Northern Offshore merger arbitrage

Northern Offshore (NOF, NFSHF) is a marine drilling company that managed to attract the attention of several value investors in 2014 (a good write-up can be found here). Even when oil prices were high it was a somewhat speculative investment, and when oil prices crashed at the end of 2014 the stock followed. In the past year, the stock moved from a high of NOK12.55/share to a low of NOK1.75/share. In hindsight, the selling panic in the stock proved to be an excellent buying point since Shandong Offshore International announced that they reached a deal to acquire the company at NOK7.59/share two weeks ago. While the big money has now been made I think that playing the merger arbitrage is also attractive. The stock is currently trading at NOK7.20/share which implies a possible 5.4% absolute return.

I think that is a big spread for a deal that should be pretty low risk. There is no regulatory risk, the deal will be financed from the purchaser’s existing cash resources and 65% of NOF shareholders have already indicated that they will vote in favor for the acquisition. In addition to this there is a US$12.5 million break-up fee payable by the purchaser if they fail to complete the acquisition. That’s a large fee since the total deal value is just US$160 million. I’m guessing that the spread is relatively large because it’s a transaction in a small cap stock on a foreign exchange (for most investors), and the fact that the acquirer is a Chinese company is probably also not helping. If this is indeed a real risk I think you are getting paid enough to take it.

Northern Producer

Disclosure

Long Northern Offshore

Half-year portfolio review, 2015 edition

With June behind us it is once again time for the obligatory performance review. The first half of 2015 delivered a solid double-digit return and thanks to Greece’s troubles earlier this week I actually managed to beat the benchmark once again. At one point this year I was underperforming the benchmark by ~10%, mainly because the MSCI ACWI has a huge allocation to US stocks and as results profits more than my portfolio when the euro weakens. Foreign FX gains accounted in the first half of 2015 for approximately 33% of my return while it accounted for roughly 63% of ACWI’s return. This is after the EUR/USD moving back from ~1.05 to ~1.11.

YearReturn*Benchmark**Difference
201218.53%14.34%4.19%
201353.04%17.49%35.55%
201427.71%18.61%9.10%
2015-H113.17%11.49%1.68%
Cumulative162.19%77.65%84.55%
CAGR31.71%17.84%13.86%

* Return in euro’s after transaction costs, dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s

The MSCI ACWI isn’t really a good benchmark for my portfolio, but I don’t think there is a better alternative since the majority of my portfolio consists of securities that aren’t part of any index, or if they are they don’t share that index with the other constituents of my portfolio. Because of that the MSCI ACWI should be viewed more as a reference point instead of a true benchmark. The reason that I use it is the fact that it is well-known, globally diversified and I aim to take roughly the same amount of risk as a diversified 100% equities portfolio

Performance attribution H1 2015

In the first half of 2015 special situations generated a large part of my profits, and I expect that this trend will continue in the second half of 2015 since I’m currently invested in a large number of special situations. MCGC is, of course, one of these and I’ll expect to write-up another idea later this week since I Invested in a Chinese merger arb once again. Currently, 28% of my portfolio is allocated to special situations as can be seen in the graph below:

Portfolio overview 2015 H1

The 28% allocation to special situations is a new all-time high, simply driven by the lucky circumstance that I’m finding a lot of interesting situations this year while I’m at the same time not finding many attractive long-term value stocks. Short positions that (partly) hedge my exposure in various special situations are however not visible in this diagram. My portfolio is currently 97.2% long and 13.5% short for a net long exposure of just 83.8%: pretty conservative. I actually target a higher net long exposure, but when you enter a long/short trade where both the long and short leg consists of non-marginable securities there is not a lot you can do.

Disclosure

Long everything in the portfolio overview

Pharmstandard tender offer completed succesfully

The tender offer for the Pharmstandard GDR’s has been completed successfully today. The deal was completed without a hitch and the cash has already hit my account. Making 3% in two weeks time in – what I perceived to be – a low-risk transaction is pretty sweet.

I’m wondering if Pharmstandard GDR’s are, after the completion of the tender offer, once again an attractive deal. The price has dropped to $4.58 while Augment Investments intends to take the whole company private. If the remainder of the shares is also bought at $5.50 you could make a solid 20% return. Usually in a transaction like this that would be a reasonable assumption, but I’m not so sure if that will be the case here. I believe that the plan is to cancel the listing of GDR’s in London and then make a mandatory tender offer for all ordinary shares under Russian law. At that point of time, they will presumably offer a price in rubles that may or may not be related to the 5.50 dollar bid for the GDR’s. In addition to that I doubt that minority shareholders are well protected in Russia and if Augment Investments can squeeze out the remaining shareholders for less than that they will probably do it. But if I have a reader who knows more about how this transaction will unfold I’m of course all ears!

On a somewhat related note: last week I finished reading Bill Browder’s “Red Notice”[1] about an American fund manager who thought that activist investing in Russia was worth trying. It’s not the kind of book that’s going to make you a better investor, but it is well written, fascinating and reads like a thriller. Highly recommended!

Red Notice book cover[1] I’m probably the only blogger stupid enough to link to Amazon.com without an affiliate link.

Disclosure

No position in PHST.L anymore

Beximco Pharmaceuticals receives US FDA approval

Beximco Pharmaceuticals announced today that they have become the first Bangladeshi company to be approved by the US FDA[1]. The company apparently thinks that this is a pretty big deal, and they have even modified their homepage to display a full-size poster to celebrate this achievement. I can imagine that exporting drugs to the US could be a good business, but I doubt that the financial impact of this approval will be big. They already have approvals from dozens of other countries and so far exports only account for 4.5% of sales. But perhaps the US FDA approval could be a turning point and also make it easier to sell in other countries.

Beximco Pharma US FDA approval poster (cutout)

[1] Not sure what’s exactly the news, in the 2014 AR they already wrote that they successfully completed the US FDA inspection.

Disclosure

Author is long BXP.L

Exited Clarke Inc

I sold my position in Clarke yesterday. I needed to create some room in my portfolio, so I looked at my portfolio and asked myself the question: “If I would start from scratch today, what stock wouldn’t I buy”. AIG was actually the obvious answer, but selling that stock wouldn’t solve my problem because I have a lack of margin room in my portfolio while my net exposure is still comfortably below 100% (my target). The main reason for this is a long/short trade where both legs are non-marginable (like most of the stock I own). In this group Clarke was the obvious sell.

Since I initiated my position in the company the discount between book value (adjusted for the unrecognized pension asset) and the stock price has shrunk from 27.7% to 14.4% thanks to aggressive share repurchases. Because the discount is now a lot smaller future share repurchases will add a lot less value while fixed overhead costs remain. As a result, the stock is in my opinion now trading fairly close to fair value which I estimate at ~CA$13.50/share.

Because of the share repurchases and the shrinking discount I made a 22.5% return in roughly six months while the underlying value of Clarke’s assets remained basically unchanged: Holloway is down a couple percent while Terravest is up a little bit. Not a bad result in my book!

Clarke Inc June 2015 NAV

Disclosure

No position in Clarke anymore