21 or Q1'22.

Pershing Square Tontine Holdings (PSTH) +18% in 6 Months
Pershing Square Tontine Holdings' options traded at premiums, which offered a number of interesting arbitrage plays with limited risk of losing money (due to trust redemption value) and significant potential upside. One of the trades was to buy PSTH common shares and sell June $25 calls with an opportunity to pocket all or part of the option premium risk-free due to the downside support by the trust value ($20/share). The only scenario where such a trade would become unprofitable was if the company consumated the transaction before the options expiration and PSTH shares dropped below $20. PSTH shares have continued to trade significantly above the trust value till the option expiration even after the merger announcement with UMG. The idea resulted in "as risk free as it gets" 18% profit in 6 months.

Wright Investors’ Service Holdings (IWSH) +17% In 1 Month
IWSH was a cash shell with $6m ($0.30/share) in cash and $25m in NOLs carryforwards. For almost 3 years the company has been silently burning cash, while "considering strategic uses for its funds to develop or acquire interests in one or more operating businesses". However, a prominent outside investor and CEO were both increasing their stakes, which signalled that something could be in the works here. Eventually, as the discount to cash narrowed down and the remaining discount seemed to reflect the risk of continuing cash burn more fairly, we closed the idea with +17% in one month.

Inner Spirit Holdings (ISH.CN) +16% in 1 Month
This was a non-standard merger arbitrage in the cannabis industry with a large spread to the offer (mostly in cash) and a solid chance of a competing bid. Canadian cannabis retailer and franchisor Inner Spirit Holdings announced a merger with Sundial Growers at C$0.30 in cash + 0.0835 SNDL shares. Directors/certain shareholders with 30% ownership were in support of the transaction. The interesting part was that ISH, with its unique retail franchise network business in the Cannabis industry, seemed likely to draw competing bids, especially when the merger announcement had clearly made several invitational hints for a higher offer. No competing bids have been received yet, but with the spread narrowing from 20% down to 4%, the idea was closed. At the moment, a 6% spread is outstanding and closing is expected in early Q3 2021.

KushoCo Holdings (KSHB) +10% in 2 Months
This was a merger between two ancillary cannabis product companies - Greenlane was set to acquire its peer KushCo Holdings at 0.2546 GNLN per each KSHB share. Cheap borrow for hedging was available on IB. Target's directors supported the deal with their 12.5% stake, while potential synergies, increased scale and Nasdaq listing was likely to persuade the remaining KSHB shareholders to approve the transaction. The merger was also aiming to capitalize on the recent cannabis industry tailwinds, most importantly the potential federal-level cannabis legalization in the US. The successful closing seemed and still seems very likely, however the market was pricing this at 10% spread. The merger is expected to complete in Q3'21. After the spread narrowed down close to zero, the idea was closed with 10% gain in 2 months.

Roxgold (ROXG.TO) +6% In 2 Weeks
Gold miner Roxgold was subject to an acquisition by gold/silver miner Fortuna Silver Mines for 0.283 FSM per each Roxgold share. Plenty of borrow for hedging was available at 1% annual fee. ROXG directors (owned 3.5%) and its largest shareholder Appian Natural Resources fund (owned 13.2%) had agreed to support the transaction. Approvals from shareholders of both companies were received and the merger should close on the 2nd of July. The spread has been eliminated, generating 6% profit in a bit more than 2 weeks.

Harvest Capital Credit (HCAP) +6% in 3 Weeks
This was a merger of two BDCs. Nano-cap Harvest Capital Credit agreed to get acquired by its larger peer Portman Ridge Finance. Consideration stood at 100% of HCAP NAV in PTMN shares (valued at PTMN NAV) and cash + $0.36/share in cash directly to HCAP shareholders from PTMN's external manager Sierra Crest. The buyer seemed credible, with its external manager backed by a large investment firm BC Partners, and has already done similar acquisitions before. The transaction seemed likely to close and most of the outstanding spread was likely due to confusing consideration structure and visually large downside. Shareholder approvals were received and the merger closed successfully generating 6% return in 3 weeks, a bit lower than initially expected due to HCAP NAV decline during the time.

Marathon Petroleum (MPC) +$300 in 1 Month
A major US oil refiner and marketer Marathon Petroleum closed its $21bn speedway business sale and subsequently announced a $4bn dutch tender offer for c. 10% of outstanding shares. Odd-lot provision was included. Multiple aspects indicated that majority shareholders are not likely to participate in the tender. As expected, the offer ended up significantly undersubscribed with only 2.4% of shareholders participating. The final offer price was set at the upper limit of $63/share. The idea was closed with $300 profit for odd-lot holders and 5% return for larger shareholders. The company still has a lot of remaining cash left under its buyback program and another, higher-priced tender could be announced shortly.

Cambria Automobiles (CAMB.L) +7% in 2 Months
Luxury car dealerships owner Cambria Automobiles had received a privatization proposal from its management (owned 40%+) at £0.80/share. Due to seemingly low valuation and strong buyer's incentives a firm offer with a potential of a small price bump was expected. After two PUSU date extensions, a firm offer has finally been signed at an unchanged price. 61% of shareholders were supporting the transaction. The spread was quickly eliminated and the idea was closed with 7% profit in 2 months.

Landmark Bancorp (LDKB) +7% In 3.5 Months
This was a rather standard microcap bank merger with a larger/more efficient bank acquiring its tiny peer to capitalize on cost synergies. Community retail bank Landmark Bancorp was subject to an acquisition by Fidelity D & D Bancorp at 0.272 FDBC shares + $3.26/share in cash per each LDKB share. The buyer seemed credible and shareholder approval was likely to be received given a material premium to historical trading multiples. Shareholder approval has been recently received and the merger should close on the 1st of July. We have removed this idea from the active cases marking +7% in 3.5 months.

China Customer Relations Center (CCRC) +6% in 3 Months
China Customer Relations Center was subject to privatization by a group of insiders, which owned a combined 71.1% stake in CCRC. Consideration stood at $6.50/share. Opportunistic timing and strong management's (buyer's) incentives indicated that the offer should go through. The financing had already been secured with China Merchants Bank (a major Chinese bank). Shareholders approved the deal and the spread was eliminated. We have closed the idea with 6% gain in 3 months.

Great Canadian Gaming (GC.TO) +6% in 4 Months
One of the largest PE firms Apollo was acquiring a major Canadian gaming firm Great Canadian Gaming. Apollo increased the initial offer from C$39/share to C$45/share and won GC.TO shareholder approval. Regulatory approvals seemed unlikely to be an issue providing an opportunity to pocket a 6% spread in the short term. As expected, regulatory approvals were received and 6% profit was realized in 4 months.

51 job (JOBS) +10% in 7 Months
Nasdaq-listed Chinese online recruiter 51jobs ($5bn market cap) received a non-binding takeover offer at $79.05/share from DCP Capital. DCP Capital is a PE firm run by a former KKR / Morgan Stanley Asian team and definitely seemed like a credible buyer. Offer valuation at 19x 2019 FCF felt rather low for a market-leading online business in China, so a price increase seemed justified. After half a year of waiting, and two more buyers joining the consortium, a definitive agreement has finally been signed. The arbitrage spread was promptly eliminated and the idea was closed with 10% profit in 7 months.

Eagle Bancorp Montana (EBMT) +0% In 1 Week
This was a very small US bank tender offer for less than 4% outstanding shares with an odd lot provision. It seemed likely that the offer would end up oversubscribed and priced near the lower limit. As expected, only 30% of the shares were accepted, while the final price was set at the lower limit ($24/share). The idea resulted in 0% return in one week.

Tarena International (TEDU) -23% In One Month
US-listed Chinese education services provider Tarena International was getting privatized by its management at $4/share. The definitive agreement had already been signed. The company had a somewhat shady history, however, there were a few credible parties involved (including KKR), which made this situation stand out from most other Chinese privatizations. Buyer consortium owned 45% of economic and 74% of voting power, which guaranteed shareholder approval. Unexpectedly, Chinese government has recently unveiled plans to restrict the private tutoring sector (the growing part of TEDU), which could put a substantial pressure on TEDU business. The announcement has sent TEDU stock downwards, widening the spread from 9% to 40%. At the moment, it is not clear if the intended policy changes will be approved, however, the risk of this privatization transaction failing has increased substantially, while in such case, downside could still be very sizable. Therefore, we have decided to minimize further potential losses and closed the idea with -23% in one month.

Sequential Brands (SQBG) -68% In 2.5 Months
This was a very risky and speculative idea. Sequential Brands was a highly leveraged and distressed equity stub, that had breached its debt covenants and was receiving waiver extensions from its lenders. The company owned a portfolio of apparel brands (Jessica Simpson, Gaiam, Joe's Jeans, etc) and multiple aspects, including a launch of strategic review and sale of Heelys brand suggested a possibility of an upcoming company sale or further monetization of assets. In the very best case scenario this situation might have resulted in multibagger returns for shareholders. However, the subsequent unexpected resignation of the chairman (and 10% shareholder), retention bonuses for other executives as well as the leaked failed sale of one of the brands indicated significantly increased the risk of imminent bankruptcy with potentially limited recoveries for shareholders. Based on rumors, the company is still trying to sell its brands and the process will likely end up in court. Also, SQBG still hasn't filed its Q1 report and is negotiating with the lenders to obtain an additional waiver (expired on June 24th) under the amended BOA credit agreement. The original investment thesis has clearly worked out in the wrong direction. Substantial uncertainty and elevated risk of bankruptcy remain, thus, we have decided to remove this idea from the active cases with -68% loss in 2.5 months.

 

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