AviaAM Leasing being taken under at PLN 5.62

Last year I initiated a small position in AviaAM Leasing AB that is now being taken under at PLN 5.62/share. While I never wrote about the company on my blog, I got a fair number of emails from people asking what the implications are and if there are any alternatives like I’m some expert on Polish securities laws (hint: no). Unfortunately, I don’t think there are any good options here. The group of insiders control 78.27% of the outstanding shares right now. Hitting the 80% threshold in Poland is enough to delist the shares from the stock exchange, and after hitting 90% ownership they can initialize a squeeze-out. I don’t know if there are even appraisal rights available for shareholders in a squeeze-out, but it’s a fair guess that it’s not worth the trouble for small foreign holders to go through that process.

So, as a (small) shareholder you can elect not to tender your shares in the tender offer. But the most likely result is that the only effect of that action is that you delay the payment for your shares. Additionally, sometimes getting paid through a squeeze-out procedure has negative tax consequences since in some countries it can be treated like a dividend (no idea how this works in Poland, but it is certainly a risk). So to summarize: I think we just got screwed and there is little we can do about it…

The only positive is probably that this confirms that it was indeed a cheap stock…


Author is long AviaAM Leasing

Safeway sells interest in Casa Ley

Just before hitting the three year deadline after which Albertsons would be required to pay CVR holders fair value for their stake in Casa Ley they announced that it was sold for approximately US$345 million. The transaction is scheduled to close by February 28, and CVR holders are expected to receive a payout between 87 to 90 cents per CVR six weeks later. It’s a slightly disappointing result since the CVR was valued at $1.0149 at the time of the merger. Albertson is quick to point out that since then the Mexican peso depreciated 20% against the dollar, but on the other hand we have been in a raging bull market for three years as well. Not the best outcome possible, but still pretty decent I think. Now that we know how big the final payout will be we can calculate what kind of return my first ever CVR-trade generated:

DateDescriptionCash flow
 1/27/2015Buy one SWY share(35.12)
 1/27/2015Buy one put as hedge(0.12)
 2/3/2015Receive cash consideration merger34.91
 5/11/2017First payment PDC CVR0.017
 4/11/2018Midpoint estimated payout Casa Ley CVR0.885

As you can see the trade generated a return of 23% over a more than three year time period which is obviously pretty good, although I believe this understates its profitability. I basically paid 33 cents in 2015 to get paid 90 cents three years later. Looking at it from that perspective the internal rate of return sounds low, but that has to do with the large amount of capital that needed to be tied up in this trade for a week. But thanks to a cheap margin loan it was almost free capital, and accounting for this leverage the internal rate of return would be way higher.


Author is still long two SWY CVR’s

2017 end-of-year portfolio review

With the last trading day of 2017 behind us it’s time to tally up the results for the year. What I’m writing here is starting to get repetitive, but it was once again an excellent year with my portfolio up 30.12%. For US-based investors this might not sound so extraordinary given how markets performed worldwide, but remember that these results are in euro’s. With the euro appreciating 14.6% during the year I faced a significant currency headwind. Measured in dollars my portfolio is up a whopping 49.19% (while the MSCI ACWI is up 23.97% in dollars versus “just” 8.89% in euro’s). Volatility in exchange rates has a large impact on my results in the short-term, but in the long-run I expect positive and negative moves to cancel each other to a large degree.


* 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

It’s also becoming a tradition that I complain in these posts about how difficult it sometimes can be to track something so basic as your investment returns. I have complained about how CVRs, liquidation receivables and other esoteric assets make this process less than straightforward.

Another complication are taxes. I only care about after tax returns, but that is not the number that I report here. What I report is basically the aggregate of the returns as reported by my brokers, sometimes adjusted for items that they got very obviously wrong. Since we don’t have short-term or long-term capital gains taxes in the Netherlands this number matches my after-tax return pretty well. However, a large part of the dividend taxes that I pay during the year can be used as a tax credit. Normally this is all pretty small potatoes, except for this year when I had a large position in Sapec that paid a huge E150/share dividend. Not only generated this a sizable tax receivable in Belgium, it also generated a big tax credit in the Netherlands. I basically valued the Sapec tax assets in a way that they payment of the dividend didn’t generate a gain or loss compared to the previous day trading price. I think this is the most sensible approach, except now I report my performance after dividend withholding taxes with the exception of Sapec. Not a nice and clean situation, but I also don’t want to restate all my results to retroactively recognize the value of tax credits generated by dividend taxes in previous years.

As you can see there isn’t a lot I can complain about this year. Almost all positions performed pretty well, including my basket of Japanese companies and my basket of Italian real-estate investment funds. Inside the special situation basket there were a couple of big losers, but nothing too drastic. The Destination Maternity merger failed spectacularly, causing a 308bps loss while “undisclosed merger B and C” subtracted another 152bps and 52bps from the result. This was more than offset by a 788bps gain in the Sapec going private transaction and a 495bps gain in “undisclosed merger A”. I talked about all these outliers before in my half-year report, although at that point in time the Destination Maternity loss was at “just” 172bps and the merger was supposedly still on track to close. The second half of the year was characterized by smaller and steadier gains in the special situations basket.

My portfolio doesn’t contain any big surprises I think. It’s a fairly standard (for me) split between long-term value stocks and special situations. You can see a big position called “various receivables” that contains among other things the Sapec tax assets, delisted Tejoori shares and some CVRs that I managed to pick up during the year (for example, Ocera Therapeutics). My cash position is at the moment pretty big, but that’s mostly the result of a couple of deals that were completed just before the end of the year. Less than a week ago my portfolio was actually slightly leveraged, and I hope to be able to reinvest this cash soon. As you can see from the results above, focusing on special situations is proving to be a profitable activity for me, but the downside is a high portfolio turnover. You always need to find new situations to replace those that get completed. Hopefully 2018 will have a couple of nice ones in store for us! Have a happy new year, and may next year be just as profitable for you as this year was for me!


Author is long everything in the portfolio overview

PD-Rx Pharmaceuticals reports FY2017 results

PD-Rx Pharmaceuticals posted their 2017 annual report online yesterday. Last year was a pretty solid year with revenues increasing by 21% from $21.5 million to $26.0 million. Net income saw a similar percentage increase and went from 0.30/share to 0.36/share. Given that PD-Rx’s past revenues have been somewhat volatile I don’t think we should put to much weight on this growth, they are now basically back to the level they achieved in 2013. As always, the company provides a nice overview of historical annual sales in a “classic” PowerPoint look:

Besides good operating performance there were two positive developments during the year. First of all, the company paid its first ever dividend in June this year. Compared to PD-Rx’s cash balance of $4.85/share the dividend of $0.30/share was not very big, but it does represent a 82% payout ratio for the year. Hopefully this wasn’t a one-off occurrence.

Secondly, the passage of Trump’s tax bill should provide a nice boost to earnings in the years to come. PD-Rx Pharmaceuticals, like many US micro-caps, pays the full US corporate tax rate, so the drop from 35% to 21% should boost earnings by approximately 22%. If we crudely value PD-Rx at the value of its cash balance plus ten times 2017 earnings, value per share jumps from $8.49 to $9.33 if we adjust for the lower tax rate. Given that shares currently trade at $5.65 I still think they offer a pretty compelling opportunity.


Author is long PDRX

Last Primo Water shares released from escrow

Last year I participated in the merger arbitrage between Primo Water and Glacier Water, calling it the merger arb of the year. Because of the unusual deal structure it will take a long time to know exactly what the result will be, but today the last Primo Water shares were released from escrow which clarifies at least one piece of the puzzle. I expected that all the escrow shares  would be delivered to former Glacier Water shareholders, and that proved to be the case. Of course, just the fact that we did get all the shares doesn’t mean that it was a sure thing. Risks that didn’t materialize are unobservable, and are the main reason why making sense of investment results is so hard. But at least it’s a clue that perhaps I had the right idea.

With the last Primo Water shares sold my preliminary result is looking as follows:

DescriptionDate# of PRMW sharesRealized priceNet cash flow
Buy 1 GWSV share10/24/2016-$22.98
Cash merger consideration12/26/2016$12.1761
Initial share payment12/26/20160.252975$12.73$3.2204
1st escrow release6/29/20170.154838$12.83$1.9866
2nd escrow release9/11/20170.154838$11.69$1.8101
3rd (final) escrow release12/20/20170.309676$12.75$3.9484

As you can see, the result so far isn’t exactly a home run, but part of the reason is that the share price of Primo Water dropped and I realized an weighted price of $12.57 which is 9.0% lower than the $13.81 the stock was trading at when the position was initiated. In theory I could have hedged my Primo Water exposure, but in practice this isn’t easy nor is it free. So this is just variance I will have to accept. Sometimes it will hurt results, sometimes it will boost them.

But more importantly, this isn’t the whole merger consideration yet. The warrants, another part of the deal, still have 4 year left till expiry, have a strike of $11.88 and are worth $3.87 at the moment (assuming 30% volatility). Since we got 0.54 warrant per GWSV share that means that even with a slightly lower Primo Water price the expected payoff is still looking pretty good. What will happen next will mostly be noise from an investment process perspective, but nevertheless, if this blog is still alive in four years time I will let you know how this ended :).


Author has no direct position in Primo Water, but owns the warrants