I couldn’t help myself. Yesterday was the last day Liberty Media (LMCA) was trading before the distribution of Liberty Media C shares (2 Liberty Media C shares for each Liberty Media A share). The when-issued Liberty Media C shares (LMCKV) were trading at a 3% discount to the Liberty A shares for no apparent reason that I could think of. On top of that, when a stock split happens often the post-split shares trade up in value (again for no real reason… except for human nature). So we had a discount for the when-issued C shares AND the probability that the shares would trade up when the distribution happens today (July 24)… sounds like a no brainer for me, especially because I have wanted to own Liberty Media for a while. Nothing like a discount to make this shopper bite! Yet, it has to be noted that the situation with the Liberty shares is a bit more complex because the shares being distributed are a different class (C vs. A) and have no voting rights (though they do have the same economic rights). I don’t really think that the voting rights for the class A shares have any value because Malone controls the company with his supervoting B shares, so I discounted this seeming difference and dove in. Today will tell if my short-term thesis is correct. Not that I’m that interested in the short-term, mind you. I’m really interested in the unwinding of Liberty Media into the Sirius stake on the one hand and the new Liberty Broadband (Comcast, TW etc) on the other. That transaction will be in the form of a distribution of Liberty Broadband shares AND rights to Liberty Media A, B and C shareholders, and it should happen sometime in early fall. THAT’s the transaction I’m really interested in as it should ‘unlock some hidden value’, i.e. reprice the sum of the two parts upward. I’ll be taking a closer look at that transaction when the timing and final details are announced.
It seems to take me a long time to admit my investing mistakes. But when I finally get around to cleaning out house, there’s a wonderful feeling of liberation! The moment after you pull the trigger you ask yourself “Why?, Why did I hand on too long to a position that I knew wasn’t living up to my investment thesis?”. That’s what happened to me with MFC Industrial (MIL); I’ve known for a while that the company wasn’t performing according to my original thesis, but I held on anyway, thinking that perhaps there was a new, better thesis with the purchase of Compton Petroleum, then with the change in control to Peter Kellogg. Anyway, earlier this week I finally looked in the mirror, saw my tergiversation for what it was and took the plunge, selling the balance of my position (sorry for the delay in reporting). I finally accepted that, indeed, there were more attractive investment options out there. So I’ve recycled part of the MIL proceeds into a starter position in LMCA.
I’ve been following the Liberty family of companies, i.e. John Malone, for a long time now. I owned Ascent Media a few years back and did well with it. I looked at Liberty Ventures when that was split off but couldn’t come up with a value proposition when it started trading. Obviously I was wrong on that one as the shares soared. Then I was evaluating a position in LMCA a couple of years ago when it was trading between $70 and $80 a share but never could get comfortable with the Sirius situation. LMCA shares have advanced considerably since then, so why purchase now? The short answer is the upcoming split and spinoff of Liberty Broadband which I think will be a value realization catalyst. This post is just a ‘heads up’. I’ll be doing a more in-depth post on the Liberty Media situation as we get closer to the split date (July 23).
Always remember that I’m not advocating any investments here; do your own analysis!
I really hate to trade equities; After all, I style myself a value investor. Yet that’s just what I’ve done here. I purchased Oil States Int’l in mid May just before the month-end spin-off of Civeo, and now less than 2 month’s later I’ve sold it for a gain of about 23%. Given that my time horizon is supposed to be long term, why sell now? There is a reputable activist, Jana Partners, the one who originally pushed for the spin off, who is now trying to coax CIVEO management into adopting a REIT structure for the company. That surely would increase Mr. Market’s valuation of Civeo, or so most commentators believe. Perhaps it’s true but I have a hard time swallowing that a change in the tax structure of a company alters its intrinsic value. And that’s what I care most about.
Simply put, I sold because the two halves of OIS reached my price target. I really didn’t expect the two halves to be repriced in such a short time. I think what’s happened here is that Mr. Market in general has gotten a bit giddy and the price of all shares has been bid up considerably in the last couple of months. So I’m not attributing the runup to the new split structure (well, maybe just a little bit) but rather to Mr. Market being a bit punch drunk at this point. There may indeed be significantly more value in the two parts of OIS than Mr. market is willing to pay for today, but I really don’t have the expertise to determine that. I thought buying the company before the spin-off was like shooting fish in a barrel, a classic Greenblatt situation where the ownership constituencies for the two pieces were so different that the combined entity was being mispriced. Now that the shares have been repriced to what I consider a more likely level, any further repricing will require some OPERATIONAL improvements… and those can take time. I’m content to sit with a 23% gain in 2 months rather than waiting a year or more for a 50% repricing.. but maybe I’m wrong.
I just finished a quick read of this post about Warren Buffett’s early investments. The gist of the post seems to be that Buffett, early in his investing career, didn’t just buy cigar butts as everyone seems to think, rather his largest investments tended to be quality companies acquired at reasonable prices. I don’t really know whether I agree with this thesis as there doesn’t seem to be enough information in the post to back it up; he cites a couple of early investments while focusing primarily on Buffett’s investment in Western Insurance. What really struck me about the post was not the thesis but that Buffett was able to purchase his position in Western Insurance at 1.3x earnings. Yep, that’s right Buffett purchased his investment at less than 2x normalized earnings. OK. So my takeaway from the post was not about what Buffett did or didn’t do early in his career but THAT HE WAS ABLE TO PURCHASE SHARES IN A PROFITABLE COMPANY FOR LESS THAN 2X NORMALIZED EARNINGS! Doesn’t that kind of stock valuation seem rather incongruous with valuations in today’s market? It does to me! In fact, by comparison it makes today’s equity markets look like we are in super bubble territory. We don’t have to argue about whether the normalized Shiller PE is or is not above the long term average to determine whether today’s markets are at or above long term levels. Can you name any shares on the NYSE or NASDAQ that are trading at a PE or FCF multiple of 5, let alone 1.3? If you can, please send those names along to me (and only me as I don’t want the rest of the universe competing with me to when I purchase a gazillion dollars worth!!)
So you may be asking why, then, am I still holding any equities in my portfolio. Shouldn’t I be 100% in cash or, even better, 100% short? The problem there is the age-old issue of timing. While I think the market is in super bubble territory, there is no reason it can’t reach super, super bubble territory or even super, super, super bubble territory before a crash. I think I finally learned my lesson last year when I took a small position in S&P 500 puts…. and lost it all as the market steadily climbed higher. There really is no reason for an investor to speculate on the direction of the market. However, that doesn’t prohibit an investor from holding cash if nothing really mouthwatering seems to be available. So today I’m about 1/3 in cash and 2/3 in equities that I think are still either significantly undervalued or have somewhat of a negative correlation to the market. Let’s review. My biggest two positions are AIG (about 1/4 of the portfolio after the recent reduction) and BAC warrants, both companies significantly undervalued by Mr. Market in my view. Then there is Steel Partners (SPLP), a holding company trading at a discount to NAV, where many of the listed companies it holds positions in are, themselves, trading at a discount to intrinsic value; so two levels of discounts. On the non-correlated side I have investments in some commodities that have fared poorly recently, gold (Novagold), agricultural commodities, iron ore and gold (Altius Minerals) and forestry products (Resolute Forest Products and Fortress Paper). I also have a position in MFC Industrial, a company with exposure to metals and oil and gas (which, however, I will be selling shortly), a video game developer that is a net/net (Gravity Ltd.), a small position in RadioShack (made even smaller by the decline in share price over the past 2 years), and finally a short-term spinoff trade (Oil States International). I plan on liquidating the MFC Industrial and the Oil States International positions in the coming weeks to increase my cash hoard even further. The rest of the less correlated positions (NG, ATUSF, RFP, FTPLF, GRVY and RSH) I view more as options than pure equity plays; each has considerable upside but can waste to nothing if conditions remain as they are today.
I know that a portfolio structured like mine will do nothing if the market levitates higher. That’s just the price I’ll have to pay to sleep peacefully at night.
I recently came across a company about to file for dissolution and liquidation, Gleacher & Company. Until a little over a year ago it was a broker dealer with fixed income trading and investment banking operations. I presume, without doing all the homework involved, it began to run out of capital after losses during the 2008/9 financial crisis. In any case, last year at the end of May the old management, including both the operating management and a majority of the Board of Directors, stepped down or was replaced. A chief restructuring officer was brought in from Capstone Advisors and, after a period of reviewing strategic alternatives including acquisitions, a business combination, the sale of the company or liquidation, new management concluded that liquidation was in the best interest of shareholders. A proposal to liquidated the business was approved by the Board in March of this year and a vote was scheduled for the May Annual Meeting, where it was overwhelmingly approved. The dissolution certificate will be filed at the end of June and the company’s shares likely delisted thereafter.
I’m always interested in liquidations because, well, most investors aren’t. Generally fund managers shy away or simply can’t invest in liquidations as 1) the company falls outside their defined investment universe, or 2) the shares are too illiquid (especially if the company delists), or 3) the timeframe is too unclear (often liquidations take 3 years or more), or the market cap becomes too small, etc. So there is generally an exodus out of the stock when a liquidation is in the offing.
In addition to being a stock shunned by a large proportion of potential investing universe, liquidations have other endearing characteristics. One of these is that management has to actually tell shareholders what they think company is worth! Most times they give a range of projected liquidation distributions, and in general, my experience is, management is extremely conservative when they provide these numbers. Of course management isn’t omniscient, and the estimates are only their best (conservative) guess as to what the payouts might be; adverse things can and do happen that negatively impact the ability of management to deliver projected payouts. But think about it. Usually in a liquidation scenario new management has been brought in to wind down the company. What possible incentive do they have to OVER-estimate future payouts? Much better to under-estimate and over-deliver than the other way around as this obviates any potential lawsuits that might assert management misled investors as to the value of the company. In the case of Gleacher, new management was indeed brought in last year to determine the best strategy to adopt to maximize shareholder value: restructure, sell or wind down the company. As part of this analysis management prepared estimates of likely liquidation proceeds which were presented to the Board along with the suggested liquidation strategy. These were subsequently incorporated these into the Proxy statement provided to shareholders for their approval at the Annual Meeting: an initial distribution of $3.23 per share shortly after filing the dissolution certificate with subsequent distributions of between $6.47 and $11.32 per share. Now, I really like to invest in liquidations when the stock is trading at or below the low-end of management’s estimate of total distributions. That, however, is not the case here, and in fact I’ve rarely come across this situation, as estimates are, as I said before, VERY conservative and market pricing generally reflects this. When an opportunity like that presents itself, take it! It’s like shooting fish in a barrel. Our current liquidation, unfortunately, requires a bit more analysis as the shares are currently trading at $11.45, almost 20% above the low-end of management’s total payout estimate of $9.70. On the positive side, shares are trading somewhat below the middle of the management’s range, say at the 36th percentile, where 50% would be the exact middle. What makes this situation interesting is that 2/3 of total assets are in already in cash, and shares are trading below book value ($12.27 as of 3/31/14). So lets take a deeper dive and see if we can get comfortable with potential valuation upsides and downsides.
First, let’s take a ‘big picture’ view. Below is the schedule included in the March 31 10Q detailing the estimated initial liquidating distribution payable to shareholders.
|Estimated Initial Liquidating Distribution to Shareholders|
|(000s except per share amounts)||Total||per share|
|Cash and cash equivalents (incl. segregated cash)||$62,466||$10.10|
|Expenses and Cash reserves (est.)|
|Cash operating expenses (excluding comp) after March 31, 2014||($9,296)||($1.50)|
|Reserves for claims and contingencies||($29,506)||($4.77)|
|Estimated cash to distribute to shareholders||$20,000||$3.23|
|Assumed shares outstanding||6,184|
The above calculation simply takes current cash plus segregated cash less estimated operating expense and compensation during the liquidation period, $13 million, less a reserve for any and all contingencies. Of course, I don’t know exactly what these ‘operating expenses’ include as neither the 10Q nor the proxy provide any detail for this line item. I will assume they include fees for Capstone’s Chief restructuring officer (not an employee of the company), office space and as-needed professional fees, Board of Director fees, and other expenses that I have not been able to identify. The Compensation line includes salary and retention payments for the General Counsel ($1.8 million) and Controller ($1.1 million) plus support staff through 2014. As you will notice there is no line item in the above analysis for other assets which might be monetized. This, along with potential savings in operating expenses during liquidation, will be our primary upsides.
Let’s look at the largest of the expense line above, the Reserves. What exactly are these reserves? A footnote to the 10Q defines them as follows “DGCL 281(b) requires the Company to pay or make reasonable provision for the payment of all claims and obligations (including all contingent, conditional or unmatured contractual claims), claims that are subject to pending actions, suits or proceedings against the company and claims that have not arisen or been made known to the Company but are likely to arise or become known within 10 years of dissolution.” It then goes on to specify them for Gleacher as follows: “The Company and its subsidiaries have set aside reserves associated with (i) ClearPoint, (ii) claims made by Thomas J. Hughes (our former Chief Executive Officer) and John Griff (our former Chief Operating Officer), (iii) potential tax exposures and (iv) general reserves for other potential claims.” I am assuming that general reserves include net accruals not yet paid as of 3/31/14, i.e. those liabilities showing on the company’s 10Q 2014 balance sheet that have no offsetting assets associated with them. The assumption is based on exclusion, as the definition of ‘operating expenses’ is those expenses “..incurred after March 31, 14″.
Below is my breakdown of what the expense, compensation and reserves line items might include:
|Cash operating expenses (excluding comp) after March 31, 2014||($9,296)|
|Capstone – office space||($216)|
|Other (mostly professional fees)||($3,480)|
|General Counsel & Sec.||($1,817)|
|Reserves for claims and contingencies|
|former CEO/COO claims||($7,900)|
|Legal fees related to CEO/COO||($1,000)|
|Other accrued compensation||B/S||($532)|
|A/P and Accrued expenses||B/S||($2,346)|
|Other accrued payables||B/S||($647)|
|Accrued taxes net||B/S||($2,954)|
|NY State tax claim and|
|other general claims||($4,604)|
Let’s look to where the upsides might be from the above schedule before we move on to other assets that might be monetized.
It’s possible but unlikely that Capstone will charge less than its entire fee (do you see any incentive for this?), but the Board could be terminated early if the assets are place in a liquidating trust, though I won’t include this. However, savings most likely will be achieved in other (unidentified) operating expenses (most likely professional fees): I will assume 50% of these can be saved. Regarding compensation, it is unlikely that savings can be achieved here as both the General Counsel and the Controller were offered retention contracts which were signed in the 4th quarter of 2013 and run through the 4th quarter of this year, so these are primarily contractual payments which can only be reduced if the company is sold between now and the end of summer (quite unlikely at this point). The ‘Reserves’ line item hold the greatest potential upside. The Company has accrued nothing for potential indemnification regarding the ClearPoint transaction under GAAP so I conclude that any liability is unlikely. Likewise, the Company accrued nothing for the CEO and COO claims regarding compensation due on a ‘change of control’, which the company denies. These claims will be heard before FINRA this summer, but I will conclude that it is likely to result in no monetary payment to these former officers (let’s hope not as they are the characters that presided over the firm’s demise!) Together, these two items make up more than half the Reserves! Other items in the Reserves that I can identify include balance sheet liabilities. These are primarily accruals which, except for the Restructuring accrual, show little promise of upside. The Restructuring accrual relates to payment of vendors for termination of contracts, and here, since little has been paid over the past 6 months, I estimate we might see a 50% savings as a potential upside, though not necessarily likely. Then I’ll estimate that 50% of the other unidentified claims is likely with a further 50% possible..
|Potential upsides from liabilities||Total||per share|
|Cash operating – other||50%||$1,740|
|CEO/COO compensation claims||100%||$8,900|
|Other general claims||100%||$4,604|
|Total from liabilities||$23,756||$3.84|
Next let’s consider upsides from the monetization of unencumbered assets. I am going to categorize these into two buckets, likely and possible. In the likely category I would put receivables and deposits from clearing organizations (in fact these may have already been collected), insurance receivables, management fees from the Employee investment fund and Homeward transition fees. I will also include the Investment in FA Technology Ventures LP (FATV) at carried, ‘fair market’ value. Possible upsides would include the receivables of loans and advances and ‘other’, receivables related to potential tax liabilities collateralized with assets from former Gleacher shareholders net of payables to same, the amount of Investments for the Employee Investment Fund greater than payables due to employees for same, that portion of Financial Instruments related to deferred compensation plan which is greater than liabilities for same (subordinated debt) and some portion of prepaid expenses that might be recovered (50%).
The FATV Investment merits further attention as it is the largest non-cash asset on the balance sheet and the one with the greatest potential upside. Initially I was a bit confused as to valuation because of the wording in the 10K and 10Q. First, what is the FATV investment? It is a limited partnership which owns part or all of 6 private companies (not specified in the SEC filings) which is managed by a subsidiary. Gleacher owns approximately a 23% interest in the partnership, and the Gleacher subsidiary that manages the partnership (I presume the general partner) receives a management fee which has been accruing, I assume because the partnership has no income. The 10K and 10Q state that the partnership is scheduled to terminate on July 16, 2014, but makes no mention of what will happen when this termination takes place. Will each limited partner own outright an interest in the companies currently managed by the limited partnership? What is stated is that only 1 of the 6 companies is near a liquidity event (either a public offering or, more likely, a sale). Is it possible that management will look to liquidate their interest in the other 5 companies before a liquidity event? This is unknown, but could mean a significant reduction in the value of the investment. Not only are these logistical questions outstanding but I was also confused initially about how to interpret the line item on the Gleacher balance sheet. The confusion arose because at one point the FATV investment is described in the SEC documents as follows: “The Company has an equity-method investment in FATV of approximately $18.2 million”. So this made me believe that the $18.2 million represented not the fair market value of the investment but the total cash invested in the partnership plus the company’s pro-rata share of earnings and losses since the investments were made. However, footnote 1 in the 10K defines the line item ‘financial investments’ as follows: “The Company’s financial instruments are recorded within the Statement of Financial Condition at fair value. ASC 820 “Fair Value Measurements and Disclosures” defines fair value as the price that would be received upon the sale of an asset or paid upon the transfer of a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.” And, in note 10 a breakdown of the Investments line item is titled “Fair value information regarding the Company’s investments”. And, indeed, the 10K and 10Q include guidelines regarding the ‘fair market’ valuation’ of the partnership interest. So I have to conclude that indeed the ‘Investments’ line item (interests in the FATV partnership) are indeed carried at fair market value based on the level 3 criteria laid out in the 10K and 10Q. But looking at these guidelines one has to consider that the ‘fair market value’ presented is, in fact, understated. This we won’t know for sure until there is some liquidity event. But given the criteria for venture capital investment, 5x EV/EBITDA and 55% discount for illiquidity, one must conclude that there is considerable upside to this valuation. If a liquidity event were to come along we might see the illiquidity discount shrink or disappear. For the purposes of this analysis I have estimated that the 55% discount could shrink to 20% which would give up to a 77% increase to the valuation.
|Potential upsides from assets||Total||Likely||Possible|
|Receivables from Clearing Org.||$2,585||$0.42|
|Receivables – insurance||$262||$0.04|
|Receivables – EIF mgmt fees||$267||$0.04|
|Receivables – other||$184||$0.03|
|Receivables – Gleacher shareholders net||$474||$0.08|
|Investments – FATV at carrying value||$18,226||$2.95|
|Investment – FATV at 20% discount to pc||$14,176||$2.29|
|Investments – EIF net of liabilities||$324||$0.05|
|Recumbent of prepaid at 50%||$1,348||$0.22|
|Monetization of office equipment at 20%||$20||$0.00|
|Monetization of other non RE assets||$383||$0.06|
Summarizing these projected and potential distributions I come up with:
|Projected Distributions||Total||Per Share|
|Initial liquidation distribution||$20,000||$3.23|
|Potential upside from liabilities||$23,756||$3.84|
|Likely upside from Assets||$21,340||$3.45|
|Possible upside from Assets||$16,909||$2.73|
|upside from current price||16%|
Gee, that’s doesn’t look like a particularly enticing investment opportunity, does it? An upside of only 16% from today’s market price per share? I haven’t even come up with enough upsides to arrive at the high-end of management’s valuation range. What am I missing? I don’t know, but something obviously. Let’s look at the list of investors to try to determine if Mr. Market is just being his usual stupid self, or if there are some sophisticated investors who might know just a little more than I do.
|MatlinPatterson FA Acquisition LLC||(a)||1,778,413||28.76%|
|Stone Lion Capital Management||(c )||574,490||9.29%|
|Scoggin Worldwide Fund||(a)||550,516||8.90%|
|Mendon Capital Advisors Corp||(a)||502,300||8.12%|
|Farallon Capital Mgmt||(d)||442,300||7.15%|
|Hudson Bay Capital Mgmt LP||(b)||242,178||3.92%|
|Total Shares outstanding 3/31/14||6,183,654|
|(a) identified in 2014 Proxy Statement|
|(b) identified by Yahoo Finance as of 3/31/14|
|(c ) 13D filed 6/5 with increased ownership of 2,352,903|
|(d) from 13D filed 5/12|
So, indeed there are some large sophisticated investors with substantial positions in Gleacher. MatlinPatterson (MP) has been represented on the Gleacher Board for a number of years and substantially shepherded the company through the Board and management transition last year. In total 6 large investors control about 2/3 of the outstanding shares. That should provide some comfort to a small investor who might coat-tail these more sophisticated guys. But wait, something funny just happened! Stone Lion Capital who initially took a position in April (and therefore at prices not substantially different from today’s) increased their stake to 2.4 million as of June 5th. Wow! But there’s something funny about this. The number of shares Stone Lion added between their April and June filings is EXACTLY the number of shares that MatlinPatterson (MP) owns. Huh? It looks to me like the largest investor, and the one closest to the company as it has representatives on the Board, just sold out to another fund. MP clearly bought their investment at prices higher than today’s yet here they are selling out for a loss! It makes me think that perhaps the IRR MP projected from holding on to their Gleacher shares when the company moves into liquidation didn’t quite make the hurdle rate the company requires. That’s not exactly a good sign. But the fact that another fund bought into the liquidation should be some consolation.
Another consideration I haven’t discussed is timing, i.e. when the liquidation distributions might be made. This is secondary to the total distributions but important when calculating expected IRR. We know the initial distribution of $3.23 will most likely be paid out in the month following the filing of the certificate of dissolution (June 30th), so that would be during July. Of the major components of the Reserve, the CEO/COO litigation will probably be resolved by year-end or sooner (the hearing before FINRA being scheduled for this summer), and the ClearPoint reserve not before the 3 year anniversary of the transaction, February 22, 2016. Then there is the FATV monetization; the SEC documents mention that one of the 6 private companies is in the initial stages of negotiations which might lead to a liquidity event and that this company is a significant portion of the value of the partnership interest. So we might expect a second distribution of $2.00 to $3.50 sometime in the 1st quarter of 2015, lower if the liquidity event doesn’t happen, higher if it does. There could be a 3rd distribution in the first quarter of 2016 when the ClearPoint indemnity expires and liquidation expenses are more fully calculable. Then I might expect a final distribution on the 3rd anniversary of the dissolution certificate filing with possibly a liquidation trust established if the FATV investments cannot be monetized before that point.
One final note that potential investors should consider. The Proxy Statement lays out quite clearly that once the dissolution certificate is filed holders of the stock may become liable for any debts or obligations the company may have or incur above and beyond the assets it holds. Yes, that’s right! your liability is not limited to the amount you invest in purchasing the shares: they might come after your for more money if the liquidation cannot cover its obligations, say because it loses the litigation with the former CEO and COO. Buyer beware!
All in all this is not too exciting a liquidation. I initially took a very small position, but after a more thorough analysis and reflection I don’t see enough upside to justify the risk so I sold the shares I had bought. I could be wrong and the FATV investment could be worth substantially more than I can determine from the information available, or the liquidation could happen much more quickly that I think (I can see it dragging out for a number of years with a potentially significant portion of the distributions happening in year 3 and beyond), but those are things I just can’t know. In other words, this may be a pitch right over ye olde home plate, but I’m just not swinging…better to keep my powder dry for another day.
As always, I look forward to any insights my readers might provide, and remind you that I’m not providing any kind of investment advice here: you’ll need to do your own analysis and reach your own conclusions regarding the Gleacher liquidation.
There are a couple of ways of looking at AIG’s recent share price action year-to-date:
- The shares have lagged the market and have only been grudgingly dragged higher by the impetus of the market, or
- The shares have now broken out of their year-to-date trading range and will therefore now move higher.
I really don’t have any clue which of these two views are right. In fact I really don’t have any idea what AIG shares will do in the short-term. Yes, I do think they are still significantly undervalued vs. a market that looks to me slightly overvalued. But what is more important to me is that I set down a series of sell targets when I first purchased my AIG holdings and we’re fast approaching my first sell target. AIG was, until yesterday, about 1/3 of the total equity holdings in my ‘value’ portfolio, and although I think the shares are still undervalued, the confluence of my first sell target approaching and this concentration have convinced me to reduce my AIG holdings (somewhat to my dismay as I have become quite fond of my AIG shares). But there it is: the discipline of selling somehow trumps any aversion to selling (and potentially incurring taxes). So I’ve reduced my position by 20%, freeing up some cash for other investments. Well, that’s not exactly true as I already had over 25% in cash so technically I didn’t need to ‘free up’ cash in order to make some additional investments, but I do want to keep my cash position up there in case of a market swoon. What new investments you might ask? Well, I’ve upped my position in Altius Minerals slightly as the share price has come down after the recent secondary. But I’m most interested in a liquidation situation, which, for the moment or at least until I take a position (or not,) shall remain nameless. As I’ve written before, I’m trying to move my portfolio away from equities that follow Mr. Market’s manic moves and back into the ‘Greenblatt’ areas of spinoffs, restructurings and liquidations. Along with the Fed, I’m getting rather nervous about the relative quiet in the market.
On another note, the Oil States International spinoff of Civeo Corp. took place as announced on May 30th. My original position is up about 10% so far and I’m targeting about another 10% return over the next 6 months (or possibly sooner). As I did no in-depth analysis of OIS or CVEO before investing (except for reading the spinoff documents of course) I really have no idea exactly how much the two companies are undervalued. I was attracted because of the nearness of the impending spinoff, where the shares were priced at the beginning of May vs. their trading range over the past 12 months, the presence of an activist investor and the potential for CVEO to become a REIT. While most analysts are focused on the CVEO portion of the spinoff, I think OIS may do equally as well. Just a little contrarian thinking. Now if I’d just looked at the National Oilwell Varco spinoff as well…
In March 2014 Steel Partners announced a Dutch tender auction for $49 million worth of units at prices ranging from$16.50 to $17.50. Initially the price of SPLP units rose on the news, gradually settling back into the high $16 range as the April 23rd tender deadline approached. But when the results of the tender were announced the unit price fell back, down to around $16 where it is today. The simple reason is that the offer was oversubscribed at $16.50! This means there were a number of large holders that wanted out. Most likely these were original investors in Lichtenstein’s hedge fund (which was forcibly transmuted into the limited partner structure after the 2008/9 financial meltdown) who were waiting for an opportunity to liquidate their holdings without having a devastating impact on the market price.
Remaining unit holders should be pleased, right? After all, 2.97 common units (about 9.6% of units outstanding) were repurchased at a price significantly below Net Asset Value. That theoretically increases the discount to NAV of the remaining units. So why did the unit price not react positively? Well it may have to do with the fact that the offer was significantly oversubscribed at the low-end of the price range, so owners of another 1.5 million units would have been happy to part with these units at the final $16.50 price. This could translate into continued pressure on the market price as those owners try to sell. But, it could also have to do with the filing of an 8-K on May 2nd in which the general partners announced that 1.5 million units of class c units (eventually exchangeable into common units) were issued to management representing incentive awards for 2012 and 2013. So, in effect, there was really only a net 1.5 million unit reduction counting both the Dutch tender and the issuance of these incentive units. The incentive compensation scheme for WL & Co. has been there all the time for limited partners to see, but perhaps it wasn’t until the effects were actually concrete that we realized how much we are paying to the general partner’ skills. The continuing impact of the incentive unit issuance is in all intents similar to a creeping takeunder, and we, limited partners, will eventually be squeezed out, or at least seriously diluted, through the management incentive structure. Yes, more management ownership will align management’s interest with those of the limited partners, but
the combination of high incentive pay [automatically reinvested via C shares will] and discounts to market price for incentive units issued to management (ostensibly because of lower liquidity with a lockup period) eventually erode limited partnership interests. Certainly large investors forced to remain in the partnership because of liquidity issues (not a lot of units are traded daily with respect to the number outstanding) might object that the liquidity discount afforded management is out-of-place. I know I think so, even if I’m not a large unitholder. (edit: see Auggie’s comments below)
The positive impact of the Dutch tender was practically negated by the issuance of incentive units, kind of like when management grants themselves options then proceeds with a similar sized share buyback program. In essence the tender offer simply diluted the negative impact of the incentive units. So where does that leave us? As to the unit price, just about where we were at the end of the 1st quarter with the market price at about a 35% discount to NAV. From a confidence in management perspective… significantly lower. We saw some nice gains in NAV in 2013, so management does deserve some credit. How much is hard to say as the market was ‘kind’ last year. Now let’s see what management can do in a sideways or down market. Can they still create value?…. to be continued