This Company Will Get Sold Thesis

[spartansaver]

I'm curious if anyone here has any experience in handicapping the odds of a company being sold. One of the companies I own has quite a few factors that lead me to believe it is going to be sold (controlling owner who passed away, CEO at or over retirement age, CEO recently followed a newsletter on LinkedIn devoted to selling companies), but I'm not sure if I should let something like that creep into my thoughts around owning shares in the company. Trying to keep the question somewhat broad here. 

[KJP]

I've had some luck with this approach.  Some examples of my thoughts in real time are in these threads:

 

 

 

Edited July 26 by KJP

[spartansaver]

Thank you for the response. Have you had it as a thesis in the past where you ended up being wrong? If so what were reasons?

[KJP]

5 hours ago, spartansaver said:

Thank you for the response. Have you had it as a thesis in the past where you ended up being wrong? If so what were reasons?

 

Probably, but nothing is immediately coming to mind. 

[valueventures]

On 7/26/2024 at 5:18 PM, KJP said:

 

Probably, but nothing is immediately coming to mind. 

Any current ideas for companies that you could see being acquired?

[scorpioncapital]

I can't even seem to make money on companies that have already announced to be acquired these days much less 'might be acquired' lol.

 

[Saluki]

Those are too hard to predict because there are so many companies out there and even if there was industry that was consolidating, I wouldn't invest based solely on that.  

 

However, putting on my thinking cap:

 

Curiosity Stream, which someone posted about is a tiny, subscale content platform that could be absorbed by Discovery or someone very easily. It's not big enough to survive on it's own. 

 

Intrepid Potash is a minnow compared to the multibillion dollar whales in the oligopoly Potash industry and now that the founder CEO had to step down for health reasons, that might make them a target.  

 

I own a small position in Taylor Devices and Kraken Robotics.  Both are tiny compared to other defense companies and look like good targets to get acquired.  Taylor has a poison bill in place, so it would have to a friendly takeover and Kraken seems to like being on their own, so I wouldn't bet on those happening. 

 

Seaport Entertainment, which was just spun off of Howard Hughes is tiny and Ackman already owns a bunch of it, so maybe it can be his Berkshire. 

 

Fairfax India.  It seems to perpetually trade at a discount to NAV.  Maybe at some point Prem will buy it and it will give the holders a one time boost and be accretive to FFH.  However, it seems to benefit from being small and nimble, so who knows? 

[gfp]

I wouldn't be surprised if someone made an offer for CarMax down here around $11 Billion.  Offer $100/share and see if they take it?  

 

I've thought Berkshire might even do it now that KMX doesn't own any new car dealerships but I'm not sure BRK would be interested in the financing securitizations and they probably don't want to retain a bunch of weaker credit auto loans for reputation issues if nothing else.

 

I'm not going to invest based on that thesis however.

[UK]

6 hours ago, gfp said:

I wouldn't be surprised if someone made an offer for CarMax down here around $11 Billion.  Offer $100/share and see if they take it?  

 

I've thought Berkshire might even do it now that KMX doesn't own any new car dealerships but I'm not sure BRK would be interested in the financing securitizations and they probably don't want to retain a bunch of weaker credit auto loans for reputation issues if nothing else.

 

I'm not going to invest based on that thesis however.

 

Maybe Carvana could, using its shares:)

[KJP]

On 8/5/2024 at 3:34 PM, valueventures said:

Any current ideas for companies that you could see being acquired?

 

TransAct Technologies (TACT).  Unfortunately I think it's a lower quality business than most of the others I mentioned in my prior post, so I don't have a large position in it.

[gfp]

I would add Bentley Systems - BSY - I have no position in the stock and these software companies are never "cheap" but the family has seemed to indicate they are willing to / looking to sell.  Negotiations with Schneider didn't lead to a deal at that point.  Wouldn't be surprised to see them taken out as infrastructure is still a strong theme for acquirers.  

[spartansaver]

As a follow up, the company I initially discussed was MPAD (micropac) which ended up announcing it was sold on Nov 4. Maybe one more positive data point that you can occasionally make educated guesses on companies getting sold.

[Saluki]

Great work @spartansaver In addition to the one's I mentioned above I would guess there's one that I posted about in the Investing forum that is probably for sale soon:  PETS.  It's a $100mm company competing against companies that are worth single digit billions, so they can't get the same volume discounts and are subscale, but have recognizable brands (1 800 Petmeds).  It seems they recognize they are cheap and an attractive target with no debt so they issued a poison pill recently to prevent hostile takeovers. The new CEO cut costs and returned the company to profitability so it's no longer a melting ice cube, just a profitable subscale operator trading at an attractive price. 

 

 

[Saluki]

You know what, I would also guess POWW should get sold soon.  The management is terrible and they have an incredibly profitable online business paired up with a money losing ammunition business.  Vista Outdoor sold their ammo brands off, and if someone like that buyer could stop the ammo business from losing money, they could use the online business to sell all their ammo brands, and have intel on how much of their competitor's ammo is selling and at what prices.  It's about half what it was a year ago and even with the board members suing each other, their auditor saying that you can't rely on their past numbers, and the very questionable related party transactions, it's still a good business if you just get rid of management and replace them with your own people. 

[SafetyinNumbers]

I bought some TTEC recently. CEO owns over 50% and is bidding for balance at $6.85. Company formed a special committee at the end of October so nothing has gone definitive and there might be financing risk. Usually one would expect a bump in these cases but the market is acting like there is no deal. It’s <1% position.

 

I also think Accord Financial (ACD.TO) gets sold in the next 10 months. The market cap is < C$35m so very illiquid. The company has publicly stated it’s looking at strategic alternatives. It’s a lending business with 4 divisions remaining after selling the Chicago business a few months ago. I believe they want to hold onto the small business lending company in Vancouver and are combining the two asset backed lending businesses in Montreal and South Carolina. That leaves BondIt the LA based media finance business. It’s hard to sell because the BondIt management need to ok the buyers but I know they have been trying for a while. My timeline of 10 months is because they have a debenture due in Jan 2026 that they have already extended once. While they may be able to extend again at some cost, I don’t think they want to. The CEO’s and Chairman’s families and friends own the debentures as well as around 25% of the company each.

 

In full disclosure, I own >2% of the company and have been adding some almost every day on what I assume is tax loss selling but there can always be information asymmetry with such a small company. Management tells me they have been restricted for over a year which is why they haven’t bought any but ultimately it’s a lending business so there is always balance sheet risk i.e. risk of a zero. I got long because it was obvious the business needed to be sold because its cost of capital is too high and private credit was exploding so there were lots of buyers. 

 

Usually my biggest investing mistakes have been because management didn’t make logical decisions for reasons I didn’t understand. In this case, I think the CEO wanted to sell for a big price instead of a fair price so he destroyed a lot of value trying to get scale and he didn’t appreciate that his cost of capital was going to keep going up. He assumed the stock would go back to trading at a premium to book and he was wrong. On top of that the profitability of the business was squeezed. 

 

My interpretation of events is a lot of me filling in gaps making assumptions how a reasonable board would act. I’ve had a chance to meet many of them over the years at the AGMs and plenty of interactions with the CEO and Chairman as I mentioned above. I think that along with my experience at UBS and an investor for 20 years gives me an informed interpretation but I’m wrong a third of the time and I have been wrong here so far. The entire loss for me so far has been multiple contraction but the opportunity cost has been huge. I could have owned more FFH instead!