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Aman1

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  1. I took a look at the Dell bond issue when it came so did some work on this, but nothing too substantial it has to be said. One of the things that stood out when looking at the debt security package was trying to establish a market value for the tracking stock. The VMWare tracking stock will be a share class of the main Dell LBO vehicle, so you are not only tracking the underlying main VMW equity listing, but you will also have to price in a discount based on the credit risk of the Dell issuing entity. This is a business that has out-of-the-box leverage of around 5x with comparable EV/EBITDA's of around 4x in the space. Also, the upsized bond deal led to a 1:1 reduction in the bank loan financing - i.e. total secured debt issued remained the same, with the mix of bonds increasing. Longer term I suspect they look to buy in the tracking stock, but the short- to medium-term intention has to be to de-lever the business to a point where it has equity value. These are just my 2c - to be fair, this view was based on a cursory assessment rather than a prolonged deep dive.
  2. I still think there can be value in "special situations". One of the main reasons is the institutionalization of money management that is making the markets, ahem, "more efficient". As someone that works in it, I think that the fund management industry as a whole is now overly reliant on automated data gathering of company fundamentals, screening and (somewhat amazingly) sell side research views on companies. I think reading SEC filings is being neglected, and as management fees are cut by competition from ETFs, the fund management industry has less money to throw at analytical resourcing over time, creating a continually greater reliance on technology to fill gaps. In addition, the use of benchmarks to manage most active managers mean lots of time is spent only focusing on companies in the benchmark, rather than devoting much effort to under-the-radar stocks. The great things about spin-offs (and let's not forget the parent left behind), M&A, post-bankruptcy stocks and other situations is that the automated data feeds (bloomberg etc) will be dark on these companies for at least a quarter - offering the enterprising investor some time to actually go through an SEC 10-12B filing and have an edge on the volume of slower institutional money that won't look at it until it gets in the industry data systems and at that point might show up on a stock screen. That said, going back to the Greenblatt book - his idea is straightforward imho. It is to buy above average return-on-capital companies at below average multiples. This framework is key when looking at special situations. While it might give you a small advantage over those that rely on data systems and don't read through SEC filings (a surprisingly high amount of institutional money in my view), it's still on you to decide if the spin-off makes sense on RoC and valuation. The same applies for looking at these metrics for the parent left behind in a spin-off or for a assessing a company after a merger goes through and the merger arb guys get out of the stock. There has been a spate of spin-offs in the US at unattractive valuations; so while you have informational advantage, they just haven't been interesting. Some will still creep through though - i doubt that you'd lose much money buying Associated Capital Group (AC), despite it being a Q415 spin-off, for example.
  3. That's the principal only, you record the interest expense as it is incurred, not upfront. The interest liability is going to be recorded in a separate account as a current liab, eg.: Yr1 Dr.Cash 10000 Cr.LT Debt 10000 Yr2 Dr.Int Exp 1000 Cr.Int Payable 1000 Dr. Int Payable 1000 Dr. LT Debt 1000 Cr.Cash 2000 Pretty harsh going straight for Debits & Credits!!! :o For corporates, the total debt is the principal only. Don't forget to include short term portions of long term debt (current liabilities) in this number and potentially any significant operating lease liabilities and the net pension liability if the pension is material. A simple rule of thumb for operating leases is to take the current year operating lease payment (rent) and multiply by 5. Finance leases are already included as debt so no need to worry about those. For pensions, remember to use the actual economic deficit - which means taking the "projected benefit obligation (PBO)" from the notes to the account as the liability and taking the fair value of plan assets. This net liability should be added to the debt if it's a material number, particularly in UK / European companies where the pension can rank senior to bondholders. Would be interesting to know where pension deficits rank in US Chapter 11 bankruptcy. I think banks, perversely, are allowed to record discounts on their debt as a gain (which means I assume they drop the principal amount to face value) but I don't really look at the big banks so someone with better expertise could clarify that. I am a qualified IFRS accountant and did some US GAAP when doing the CFA. I can help on financial reporting questions but will be of no use on tax related stuff (I've never looked at US tax but mainly because tax laws pretty much change every other year, I qualified 10 years ago and have not kept up to date on it).
  4. For anyone looking at US spin-offs, the following is a must-bookmark link. Forget middle-men, this is the best way to periodically review the lastest spin-offs directly: http://www.sec.gov/cgi-bin/srch-edgar?text=form-type+%3D+10-12b+OR+form-type%3D10-12b%2Fa&first=2015&last=2016
  5. Greenblatt never suggested blindly investing in spinoffs! Bigger picture, Greenblatts thesis is to own "quality" (high ROC) businesses at relatively "cheap" (EV/FCF) valuations. His later stuff on the magic formula fleshes this out. Looking at spinoffs was (and still is) a good way to assess stocks on the above criteria where you have a head start over lazy investors; it's financials are not yet in data streams like Bloomberg and Factset so will not show up on screens, plus a lot of investors won't touch an SEC 10-12B form. The relatively small spinoff also has the forced selling characteristics you discussed. If you want a Q4 2015 spinoff as an example, take a look at Associated Capital Group (TIcker: AC). Trading at a 30% discount to liquid balance sheet investments and you get the opco (a $1bn hedge fund) for free.
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