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Sale of Aviat Networks (AVNW) and 3 purchases

May 11, 2017

I haven’t been posting much recently; I’m a little gun shy since shares in the companies I wrote about in my last 2 posts dropped 30%+ after I mentioned them. Today I’m updating my portfolio for a sale and 3 recent buys. First, the sale; I’ve finally sold out my small position in Aviat Networks. I initially purchased shares in the company because it was a holding of Steel Partners LP and they have a history taking a minority position in small companies, influencing (or replacing) management, turning the company around and taking out the public shareholders at a decent premium. However, Aviat had a few problems I did’t see when I first purchased my position, and after I purchased in 2014 losses continued and, in fact, began to grow. The shares, reflecting a 3:1 reverse split, fell from the mid teens down to almost $5 a share. Then, and only in the past 6 months, the price begun to climb. I don’t know exactly what’s behind this surge; there have been some recent ¬†announcements about new products but earnings have certainly not been anything to write home about. Earnings are due out after the market close tonight (sorry, didn’t publish this until the day after!) but with the share price up some 50% since I purchased I’m happy to gracefully exit and put my funds to use in a more depressed sector (read CASH or perhaps natural resources).

OK, so where and why have I been putting funds to work since my last post in February? I’ve taken 3 small positions: Awilco Drilling (AWLCF), Rite Aide (RAD) and Tropicana Entertainment (TPCA). The first, Awilco Drilling, was a darling of the value investing community until 2 years ago when oil prices tanked and the stock cratered, dropping almost 90%. Awilco is a simple company; it owns and operates 2 semi submersible drilling rigs in the North Sea. That is, it owns 2 but operates one as the demand for drilling rigs in the North Sea is currently low or non existent. The one operating rig is under contract only until next April. What then? Either demand picks up and both rigs are put back into operation or the second rig could also be stacked like the first, and the company basically put on hold. Alternatively, the 2 rigs could be sold (for scrap or otherwise) and the proceeds distributed to shareholders. My bet here is that there is some recovery in oil prices or that at the very least there is some recovery in day rates for rigs in the North Sea. There should be at least $.60 in dividends before the end of the year from cash generated by the one operating rig.
My second new position is Rite Aid. I know, I know, merger arbitrage is generally a no win game for the non-professional. I’ll admit I have no edge here, but my thoughts on this long drawn out acquisition are simple: 1) the proposed acquisition has dragged on for so long it’s likely most arbitragers have given up and sold their position, 2) the terms of the acquisition have worsened since the initial offer by Walgreen creating further incentive to dump the shares and 3) even if the acquisition doesn’t go through (I give it a 50 50 chance) I think that the company is worth more than the current $4 and change a share based on operating results over the past 10 years.

And my final new position is Tropicana Entertainment (TPCA), an idea that I purloined from.. well, I can’t remember where. The narrative behind this is that Icahn, who owns a majority of shares, values the company on his LP’s balance sheet at $49/share. If its worth so much more than the market price might he not just step up and purchase all the remaining shares at even a 10% discount to his estimate of intrinsic value?

The above is just a shorthand narrative for these three new investments. I’ll try to put something together a little more in depth shortly.

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2 Comments
  1. Here’s a good TPCA write-up from Clark Street (maybe this is where you saw the idea)…
    http://clarkstreetvalue.blogspot.com/2017/02/tropicana-entertainment-buyback-plan.html

    AWLCF is an interesting bet, albeit speculative. I’ll dig into that one more. Thanks.

    • Yes, that’s exactly where I saw it! I was being very lazy.. Thanks!

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