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Current Work-outs/Special Situations?


investor-man
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Hi all,

 

There has been a lot of jitters on the board lately with regards to stock market overvaluation, Ukraine, and China, and more and more people on the board seem to be turning to cash as a hedge for these jitters. I'm young'ish, I've got a relatively small portfolio, I'm fully invested and looking to stay fully invested. The two latest Brooklyn Value Investor blog entries pretty much explain my stance on why I want to stay fully invested (Go Brooklyn!):

 

http://brooklyninvestor.blogspot.ca/2014/03/perils-of-trying-to-time-market-ii.html

http://brooklyninvestor.blogspot.ca/2014/03/buffett-market-timer-part-1-partnership.html

 

Like Brooklyn Value Investor, I've been looking to see what Buffett did during times like these to outperform the S&P. It looks like he'd put more money into he called Work-outs and he defined them as:

 

A work-out is an investment which is dependent on a specific corporate action for its profit rather than a general advance in the price of the stock as in the case of undervalued situations. Work-outs come about through sales, mergers, liquidations, tenders, etc.  In each case, the risk is that something will upset the applecart and cause the abandonment of the planned action, not that the economic picture will deteriorate and stocks decline generally

 

My question to the board is what are some current special situations/work-outs that you see? I'm still a value investing neophyte, but I'll start:

 

Liberty Interactive

Liberty Interactive (LINTA or LINTB) plans to "spin-off" its QVC and e-commerce portfolio. This won't actually result in two separate companies, which is why I use quotes, but will result in two different tracking stocks. Its QVC unit is a much better business than it's closest competitor, Home Shopping Network (HSN), but is trading at a discount to HSN. It's e-commerce businesses are pretty good and generally look undervalued. Forming the tracking stock will make it easier for analysts to see the undervaluation and should push up prices. This doesn't look like a double, but it looks like a good way to unlock some value. Here's a good breakdown:

http://oraclefromomaha.wordpress.com/2013/10/08/92/

 

Altius Minerals

Altius Minerals (ALS.TO) is interesting from several angles. I'm definitely not the best person on the board to describe this business, but in short, it's a company that buys land in Canada and turns it into mines/mining companies which it spins-off and keeps a royalty on the gross revenues. It has had an annualized growth rate over its 15 year history of about 30% and its management is heavily beloved by the board. Right now it's currently awaiting government approval to develop several projects, and if any/each of these are approved, the value of the company ought to increase dramatically. I like this because even if the projects don't turn out, it's a great company that's fairly priced, providing a nice margin of safety. Another angle is that this company is valued much more like a mining company than a royalty company. Over time the more mines it spins-off and turns into royalties, the more people will look at it as a royalty company, and royalty companies trade at much higher multiples. As I mentioned, I'm not the best person on the board to explain ALS.TO, so check out the thread:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/als-to-altius-minerals/

 

Fiat

Fiat (FIATY) -- (this is using the term "work-out" very loosely) is planning to list on the New York Stock Exchange by October 1st. Giving Fiat and more visibility and access to American capital markets ought to provide a strong catalyst for share price increases. That said, I think of Fiat mostly as a typical undervalued stock, and I'm not sure it fits the bill of "work-out" or "special situation".

 

I've really only been looking for special situations recently and I feel that these are a bit of a stretch. What ideas out there can you guys point to?

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DEMBF, AOBI, SSY.  I don't know if they are good deals or not now.  I am starting to think some of them may have been mistakes.

 

There was a blogger posting the other day about a german open end real estate investment funds that are being forced to liquidate.  I can't remember the name of it.

 

AlphaVulture blog has some interesting ones from time to time.  As does whopper investments.

 

The RMGN situation was interesting.  I missed it and I am not sure if it was doable or not anyway.  If it was it would have been a hell of a deal.

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They are in the process of converting to a REIT. They are awaiting an IRS ruling and have been reporting as a REIT this year. They expect a favorable ruling because there are prior rulings that support their effort.

 

This has been in progress for months, everything I've seen expects a ruling this quarter. If the company were to pay a dividend and were valued as a REIT they would have a much higher valuation.

 

The play is they get the favorable ruling and re-rate. As the ruling has dragged on the stock has fallen, hence the opportunity.

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DEMBF, AOBI, SSY.  I don't know if they are good deals or not now.  I am starting to think some of them may have been mistakes.

 

There was a blogger posting the other day about a german open end real estate investment funds that are being forced to liquidate.  I can't remember the name of it.

 

AlphaVulture blog has some interesting ones from time to time.  As does whopper investments.

 

The RMGN situation was interesting.  I missed it and I am not sure if it was doable or not anyway.  If it was it would have been a hell of a deal.

 

The blog which mentioned German real estate funds was http://wertartcapital.com/

Good blog I recommend following

 

http://investingsidekick.com has a few special sits among investment companies on the small AIM market in London.

 

http://stockspinoffs.com is another great website for following spin offs which was a Greenblatt favorite for special situations

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IRM doesnt look v cheap? will there some very large costs be cut if they convert to the reit? you really need more then 500 million in income for that one to be cheap?

 

They detailed all of it in a recent investor presentation found on their website.

 

I thought it was odd the CFO left during the approval process. Granted he left for IDXX which is among the top of my wish list of wonderful businesses if the market cracks but seems like odd timing.

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  • 6 months later...

Comcast merger might have some interesting merger securities, considering how hard they're pushing for it.

 

Yea, if that actually happens. It's looking a little shaker than it did earlier this summer.

 

http://www.economist.com/news/business/21621777-lobbying-over-comcasts-bid-create-cable-tv-behemoth-coming-head-tying-up-cable?zid=292&ah=165a5788fdb0726c01b1374d8e1ea285

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Nothing too exciting about this trade but it's a special situation with little beta to the market.

 

Long SWY + disaster hedge puts. SWY is trading for $34.36 add in some $28.00 Jan 15 puts for ten or fifteen cents to carry you to the expected deal close in the 4Q or January for all in costs of, call it, $34.50.

 

SWY merger consideration is $32.50 in cash + CVR to receive proceeds of a sale of certain real estate assets and either the proceeds of the sale of SWY's JV interest in a mexican grocer or (if no sale is completed in the next few years) fair value of those assets.

 

SWY management estimates the contingent value right to be worth $3.65. So for $34.50 you can buy $36.15 in estimated value. The CVR will not be liquid or transferable. I choose to buy the puts to quantify my downside in case the merger breaks (although i think the chance of that is very slim). 

 

If management's estimate is correct, this is only a 6% upside / 18% downside trade, but with 94% of capital returned to you in cash in less than 3 months, I think creating the CVR at a nice discount to management's value is worth it. Obviously gets more interesting if SWY drifts closer to the cash consideration.

 

 

 

 

 

 

Value to Safeway Shareholders

Under the merger agreement, Safeway shareholders will receive $32.50 per share in cash.  Additionally, shareholders will have the right to receive pro-rata distributions of net proceeds from primarily non-core assets with an estimated value of $3.65 per share. The proceeds are from:

(1) The sale of the assets of real-estate development subsidiary Property Development Centers, LLC (“PDC”) comprised of its shopping center portfolio including certain related Safeway stores, and

(2) The monetization of its 49% equity interest in Mexico-based food and general merchandise retailer Casa Ley, S.A. de C.V. (“Casa Ley”).

If the sales of PDC and/or Casa Ley are completed prior to the closing of the Merger, the net proceeds from these sales will be paid to shareholders at or before the closing of the Merger in a special dividend.  If the PDC sale and/or Casa Ley sales are not completed by the closing of the Merger, Safeway shareholders will receive a non-transferable contingent value right (a "CVR"), which will provide shareholders with their pro-rata share of the net proceeds from the PDC and/or Casa Ley sales, as applicable, subject to the terms and conditions of the CVRs. The PDC CVR will have a two-year term.  The Casa Ley CVR will have a four-year term. If Safeway is unable to sell Casa Ley before the four-year expiration of the CVR, shareholders would receive a cash distribution equal to the after-tax fair market value of Safeway’s interest in Casa Ley at such time.  There can be no assurances that Safeway will be able to sell either or both of PDC or Casa Ley.

 

 

http://investor.safeway.com/phoenix.zhtml?c=64607&p=irol-newsArticle&ID=1939975&highlight=

http://www.cerberuscapital.com/news/safeway_and_albertsons_announce_definitive_merger_agreement

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And then the Yahoo / BABA / Yahoo Japan Stub that i've been shouting about in the Yahoo thread.

 

However you want to slice and dice it or execute the trade (straight long Yahoo and wear the BABA risk is the simplest, or you can go full arb and short out the BABA and Japan, or you can play with options), Yahoo minus BABA is cheap and it is a very interesting situation.

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