American DG Energy merger: attractive with an 19% spread!

American DG Energy Inc. (NYSEMKT:ADGE) is being acquired by Tecogen Inc. (NASDAQ:TGEN) in an all stock transaction. Tecogen is offering 0.092 shares for every ADGE share. What is very surprising is that when the deal was announced the stock price of ADGE barely reacted. ADGE closed just 6.8% higher on negligible volume while Tecogen was offering a premium of approximately 35%. Since then the stock prices of both companies have barely moved and as a result the spread is still an extremely juicy 19%. Note that, because both stocks are fairly illiquid and can have a wide bid/ask spread putting an exact number on the spread is hard, and entering a position at this price might be even harder. I decided to pay up for my ADGE shares.

With a spread this big your reaction is probably “there must be something serious wrong here”, at least that was what I thought. But after reading the preliminary proxy statement there isn’t a whole lot that I can find that would worry me. What is unusual is that both companies are already very closely related. They are already located at the same address, the have the same two co-CEOs, the same big shareholders and they are sharing board members. From the S-4:

Senior Leadership Overlap

  • John Hatsopoulos is the co-Chief Executive Officer of both Tecogen and ADGE.
  • Benjamin Locke is the co-Chief Executive Officer of both Tecogen and ADGE.
  • Robert Panora is the President and Chief Operation Officer of Tecogen and General Manager of ADGE.

Board Overlap

  • John Hatsopoulos is a member of the Board of Directors for both Tecogen and ADGE
  • Charles Maxwell is a member of the Board of Directors for Tecogen and Chairman of the Board of Directors of ADGE.

Ownership Overlap

  • John Hatsopoulos together with his family beneficially owns more than 22% of Tecogen and 20% of ADGE.
  • George Hatsopoulos together with his family beneficially owns more than 21% of Tecogen and 19% of ADGE.

But I don’t see that as a negative in this case, this just means that it makes a ton of sense to merge the two companies. They are active in adjacent businesses and since ADGE has a market cap of just ~$17 million and Tecogen has a market cap of ~$85 million maintaining two separate stock listings is just too expensive. The two companies expect that they will be able to eliminate approximately $1 million in costs annually by merging, which is significant. What I think is perhaps the biggest worry of people interested in playing the merger arb is this:

No Deal Protection Devices; Termination of the Merger Agreement
The Merger Agreement does not contain any so-called “deal protection devices” such as a no-shop provision or a termination fee. Prior to obtaining ADGE stockholder approval, ADGE may withdraw or modify its recommendation to ADGE stockholders with respect to the Merger, terminate the Merger Agreement and enter into an agreement with respect to a competing acquisition proposal with a third party. In addition, Tecogen and ADGE may mutually agree to terminate the Merger Agreement at any time prior to the Merger effective date, regardless of whether Tecogen or ADGE stockholder approval has been obtained. See “The Merger Agreement – Termination of the Merger Agreement by Either Tecogen or ADGE.”

This obviously makes it easy for both companies to change their mind, and cancel the deal, but I don’t think that is a significant risk-factor in this case. There is really just one party here, and that partly must be interested in pursuing the current deal. Why? Because just getting a merger agreement signed and getting a preliminary proxy statement on the SEC site is an expensive process. You’re not going to spend a solid six figure dollar amount, or perhaps even a seven figure amount, if you aren’t serious. Especially if you are also a shareholder in both companies.

So I think that this deal will probably be completed, and I also think it will be completed soon. It doesn’t require any regulatory approvals, and both companies expect to complete the deal by approximately March 21, 2017. Getting shareholder approval should also not be problematic considering the inside ownership in both companies. Insiders own 24.8% of Tecogen and 18.0% of ADGE (and family members related to the insiders own a bit more). They will require some support from outside shareholders, but it is a deal that makes sense and as an ADGE shareholder you get a nice premium, so I don’t see why it shouldn’t happen. The Tecogen Q3 conference call contains a couple of interesting tidbits (not all on the slide) that further demonstrates how closely related the two companies are, and why a merger makes sense.

To me it seems that ADGE is just a stock that is being ignored by the market. Since the deal was announced on the 2nd of November total trading volume in the stock was a bit less than 2 million shares for a total value of roughly $600,000. That’s absolutely nothing for a company with more than 50 million outstanding shares when a big corporate action is announced. If it would be a controversial deal you would at least expect to see some trading action, or a high short interest. In this case, just nothing is happening. Another hint that owners of ADGE and Tecogen might not be keeping track of what their stock is doing comes from the S-4:

After due consideration, the Board of Directors of each of Tecogen and ADGE determined not to require approval of a “majority of the minority” of stockholders of each company as a condition to closing of the Merger due to a number of factors, including but not limited to: (a) a historical pattern of a significant percentage of stockholders of each of Tecogen and ADGE not voting in prior annual meetings, making it difficult to achieve a majority of the minority of all eligible shares for each such company, particularly in light of the significant equity ownership of officers and directors and their families of each company;


Perhaps that I’m missing something here, but I don’t see what… I bought a decent position, and in case I’m somehow missing something I guess the downside is limited. ADGE is barely up compared to the price before the transaction was announced so it also shouldn’t drop a lot in case the deal doesn’t go through. It’s a bit of a weird situation, but I think it’s extremely attractive at current prices. Investors love calling random stuff an asymmetric risk/reward opportunity, but this is really one of those deals. And not in the usual merger arbitrage way with a little upside and a lot of downside! 🙂


Author is long ADGE, no position in TGEN

Tejoori Limited: liquidating with a 40% discount to NAV?

Tejoori Limited (LON:TJI) describes itself as a investment company that invests in ethical and Sharia compliant ventures around the world. Like many companies listed on London’s AIM market the track record of the company is truly terrible. After IPO’ing in 2006 for $4.90/share the stock saw more than 99% of its value evaporate. Since 2015 the stock has been able to recover a bit from a low of $0.03/share to the current price of $0.39/share. The reason for the big recovery is that Tejoori started selling all its assets and last week the company announced that it has signed an agreement to sell its last remaining asset (a plot of land in Dubai) for a gross consideration of US$5.8 million. Last year the company managed to sell two other plots that generated most of the cash that the company now has on hand. Assuming that the sale of the final plot goes through without problems the balance sheet of Tejoori looks as follows:

As you can see, the company has only cash remaining on the balance sheet together with some receivables and some small liabilities. The “other receivables” are related to an earlier sale of some assets, but apparently the acquirer has so far been unwilling to settle the remaining amount. I have applied a 50% haircut to account for this, but being a bit more conservative might also be warranted. The receivable is related to a sale in 2013, so it’s long overdue:

During the year ended 30 June 2013, the Group successfully replaced the Lagoons plots for alternative plots in the Arjan project located in Dubai, UAE. USD 0.6 million of the additional costs incurred on the exchange of plots was payable by the acquirer which has been added to the earlier receivable of USD 3.1 million. However, the acquirer has refused to settle the balance due to the Group. While the negotiations are ongoing to settle the dispute, no impairment has been recognised.

While the company has at this moment basically sold all its assets the big question mark is: will it actually fully liquidate. Tejoori has communicated its desire to return a part of the cash, and given its current small size I don’t see the point of trying to remain in business. In the latest annual report the company wrote the following:

The Company intends to, as previously stated, return to shareholders a certain proportion of the cash generated from the sale of the plots undertaken to date and it intends to finalise these details following the sale of the third Arjan Plot.

The Company is, in conjunction with its advisers, considering the most effective and efficient manner in which to return cash to shareholders and following the disposal of the third plot the Company will update shareholders further. The Company is also, as part of this review process, evaluating the merits of the Company maintaining remaining as an AIM quoted company given the costs associated with the listing.

I expect that the company will fully liquidate after selling the last land plot earlier this year, but it might take some time since they first need to settle the unpaid receivable and if legal steps needs to be taken that might potentially take significant time and money. But I expect that a large part of the money can be and will be returned to shareholders already this year. But since the company hasn’t fully committed to a full liquidation this remains a bit uncertain.

One thing that is positive is the current operating costs of the company aren’t that high. Last year administrative and other operating expenses were $177,500. Presumably this amount could be lowered significantly if the company decides to delist from the AIM. But with ~$18 million in equity and a ~$10 million market cap there is I think a sufficient margin of error. A few years of operating expenses isn’t going to destroy all potential upside.


As a holding company holding only cash (when the last transaction is completed) this is a very simple situation. If you think that this cash will most likely be returned to shareholders you have a great deal, if you think the company will find a new way to light money on fire it’s not attractive. Given what Tejoori has done the last year, and what they have communicated I think it’s very likely that they are going to continue to do the right thing. At the same time, this isn’t a super high conviction idea and since trading costs are also very high on the AIM market I made this a small position. I think it’s still a pretty good addition to my basket of special situations.


Author is long Tejoori Limited

Retail Holdings update

Retail Holdings has seen an action packed week. Chris DeMuth Jr., one of the most popular Seeking Alpha authors, published his thesis on the company last week and called it his top pick for 2017. The market didn’t ignore him, and shares rose 25.8% from $14.70 to $18.50. One interesting tidbit that he picked up on, that I failed to spot, is that in the latest annual report the company changed their time frame for the liquidation of the company from 3 to 5 years to 2 to 4 years. It seems like a small detail, but no reason to change that if the liquidation of the company isn’t moving forward.

Yesterday Retail Holdings issued a press release with an “updated strategy statement” that reconfirms this two to four year horizon. More interesting is that they also confirm that they repurchased 542,782 shares last year, a significant amount since it represents 10.6% of the outstanding shares. Assuming they bought back these shares at $15/share (probably a slightly pessimistic estimate) this grows NAV/share with 5.4% from $27.39 to $28.87. Too bad that the shares are now trading higher, since potential future purchases will be less accretive since they have to be done at a smaller discount to NAV.

While I think Retail Holdings is still very undervalued I sold a bit of my position this week. When I called the company “my best idea for 2016” on Seeking Alpha it was trading at an effective discount of 61.5%. Since then shares are up ~70% while the discount is down to 35.9%. Still attractive, just not as attractive as before.


Author is long Retail Holdings

Exited the American Farmland merger arb

Today I sold the remaining piece of my stake in American Farmland. I had already sold the majority of my stake last year since the spread quickly collapsed after I entered the trade. It started with a juicy 13.2% spread while now just 2.6% is remaining. Since I was only long American Farmland without a corresponding short position in Farmland Partners I didn’t capture the whole shrinkage of the spread. I bought American Farmland at $7.45 and sold my last shares today at $7.98 for a 8.0% return (taking into account a $0.0625/share dividend). If this would be a cash deal I would have tried to capture the last remaining percentage points since this deal will probably close very soon, but since I’m not that thrilled to own Farmland Partners I’m happy to leave a little bit of money on the table.


No position in AFCO or FPI

2016 performance review

With another year behind us it’s time to make up the balance for 2016. The year started somewhat challenging with global indices and my portfolio going down roughly 10% in February. If you would have told me that this would be followed by a Brexit and Trump winning the US presidency I would have predicted disaster, but instead the MSCI All Country World Index is up double digits and thanks to a truly phenomenal second half my portfolio finished the year up 43.6%. In some ways this is my best result ever. Because the amount of capital I’m working with has been growing it’s for sure my biggest year measured in euro’s, and because of some conservative accounting choices I think my performance is somewhat under-reported and in reality I’m beating the index with a (slightly) wider margin than in 2013.


* 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

When I started this blog I thought that roughly 5 years would be enough to build up a track record. I’m either extremely lucky to outperform the index like this for 5 years in a row, or I’m creating some true alpha. Of course, concluding that I’m adding alpha isn’t the same as estimating how big my edge is, and I think a 5 year track record is not even close to enough to answer that question. I wish I could confidently claim that I’m expected to continue to perform like this, but that’s probably not true. I don’t know what I can realistically expect going forward, but I doubt it’s the CAGR of more than 30% like the past five years. But I would be more than happy with just half of that, and perhaps that is possible :).

When you start investing you think that one of the easiest things to do is precisely tracking your performance, but since I started accumulating weird stuff that is non-tradable it isn’t that straightforward anymore. This year I spend money acquiring Alexza Pharmaceuticals CVRs, Dyax CVRs, shares in DNIB Unwind (liquidation trust), and Primo Water shares (in escrow) and warrants. They are all non-tradable and being marked to market at zero by my broker. Since some of these were big positions I couldn’t simply do the same in good conscience. That’s why I marked DNIB Unwind at cost while I marked the Primo Water shares held in escrow at market value. I believe this is still very conservative, but a bit more correct:

  • I sold the DNIB Unwind shares after acquiring them since all liquidation payments are only for record holders as of 30 Aug 2016. Even though the shares were worthless after that date they continued to trade at a meaningful price. In a more aggressive valuation I could take credit for these proceeds which would increase the result by 157bps.
  • I took full credit for the value of the Primo Water shares even though they are still hold in escrow, but I marked the warrants at zero. Valued with 30% implied volatility they are worth another 108bps.
  • I valued the DYAX and ALXA CVRs at zero while valuing them at cost would add 70bps.

In addition to these choices, I also included the value of the Beximco cash and stock dividend in my result for this year. The stock is trading ex-div for both, but my broker doesn’t recognize the dividends. Including these dividends increased my performance with 84bps.

As you can see in the above graph almost everything I owned managed to end up in positive territory this year with the exception of Conduril. I’m not quite sure why the stock has been performing so poorly. The company is expected to receive a large amount of cash from Angola this year, and the recovery in oil prices should also be a positive for business in Angola. Because I think the stock is now very cheap again I have added to my position multiple times last year around current prices, and this morning I bought a few hundred shares more.

There is also a big loser hiding in the special situations basket. I had a position in Aixtron, a German company (with an US subsidiary) that was being acquired by a Chinese company, but unfortunately the deal was blocked by Obama because of national security concerns.

Beximco Pharmaceuticals has been by far the best performer of the year. The business itself managed to generate some nice numbers, but most importantly the discount between the shares in Bangladesh and the GDRs that trade in London has shrunk significantly. At the moment the discount is still sizable at roughly 35%, but that’s a lot less than the 60% earlier this year. I sold some shares of the company in the past months, but because of its strong performance it remains one of my biggest positions.

If you remember my previous post with an overview of my portfolio you will recognize that my current portfolio composition is fairly typical. I have a decent chuck of money allocated to special situations, and there is plenty of cash available for new positions. I’ve got some promising ideas already, so I expect that I’ll be able to spend some of the cash soon :).


Author is long everything in the portfolio overview