Performance – November 2021

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Our tracking portfolio lost 0.3% during November 2021 and is up 59% year-to-date. A detailed performance breakdown is provided below.

We have posted 12 new special situation ideas during November. We have also closed 15 cases. The key highlights are:

All the other ideas closed during the month are detailed below.

36 ideas are currently active on SSI.

 

TRACKING PORTFOLIO -0.3% IN NOVEMBER AND +59% 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.

The chart below depicts hypothetical returns of $10k tracking portfolio since the start of 2017:

 

PERFORMANCE SPLIT NOV’21

The graph below details the individual MoM performance of all ideas that were active during the month of November 2021. This chart excludes Quick Ideas.

 

MAIN IDEAS CLOSED IN NOVEMBER 2021

Laureate Education (LAUR) +32% In 4 Months
Private education company Laureate Education had recently sold a substantial part of its business and was continuing the liquidation process with a pending Walden University sale (50% of the remaining business). Walden sale seemed likely to be completed successfully and was due to be followed by substantial distribution to shareholders. The remaining assets, Peru and Mexico operations, were also expected to be sold after the normalization of earnings post-covid. Pro-forma for Walden sale, LAUR seemed dirt cheap trading at 3.6x TTM EBITDA, while applying conservative enough multiples for Peru/Mexico operations, suggested potential 50% upside. Control by a consortium of credible PE firms including KKR provided confidence in the liquidation process. Downside seemed well protected. As expected, Walden’s sale was completed and the company announced a large $7.01/share special dividend (half of the market cap at the time of the write-up). The financial performance of Peru/Mexico was swiftly improving and reached pre-COVID levels, however, management provided no details on further sales in the Q3 earnings report. Given the substantial run-up in share price post-dividends and Q3 results, we exited the position with a +32% return in 4 months.

Swick Mining Services (SWK.AX) +16% In 1 Month
Drilling services provider DDH1 was due to acquire its smaller peer Swick Mining Services at 0.297 DDH per each SWK share. Additionally, before the merger, SWK planned to spin off its core scanning technology business Orexplore through distribution to existing shareholders and the creation of a separate ASX listing. At the time of the write-up, SWK shares were trading at 6% spread to DDH1 share consideration alone with any upside from Orexplore spin-off coming in for free. The value of the spin-off was uncertain, but marking it at the to-be-injected cash levels added offered a further 12% (i.e. +18% in total). Shareholder approval seemed likely due to strong strategic rationale and substantial management ownership. Hedging availability was limited, however, given a stable DDH price since its IPO, large spread, and mining industry tailwinds, unhedged trades seemed to be safe enough. A month later, Orexplore prospectus was filed unveiling management’s valuation estimates substantially above the levels in the write-up. As expected, SWK share price jumped up and we closed the idea with +16% profit in 1 month.

BrightSphere Investment Group (BSIG) +15% In 3 Months
BSIG is an asset manager 25% owned and chaired by a prominent investor John Paulson. The company was in the process of transferring from a multi-boutique asset manager to a single boutique-focused manager. 5 out of 7 affiliates had already been sold. The sale of the 6th was expected to close in Q3’21. After the sale, BSIG was expected to remain with its flagship quant asset manager Acadian and more than half of the market cap in cash. Management made numerous comments that they would return a substantial portion of cash to shareholders, so a large distribution was expected. Besides that, pro-forma valuation of Acadian seemed way too low trading at 6x adj. EBITDA, substantially below where smaller affiliates were sold. Management seemed open to selling Acadian as well but hadn’t found the buyer yet. As expected, after the sale of the 6th affiliate, BSIG announced a tender offer for 42% outstanding shares at $31.50/share (20% above the write-up prices). However, surprisingly, John Paulson also decided to participate in the tender on a pro-rata basis raising doubts about the valuation of the remaining business. Hence, we’ve trimmed our position to the odd-lot size only and marked a 15% return in 3 months. The tender offer expires on the 6th of December and there’s still some quick/low-risk upside ($100) left for odd-lot shareholders.

Dundee Corporation (DC-A.TO) + 13% In 2 Weeks
Dundee Corporation was a primarily mining investments holding company that traded at a 60%+ discount to the reported BV and a 30% discount to net cash and public investments on the balance sheet. The company had been a long-hated stock that ended up forgotten by the market. However, management was in the process of a turnaround – the company was selling and using the proceeds to buy back stock. Recently, the company sold a major non-core asset at 1x BV, and the updated Dundee’s investor presentation put much more emphasis on the material cash position and stressed stock undervaluation. Given the context of previous buybacks, management’s decision to become more vocal seemed to be a sign of another upcoming buyback or tender offer. However, nothing of sort was announced with the Q3 results – quite the opposite, management intended to focus on growing Dundee mining portfolio instead. As near term tender offer seemed to be off the table and there was no clear catalyst for Holdco discount to narrow, we decided to close the idea with a 13% gain in 2 weeks.

Flexion Therapeutics (FLXN) – Multi-bagger Upside TBD
Pacira Biosciences was acquiring Flexion Therapeutics for $8.50/share in cash + a non-tradeable CVR with additional payments totaling another $8 per share if all milestones are met by the end of the year 2030. Due to substantial strategic benefits to the buyer, no antitrust concerns, and material offer premium, the merger was expected to close successfully by the end of 2021. FLXN was trading just above the cash consideration valuing the CVR at $0.77/share vs $8 in potential milestone distributions. Analyst estimates clearly suggested that at least the initial milestones should be easily reachable (c. $3/share in value), while the CVR valuation model suggested a present value of at least $3.70/share. As expected, the merger closed just a couple of weeks later – shareholders have received almost all of the investment cost basis back and a further multi-bagger upside from the CVR is expected in the future. As CVRs are non-transferable we have removed this idea from active cases.

Grayscale Digital Large Cap Fund (GDLC) -3.5% In 1 Month
Physical crypto investment fund GDLC had historically traded mostly at a premium to its NAV. However, the premium suddenly turned into a 25% discount. This presented an interesting short-term trade opportunity for expected spread reversion or at least elimination of the discount. There were various possibilities to hedge crypto exposure. A thoughtful discussion by SSI members challenged this idea and argued that the current discount will persist mainly due launch of cheaper ETF alternatives. We’ve kept the position open for a month but as the discount showed no signs of narrowing we closed it at a 3.5% loss.

Sohu (SOHU) -10% In 4 Months
Chinese brand advertising and online gaming company Sohu had to be a major beneficiary of Tencent/Sogou merger. Sohu’s 45% stake in Sogou translated into $1.18bn in cash consideration or $24 after-tax proceeds per Sohu share. Aside from merger proceeds, Sohu also had a substantial net cash position, RE assets, and a few operating business assets all of which amounted to an incremental $16/share of value or $40/share in total. At the same time, Sohu was still trading at only $20/share – i.e. below the expected merger cash proceeds ignoring any value whatsoever from the remaining assets. We expected the closing of the Tencent/Sogou merger and the appearance of cash on the Sohu balance sheet to be the catalyst for re-rate. Unfortunately, neither closing of the merger nor subsequent Q3 results had any effect on Sohu’s share price. Apparently, in light of the general Chinese stocks’ sentiment/sell-off over the last few months, the market refuses to re-rate the stock fearing that Sohu management will waste the cash patching up cash-burning legacy advertising businesses or spending on some other new ventures. Closing this case at a 10% loss in 4 months.

 

QUICK IDEAS CLOSED IN NOVEMBER 2021

Quick ideas are not included in the tracking portfolio.

Sunnyside Bancorp (SNNY) +10% in 3 Months
Sunnyside Bancorp attracted 3 bidders with the latest two being PE firm Rhodium at $18.75/share and RE and bank investor K. J. Torseo at $20/share. At the time, shares were trading below the lower Rhodium’s offer. Subsequently, Rhodium raised its offer to $20.25/share to which Torsoe countered with $22/share. SNNY management for some reason was completely ignoring Torsoe’s offer and intended to proceed with Rhodium instead. Torsoe then raised the bid $23/share and promised to launch a hostile tender offer. However, the hostile tender never materialized and shareholders approved the takeover by Rhodium at $20.25/share takeover. This interesting bidding war delivered +10% gain from the write-up prices in 3 months.

The ExOne Company (XONE) +7% in 1.5 Months
This was a consolidation transaction in the growing U.S. 3D printing industry. Desktop Metal, a 3D printer manufacturer ($2bn market cap), signed a definitive agreement to acquire The ExOne Company, its smaller peer. Consideration included a fixed cash portion of $8.5/share and an adjustable stock portion of c. $17/share. Plenty of cheap borrow was available for hedging. XONE’s long-serving chair/largest shareholder (19% stake) supported the merger and other shareholders were likely to follow suit. As the spread narrowed down, we have closed the idea with 7% return in 1.5 months.

SOL Global Investments (SOL.CN) +C$65 Upside In 1 Month
Cannabis investments holding company SOL Global Investments announced tender offer for 14% of outstanding shares or 30% of the public float at C$4.05 – C$4.25/share. SOL was trading significantly below the lower tender limit at C$3.4. The large tender size suggested that a large part of the tendered share were likely to be accepted in the offer at a 20% premium to the write-up prices. Odd lot holder had a clear risk free return of C$65. The offer ended up being oversubscribed (c. 65%-70% proration) and priced at the lower limit. Increased participation in the tender might have been induced by the general cannabis market slump since mid-November and due to increased doubts over US cannabis legalization in the short term. With SOL shares trading post-tender above the write-up prices, larger than odd-lot positions would have worked out pretty well too.

Tronox (TROX) +3% in 2 Months
Rumors appeared that titanium dioxide producer Tronox received a $27/share offer from Apollo, a 16% spread to trading prices at the time. The alleged offer seemed opportunistic as it came at the beginning of the TiO2 producers’ industry upcycle. The rumored offer valued the company around the 6.7x 2021 adj. EBITDA and 13% FCF yield, which didn’t seem expensive relative to peers. However, as two months passed without any further updates or rumors and it is not clear whether the company is still in play, we are removing the case from active ideas.

InvenTrust Properties (IVT) +C$40 in 1 Month
InvenTrust Properties, a shopping center/grocery REIT, had recently uplisted to NYSE and launched an dutch tender offer with odd-lot provision for 5% of shares to support the price and liquidity. The tender range was set at $25 – $28, with shares trading below the lower limit. Valuation comparison with peer REITs and the fact that shares were trading below $25/share indicated that the offer is likely to get oversubscribed. The chances of the final prices ending above the lower limit were slim. Therefore this was an odd lot play only. As expected the offer, ended up oversubscribed and priced at the lower limit – odd-lot holders cashed out low-risk $40.

JOYY (YY) -12% In 3 Months
Rumors appeared that the two largest shareholders of Chinese live streaming leader Joyy intend to take the company private. The alleged consideration stood at $75-$100/share, vs $60share price at the time. The respective shareholders were chair/founder David Li (with 23% economic and 76% voting power) and Xiaomi founder Lei Jun (with 8%). The outstanding spread reflected the market’s skepticism regarding the potential transaction as well as the general overhang from the Chinese gaming industry crackdown. YY appeared cheap, trading at a negative EV proforma for the YY Live sale that had been agreed earlier with Baidu. This increased motivation for the controlling shareholders to take the company private. However, 3 months have passed with no updates on the offer. Also, Joyy announced a substantial buyback program (1/3rd of market cap), which further suggested that takeover is not in the cards in the short term. This idea resulted in 13% loss in 3 months.

Steel Connect (STCN) -16% In 8 Months
This was a speculative bet on buyout by controlling shareholder and management. STCN received a takeover from its parent SPLP at $0.65-$0.72/share. The offer was highly opportunistic, made during the COVID lows. The market clearly thought that the consideration is inadequate, pushing the share price about 3x higher vs the offer price. Despite such premium, it looked like there’s still a chance that SPLP will want to proceed at even higher prices. SPLP had a track of similar minority buy-outs at higher prices (sometimes raising the initial consideration several times). The valuation at 5.3x TTM EBITDA and 16% FCFE yield seemed to leave plenty of room for an improved offer. However, both companies went silent with no updates about the takeover offer for over the last 7.5 months. We’ve decided its time to move on marking a 16% loss.

Global Yachting Group (GYG.L) -29% In 5 Months
UK superyacht coating firm GYG received a non-binding takeover offer from a PE group Harwood Capital. The consideration was set at £0.925/share and offered 13% upside. PUSU date had already been extended once. The largest shareholder with a 27% stake was supporting the takeover. Harwood was a credible buyer and had already accumulated 17% stake. The takeover seemed like a post-COVID superyacht rebound play for the buyer. Valuation at 11x adj. 2020 EBITDA appeared reasonable. However, unexpectedly GYG run into issues with one of its shipyards, which resulted in certain financial troubles due to delayed payments. Subsequently, Harwood has significantly lowered the offer price to £0.70/share and was ready to negotiate a CVR on top of that. The negotiations got prolonged for a few more months and eventually, Harwood decided to walk away from the acquisition. The idea was closed with a 29% loss in 5 months.

 

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