I wrote about the Black Earth Farming merger slash liquidation in April. At that time the company expected to distribute between $185 and $193 million to shareholders at the end of June. Due to some delays in regulatory approvals that date has been pushed backwards to early September, and the amount of the distribution has been adjusted downwards as well. Shareholders are now expected to receive between $180 and $182 million which translates to SEK 6.68 and SEK 6.76/share, significantly lower than the initial company estimate that was between SEK 7.2 and SEK 7.5/share. In dollars the new estimate is just marginally lower than the bottom of the old range, but in Swedish krona the difference is a lot bigger so it seems that the biggest reason is simply a change in exchange rates (even though the company was partially hedged). Other contributing factors were lower crop prices, and some additional money that is being retained to fund litigation in the US.
I exited my position in Black Earth Farming a couple of weeks ago, because the spread at that time was negative if you would take into account the change in exchange rates. With the stock now trading at SEK 6.50 the merger is once again becoming marginally attractive. It’s a spread of just 2.8% compared to the bottom of the estimated range, but with the payment expected to arrive the 6th of September the annualized return of a long position is pretty solid 23%. With no real risks remaining I think that that is not bad, so I initiated a small position again today.
Author is long Black Earth Farming again
With the first half of 2017 behind us it is once again time for the obligatory performance review. As can be seen in the table below my performance was more than satisfactory. While the benchmark eked out a small gain of 3.09% my portfolio returned almost seven times as much. I think by now I can be pretty confident that I have some edge on the market, although it remains to be seen how big it is. In almost every past performance review I have written that I don’t expect that I’ll be able to continue to repeat these returns going forward, and I still think that is the case. But who knows. Maybe, just maybe, I can keep this going for a couple of more years.
* 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
While my result for the first half of 2017 is pretty good I’m actually not that happy about it. I have reflected a bit upon why that is the case, and I think it’s because the good performance is mainly driven by just a couple of lucky outliers while I also had plenty of idea’s this year that didn’t work out or had a lot more potential than what I realized. It’s not very visible in the graph below because most of the variance is hidden in the “special situations” bucket, but Sapec is for example responsible for 795bps of the performance while “undisclosed merger A” added another 454bps. While Sapec was a great idea, the fact that I was able to buy a large position at almost the low of the day after the going private transaction was announced was just luck. That luck is partially being offset by other trades such as Destination Maternity (my biggest loser with a minus 172bps contribution) while “undisclosed merger B and C” subtracted respectively 152bps and 52bps from the result. I’m often attracted to deals where it is hard or impossible to hedge out company specific risk, and as a result I will have to accept some variance.Also very visible is that in the first half of this year my portfolio faced a large headwind from currency movements, mainly caused by the US dollar losing value versus the euro. In previous years this movement was often in the other direction, and I expect that in the long run these gains and losses will roughly even out. The MSCI ACWI benchmark faced a similar currency headwind. It was up 8.95% in local currency, but just 3.09% in euro’s. While I don’t really own any stocks that are part of that index this is one of the reasons why it’s still a useful comparison.
As you can see my portfolio is in broad strokes looking like it usually does with a large allocation to various special situations complemented with a few dozen value stocks. New is the large position labeled “various receivables”. I often participate in special situations that result in a cash outflow while my broker doesn’t recognize the asset that I receive. If the cash outflow is small relative to my portfolio I usually just value these assets at zero, but for larger transactions it would skew my results too much. A large part of these receivables are the tax assets created in the Sapec transaction, but they also contain the DNIB Unwind (liquidation trust) shares at cost and the remaining Primo Water shares held in escrow at market value.
Another change that warrants a mention is that I finally sold my position in Berkshire Hathaway this year. I bought my first shares in 2010, and since then the stock has performed pretty well. At the same time, I don’t expect miracles from it and it’s probably going to perform roughly in line with the US stock market. Since I had more ideas than money on multiple occasions this year I thought it was a good time to say goodbye to this stock.
Author is long everything in the portfolio overview
Yesterday at the end of the evening the story broke that the family controlling Sapec want to take the company private at €60/share after the payment of the €150 special dividend. This is great news, because I would have happily sold my shares for a lot less after receiving the dividend. Sapec has a book value per share of €41.60, and as you can see here I was doing my math with €30/share valuation for the stub. The book value doesn’t ascribe any value to the €36 million Sapec has provided for the Novo Bank guarantee. While the market has been skeptical about a recovery of this it could be worth up to €27/share, so the offer price of €60/share seems pretty fair. I think there is a very low risk that this deal will fall through. After the special dividend the family obviously has the liquidity to buy out minority shareholders, the fund that controls 15% of the outstanding shares has agreed to tender at €60/share and the family already controls 55% of the outstanding shares.
The timing of the announcement is a little bit unfortunate for me. The stock is scheduled to trade ex-dividend tomorrow with the payable date being Friday at the end of the week, and I thought it would be a good idea to substantially increase my position. With the majority of the cash coming back super fast the internal rate of return is pretty good, even when it would take five or six years to utilize the tax deductible this trade would generate. Yesterday the stock was halted, and today the price is of course up significantly. Luckily the math still works for me, and while it hurts to buy the stock so much higher I did execute the plan and increased my position from 5% to almost 50%!
It’s a big bet, but in my mind not as big as it sounds. I see it more as a roughly 15% position in the stub and a 5% position in a Belgium tax receivable while the Dutch tax credits provide lots of almost free upside. After the special dividend I think the stub should trade close to €60/share so I would be able to close out that part of the trade fast as well, and if it doesn’t it will probably be an attractive merger arb play.
Author is massively long Sapec
At the end of last year, on the 20th of December, Destination Maternity (NASDAQ:DEST) and Orchestra Prémaman (EPA:KAZI) announced that they had entered in a definitive merger agreement in which Orchestra Prémaman would acquire Destination Maternity in an all stock deal. Destination Maternity shareholders are going to get 0.515 Orchestra Prémaman shares in the form of ADSs that will be listed in the US and will own 28% of the combined company after completion of the transaction. The consideration represented a 34% premium at the time of the announcement, and since it’s a deal between two relative small companies with no regulatory or financing risk you wouldn’t expect a huge merger spread.
This couldn’t be farther from the truth than possible though. Ever since the deal was announced the spread has bounced around 20% (although sometimes spiking down or up significantly), and in the past week the spread has exploded to a totally ridiculous 63%. This week the spread has come down a bit again, but is with 36% still offering an extremely compelling opportunity in my opinion. I wrote an article about it on Seeking Alpha that after a 24 hour embargo is now accessible for everybody. You can find it here.
Source: authors own calculations, based on Yahoo Finance pricing data
Author is long Destination Maternity
Sapec SA is a Belgian holding company that sold their main asset last year, and is going to pay out the majority of the proceeds using a dividend of €150/share. After the dividend is paid some additional cash and some small stakes in various businesses will remain in the holding company with a total book value of €41.60/share. Assuming a 30% holding company discount the stub should be worth roughly €30/share. So if there wouldn’t be dividend taxes you would expect that Sapec would currently be trading at roughly €180/share.
Unfortunately for many investors there are dividend taxes, and in case of Belgium these are a hefty 30 percent. Because of that the stock is trading at just €152.50/share which offers an opportunity for investors who can reclaim some of these taxes and/or use paid dividend taxes as a tax deductible. The author of the “value and opportunity” blog who has been following this situation for some time, discusses here how German investors can get around the tax issue.
Dutch investors have a similar opportunity. There is a double taxation treaty with Belgium that makes it possible to reclaim 15% of the dividend taxes from Belgium (I think most countries have this, but reclaiming the tax might not be equally easy for all countries). From what I have read the procedure isn’t that complicated, although it requires some paperwork and patience. Apparently it can take more than a year before Belgium repays the 15% of the dividend taxes. The other 15% of the dividend taxes can be used as a tax credit against the annual Dutch wealth tax. So you have to be careful not to buy a too big position because then can’t fully deduct it from your Dutch taxes (it’s possible to carry the remaining tax forward to the next year, but this add some complications that makes it not attractive for me). So the trade would look like this:
|5/23/2017||-152.50||Buy Sapec SA|
|8/20/2017||+105.00||Payment dividend (estimated date)|
|8/20/2017||+30.00||Sell Sapec SA sub (estimated value, estimated date)|
|6/30/2018||+22.50||Use tax credit to offset Dutch wealth tax (estimated date)|
|12/31/2018||+22.50||Receive Belgium tax reclaim (estimated date)|
| ||IRR|| 40.78%|
As you can see the internal rate of return of this trade is more than excellent! It’s a bit sad though for Belgium investors. Sapec is a Belgium company, and they are the ones who have no way to avoid paying the tax. The company promised to research options to return capital in a tax efficient manner for small shareholders (the big holders don’t have to pay dividend taxes), but in they end they choose the worst option possible for retail investors.
Author is long Sapec SA