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Arbitrage in DGT Holding Corp. (DGTC)

December 29, 2012

Sorry, this post is rather tardy. I usually try to post about major portfolio changes within a couple of days, but about 10 days ago I took a substantial (for me) position in DGT Holding Corp. (DGTC). But really, this time I have an excuse! I’m late because I actually didn’t realize I’d taken the position until I returned from Christmas Holidays yesterday. Before I left on the 20th I put in a GTC order to purchase some DGTC shares, not really expecting the order to be filled. But much to my amazement, I somehow picked up a decent number of shares at $12.86! The investment thesis for DGTC is simple, and the company name should ring familiar to any regular reader of my posts (if not, see my writeups on SPLP). DGTC announced that it will, subject to shareholder approval, do a reverse split, a buyback of fractional shares then a forward split, effectively buying out all shareholders with less than 5,000 shares for a price of $13.50 per share. I hadn’t really been aware of the buyback until I saw this Seeking Alpha post which was referenced on my Yahoo finance portfolio page (under SPLP). Of course, by the time I read the Seeking Alpha post the DGTC share price had already moved up to the high $12 range. But I had some cash just sitting there earning practically no interest and I thought, well, why not, if I can make maybe 5% for tieing up this cash for a couple of months it might be worth it. Even if the buyback doesn’t go through (and I’m not sure why it wouldn’t, given that SPLP controls over 50% of DGTC) there is an ample margin of safety here; DGTC has over $14 of cash per share outstanding. Note that the buyback will be accretive to DGTC book value (and thus to SPLP book value because DGTC is consolidated on SPLP’s books).

The market price of DGTC has continued to creep up toward the buyout level so the opportunity to get a 5% return is no longer available. But, who knows, there is plenty of time for the spread to widen again. I assume the shareholder vote will take 30 to 60 days during which anything might happen.

This is an interesting little arbitrage, but, more importantly, it is another step in unlocking the hidden value in SPLP.

Note: I’m not going to update my Portfolio page for my DGTC purchase because I expect it to be a short-term investment of only a month or two, with the final buyout price already known.

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From → Investment Ideas

6 Comments
  1. Sid permalink

    Nice write-up.

    Would you be willing to hold more than 5000 shares of DGTC given that the NAV is much more than the current buy-back price ($14 per share in cash & equivalents, $2 NOLs and some real estate)? And it would only go up once the accretive buy-back is complete.

    Upside is visible while downside is limited by the substantial cash position, right?

    Cheers.

  2. I’m still below the 5,000 share threshold and plan to stay there. This, for me, is a place to park some extra funds and earn a small return. I still prefer SPLP as a stand-alone investment over DGTC as SPLP is a more diversified holding and I am getting a share of DGTC at a discount to the market price. I’m also not quite sure what the end-game is for DGTC. Will it be completely bought out by SPLP or will WL use it to purchase other assets to make use of the NOLs? If the former, you may get a nice bump in the relatively near future. If the latter, you may have to wait a number of years to see the value realized.

    As I stated previously in my SPLP write up, I’m still not sure WL is going to treat minority investors fairly so I would rather be in the bigger boat with more minority investors.

  3. ValGal permalink

    any concern that DGTC has still not paid <5,000 holders cash for shares even though it has been over 2 weeks since official announcement and shares stopped trading?

    Thanks.

  4. I think I read that it would take 10 business days for payment so I’m expecting it in the next couple of days.. I assume my brokerage is not as efficient in crediting monies as debiting them. In another week I’ll be on the phone to my broker though.

  5. Payment made on March 25th so my return was 4.94% for the approximately 3 months. This works out to an annualized return of over 21%. Certainly better than a money market fund!

  6. It has over $14 of cash outstanding per head to shareholders.

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