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An Uninteresting Market and a New Position (AM)

June 2, 2013

I’ve been lax about posting this past month. Traveling (and other things) are part of the excuse, but really, the biggest factor has been this market; it is now very uninteresting for a value investor. Sure, I follow what’s going on. Things are looking up in the US (in the short-term), not so rosy in Europe, downright funky in Japan and enigmatic in China. What to make of this in terms of translating it into investable ideas? Not much as far as I’m concerned. The macro picture is interesting noise, but a true value investor wants VALUE at the individual stock level. In this vertically levitating market there just isn’t much of it around. No screaming bargains beckon. Where are the stocks trading at 2 or 3 times earnings? Or those trading below NCAV? They are few and far between, and then when you do happen on one, it is UGLY. So I’ve been looking to sell my current merchandise (read shares) and wait for the next opportunity to ‘shoot fish in a barrel’. Trouble is, my current ‘merchandise’ is still selling at somewhat below what I consider ‘fair value’ (and I’m loath to trigger a tax liability for a capital gain), so I’m mostly just waiting for Mr. Market to either continue up or tumble down. I think there’s a pretty good chance of One of these TWO possible outcomes occurring. In the meantime I should shortly be adding to my cash balance as ENZN is about to pay out a special dividend and EBIX should soon be taken out at either $20 a share (sooner) within the next couple of months or at a somewhat higher price (later) subsequently. .

Well, I have to admit,  it’s not strictly true that I haven’t been doing anything, as I have recently added a new position in American Greeting (AM) shares. This is a short-term ‘risk arbitrage’ position that I expect to unwind in less than 6 months (and probably more like 2). American Greeting currently has a management buyout offer on the table. It has been endorsed by the Board and is awaiting shareholder approval. The vote should happen in June. However, management (who is the controlling shareholder in this case) has offered only a slight premium to the pre-offer trading price, and the shares are generally considered undervalued at the buyout offer levels. Add to that some skeptical activist investors, and then there is the conundrum of the MBO itself. How can management, who is supposed to be maximizing value for all shareholders represent both itself (a select group of shareholders wanting to purchase the balance of shares at the most advantageous price) and ALL shareholders, at the same time. Oh, of course, it is the ‘independent directors’ who represent those non-affiliated shareholders. And how ‘independent’ are those directors? We all know the answer to that!

Why would I take a position in AM purchased at the exact value of the offer plus dividend to be paid prior to buyout closure($18.35/share, made up of $18.20 in buyout price plus $.15 in dividends)?  Well, for one thing because I think the value of the company is greater than the MBO offer, but more importantly, there are some large activist shareholders who hold this same view! Furthermore, management will not have a say at the shareholder vote as only non-interested party votes will be counted toward approval of accepting the MBO offer. So, to summarize, the company is in ‘play’ with the management offer. The offer is a low-ball one. There is more than one activist investor involved who doesn’t think the offer is high enough. The buyout vote requires a majority of votes from non-buyout affiliated shareholders… put all these together and to me there is a good probability of an increased offer from management or from another party. Unlike the Dell situation where business results reported post buyout offer were poor (adding to management’s case for the lowball offer), AM just reported improving results for 1Q 2013 (weakening their buyout offer position). So if I had to handicap the outcome it might look something like this: 60% probability that the offer gets increased, either by management or by a third party, 20% probability that the buyout goes through in its current form and 20% probability that the buyout is voted down and falls apart. In the latter case the shares should not fall back too far (as the offer price was at only a small premium to the then-current market price) and another buyout offer might still materialize in the short-term. Just eyeing these scenarios without dropping in actual numbers gives me a warm and fuzzy feeling; 60% probability I make some money and only 20% I lose some, and not much at that. Downside: brokerage commissions and/or up to 2 year investment horizon with little investment loss. Upside 20%+. Those are my kind of odds in a market that is too sizzling for me to touch with a 10 foot pole. Again, this is just MY handicapping so, as always, you should do your own analysis of the situation before investing.

  1. J Gould permalink

    Curious to get your thoughts on your ENZN position at this point. Seems as though they sold the IP for a bargain basement price to a new pharma company just formed one or two months ago. Do you plan to hold on to your shares?

  2. My first thought is that this investment was a BIG mistake. I strayed outside my competency here but thought the company of superinvestors like Klarman and Icahn had me covered. Not the first time I acted so stupidly.

    But now that I’m where I am, what am I going to do? Hold for the moment. The company has returned $3.60 per share in dividends/return of capital over the past couple of years so my investment ‘problem’ is getting smaller rather than larger. After basically disassembling itself in preparation for a sale the company announced in May that it hadn’t found a suitable buyer (well, at least, a buyer at a suitable price). So they plan on holding their current assets with a skeleton management crew, collecting royalties which they have said they will pass through to stockholders and, I assume, looking for an opportunistic sale of what assets are left. I also assume that Icahn and Klarman have engineered this slow liquidation so I don’t really worry that management will do anything stupid. Perhaps the outlook for PEGintron and their other patented processes/substances will change and their patents become more valuable. In the meantime I’ll stay in the company of Klarman and Icahn and collect the few shekels that come in from the royalties. If the shares continue to drop (and I get off my a** and do a bit more analysis on the patent licensing income stream) I might even up my stake. It just doesn’t look like a ‘no brainer’ at the moment.

  3. bob permalink

    looking at $splp’s latest earnings release? wondering what caused the swing to a loss versus 2012? under their segment results, the swing to loss shows up mostly under corporate. am probably looking at this wrong. wondering what you think? it seems to me that outside of sxcl, the public equities have done quite well. thx in advance for any perspectives.

    • Bob,
      As with most holding companies SPLP has a ‘discount’ to NAV that increases and decreases. The units are also relatively lightly traded. This means the unit price doesn’t necessarily move in sync with the shares of companies it holds, but often reacts more to supply and demand. As to the first quarter loss, I think I addressed that in the comments to my prior (April) post. I’m still quite bullish on SPLP even though it hasn’t tracked the market up this year; this is one of the few securities that still seems to have a nice margin of safety. Management continues to rationalize the holdings and simplify the holding co structures which, eventually, should result in a decent return for unitholders.

  4. bob permalink

    thanks. sorry, for some reason, missed your response to the april post. now reading it. makes sense!

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