Performance – December 2021

Our tracking portfolio has lost 3.4% during December 2021 and is up 54% year-to-date. A detailed performance breakdown is provided below.

We have posted 9 new special situation ideas during December. We have also closed 9 cases with only one at a loss. The key highlights are:

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

31 ideas are currently active on SSI.

 

TRACKING PORTFOLIO -3.4% IN DECEMBER AND +54% 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 DEC’21

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

 

MAIN IDEAS CLOSED IN DECEMBER 2021

Verso (VRS) +33% In 3 Months
Graphic paper manufacturer Verso had received an all-cash takeover offer from its largest (9% and two board seats) shareholder Atlas Holdings at $20/share. VRS formed a special committee and after two months since the initial announcement released a strict communique that it will only accept a bid that is ‘meaningfully’ above the previous one. The way that the press release was worded suggested that Atlas was considering an improved bid. Atlas already had two board seats and likely knew the business quite well. Negotiations went on, but both parties went silent for a few months. Despite that, VRS business was riding macro tailwinds and company’s financial performance/profitability/future outlook were improving. The announced Q3 results only reinforced the higher-offer-thesis. As expected, eventually VRS signed a definitive agreement with another buyer/strategic acquirer at $27/share. A further bidding war from Atlas was unlikely, so we closed the idea with a +33% gain in 3 months.

SiriusPoint (SSPCF) +6.5% In 5 months
SiriusPoint’s contingent value rights were issued in conjunction with the merger between Third Point Reinsurance and Sirius International Insurance Group. The CVR agreement entailed that 2 years after the merger closes (26th of Feb’23), each CVR will receive a cash payout equal to $13.73 less 0.743 SPNT shares. The situation offered an opportunity to set up the trade – long 0.743 SPNT + long 1 CVR and get a payment of $13.73/share in 1.5 years vs $12.70/share cash outflow at the write-up prices. In effect, investors were getting an unsecured bond with maturity in 1.5 years at 10% below par. As expected, the spread/discount narrowed down much sooner and we closed the idea with 6.5% profit in 5 months – a sizeable gain for a bond-type risk.

ThinkSmart (TSL.L) -15% In 1 Month
ThinkSmart was a holding company with 10% ownership in the UK’s largest buy-now-pay-later company Clearpay + small remaining operations currently in wind down. The majority stake in Clearpay had been sold to global buy-now-pay-later giant Afterpay in 2018 and the sale agreement included a put/call mechanism – Afterpay received a call option on the remaining 10% stake after August’23 and TSL – a put option exercisable after Feb’24. Since the sale in 2018, Clearpay’s growth has skyrocketed and TSL’s management started winding up remaining operations while waiting to unlock the value of the remaining minority stake in Clearpay. Earlier this year Square announced acquisition of Afterpay and the change of control gave Afterpay the right to exercise its call option at any time, not just after August’23. Clearpay’s stake carrying value, which seemed to be conservatively discounted by the management, indicated a substantial 30%-60% upside to TSL shareholders. Management owned 40%+ of TSL shares, so the interests were aligned. However, uncertainty remained regarding the pre-agreed methodology for Clearpay’s stake (no disclosures provided). A few weeks after the write-up US regulators started probing into the buy-now-pay-later sector, including Afterpay, causing shares to plummet across the industry. Surprisingly, shortly after that, TSL management made an early mutual agreement with Afterpay to exchange the 10% stake in Clearpay for 1.65m Aterpay shares. This was considerably below the carrying value on TSL’s books even taking into account the change in Afterpay’s stock price during the period. Given that the market showed no risk in the Square/Afterpay merger break, it’s not clear why TSL management rushed the exchange and agreed to such a price cut. Anyways, as the discount to NAV was eliminated, we marked a 15% loss for a hedged trade.

 

QUICK IDEAS CLOSED IN DECEMBER 2021

Quick ideas are not included in the tracking portfolio.

Bacanora (BCN.L) +29% In 7 Months
Bacanora Lithium announced a non-binding offer by its largest shareholder and world’s largest lithium producer Ganfeng International Trading (US$24bn market cap). Consideration stands at £0.675/share in cash. Ganfeng already owned 29% of BCN. The main risk seemed to be UK regulatory approval as British media became concerned about Chinese control over critical minerals. However, eventually, it appeared that UK regulatory approval won’t even be required. In the meantime, Ganfeng increased the offer adding distribution of Banaconra’s holding in Zinnwald Lithium on top of the previous cash portion. The only hurdle left was Mexican antitrust approval (BCN asset was in Mexico), however, as Ganfeng had already controlled 50% of the project through a partnership with BCN, the approval seemed likely. After some delays, Mexican regulators gave the green light and the spread was eliminated. +29% in 7 months.

Community Savings Bancorp (CCSB) +17% in 7 Months
Community Savings Bancorp, a 1 branch community bank operating in Caldwell, Ohio, was to be acquired by Double Bottomline. Consideration stood at $22.76/share, subject to adjustments related to satisfaction of several conditions (e.g. CDFI application, transaction costs, etc.). Trading volume was low. The offer came at a significant premium to CCSB’s historical trading levels (1.1x BV vs c. 0.7x BV) and the buyer’s management seemed to have a proven track record. The merger closed at $23.44/share, even higher than the expected $22.76/share consideration. +17% return in 7 months.

Soliton (SOLY) +10% In 1 Month
Medical device development company Soliton was getting acquired by a $200bn market cap biopharma giant Abbvie. Consideration was $22.60 in cash for a total of $550m. Shareholder approval had already been received and the only major remaining hurdle was antitrust consent. For 2 months since the announcement, SOLY was trading at basically zero spread to the offer price. Then in August FTC issued a second request launching a deeper probe into the transaction. As a result, the spread widened to around 10%. Although historically, a large number of mergers that receive the second FTC request fail (62%-89% from 2015 to 2019), there were several strong arguments suggesting that the prolonged review was most likely a result of FTC’s large pharma merger crackdown and as SOLY’s and ABBV businesses were in different industry segments, eventual approval was likely. This proved to be correct and the merger closed shortly after the FTC approval. +10% in 1 month.

Home Capital Group (HCG.TO) +C$200 in 1 Month
Canada’s alternative mortgage lender, Home Capital Group, launched a substantial issuer bid for 12%-14% of outstanding shares at $43.50 – $48.50/share. Odd lot shareholders were accepted on a priority basis. Paid-up capital was just C$3.06/share, so withholding taxes were going to be high. Hence, the idea was actionable only to Canadian residents (and potentially US IRA accounts). As HCG traded below the lower limit price, the situation offered low-risk C$200+ profit in a few weeks. As expected, the tender ended up being oversubscribed (45% proration) and priced at the lower limit. Odd-lots made low-risk C$200 gain in under 1 month.

Laaco (LAACZ) +8% In 1 Month
CubeSmart was acquiring its smaller peer LAACO for $1.69bn gross proceeds. The consideration to LAACO shareholders stood at $9838/unit. Although the merger seemed highly likely to close in a month, an 8% spread was still outstanding, most likely due to some misunderstandings regarding the final consideration and LAAC being an underfollowed stock with a rather high nominal share price. The spread narrowed down in a few weeks resulting in 8% gain in 1 month.

Africa Opportunity Fund (AOF.L) – Removed As Non-Actionable
The Africa Opportunity Fund was a closed-end, London-listed, investment company with portfolio in sub-Saharan African equities and bonds (the latter to a smaller extent, mainly as a place to park cash). Since mid-2019 the company had been slowly liquidating its existing portfolio. About half of the portfolio had already been liquidated last year and the proceeds had been distributed to shareholders (via redemption of shares at NAV). Liquidity was extremely low, however, AOF was trading at over 40% discount to NAV. The liquidation period was set for 3 years, till mid-2022. Management aimed to maximize the returns for shareholders instead of putting pressure on some of the more illiquid holdings during the liquidation process.Current NAV stands at $1.055/share and the discount has narrowed to 28%. However, we are removing this idea from the active cases as the idea is no longer actionable due to extremely low liquidity.

 

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