Monthly Archives: October 2015

ROIQ warrants merger arb post-mortem

On Monday, ROI Acquisition Corp. II announced that the proposed merger with Ascend Telecom Holdings would not be completed. As a result, all shares of the company will be redeemed for approximately $10/share while the warrants will expire worthless. This means that I will realize a loss of 100% on my position in the warrants, and I agree with my loyal blog reader “pietje” that some reflection on what has happened isn’t a bad idea. At the same time, we have to be careful that we don’t try to extract information that isn’t there since we are talking about a sample size of just one. Expecting Value made the same point a few days ago when talking about the Globo situation, and I totally agree with him. Just because an investment didn’t work out it doesn’t mean that it is a failure that shouldn’t be repeated nor did you necessarily made the right call when you make money. Evaluating success and failure is hard when there is a lot of noise.

Burning telephone towerSo far this probably sounds like I’m creating a narrative where I conclude that the ROIQ deal is just a case of bad variance and that it’s pointless to reflect on it. That’s not completely the case. I did screw up, and I learned a lot from it. I just didn’t do it this week. When I initially posted about the deal in Augustus I was pretty clueless with respect to the dynamics in a SPAC deal and I missed some of the most important factors. So while I now think that my initial thesis was total crap it happens to be the blog post that generated the highest number of page views since I started writing. I hope that those readers came for the high-quality comments on the post, and not the post itself. Because thanks to some knowledgeable readers who commented I quickly realized that I was wrong, and I exited my position (that was sized too big) with a nice gain. A nice example of how a bad thesis can generate a good result…

I continued following the deal and learning more about SPAC acquisitions (this is, for example, a paper worth reading). At some point, I decided to re-enter my position in ROIQW because I thought it more likely than not that a deal would be completed. Recognizing that it was far from certain that a deal would be completed I sized my position very conservative at approximately 30bps of my portfolio. Unfortunately the deal didn’t go through, but I still think that I made a decent bet with good odds. Besides the fact that the deal didn’t go through there is actually no new information, so it’s tough to argue that there is something that I should have known that I missed. The second part of the story is probably a case of a good thesis with a bad result.

If there is one thing we can learn from this it is how valuable it is to receive feedback from other investors on your ideas. Perhaps a blog is not the right idea for everyone, but I can highly recommend it. Sometimes it feels like you are giving great ideas away without getting anything in return, but one avoided disaster makes it worth it. And that’s not the only reason to blog.


Technically I’m still long ROIQ warrants…

Mota-Engil Africa tender offer/delisting arbitrage

Last year I did a small post on Mota-Engil Africa when it debuted on the Dutch stock exchange. While I never had any intention of investing in the stock I thought it was interesting because it is a good comparable to Conduril, (still) one of my biggest positions. Since getting a listing less than a year ago the stock price of Mota-Engil Africa has languished, hitting a low of €3.40 compared to an IPO opening price of €11.50.

logo2The company has therefore decided that the listing in Amsterdam is a failed experiment and is offering to repurchase all shares at €6.1235. Mota-Engil SGPS SA (MESGPS), the largest shareholder slash parent company of Mota-Engil Africa is not going to tender their shares. With Mota-Engil Africa currently trading at €5.82 you can make a 5.2% absolute return when the transaction closes. The company will hold a shareholder meeting on 23 November and intends to complete the tender before the end of the year.

The €6.1235 offer is significantly above the €3.77 price the shares traded at the day before it was made public, and because MESGPS owns 82% of Mota-Engil Africa shareholder approval shouldn’t be a problem. In addition to this the deal is also supported by the second large shareholder with a 13% stake. This shareholder is going to exchange its stake for newly issued shares in MESGPS, so what remains is a float of just 5% that needs to be bought out. Effectively it’s a very small deal that shouldn’t hit any obstacles. The reason for the relative big spread is most likely the result of the low liquidity of Mota-Engil Africa. But who cares about liquidity when you can tender your shares in roughly two months time? I don’t.


Author is long Mota-Engil Africa

Argo Group sells Indonesian investment

Argo Group, an alternative asset manager, has been one of my first write-ups on this blog, but certainly not one of my most successful investments. I initiated my position at 14.69p/share only to see it drop 60% in the following years to a low of 6.00p/share a few months ago. Unlike some of my earlier investments that I sold because I thought that my initial analysis was flawed this was one idea that I kept believing in, and adding along the way. Not that this means that my first Argo write-up was flawless (far from it!) since the Indonesian investment, that is the subject of this post, isn’t even mentioned.

What I learned later is that Argo Group manages a very concentrated portfolio, and a major holding was a minority stake in a troubled Indonesian refinery. How big this asset is as a percentage of The Argo Fund has never been disclosed, but it has to be very big. In the latest interim report, Argo already reduced the carrying value of their stake in their own fund from $18.2 million to $13.8 million based on the agreed sales of an “important asset”. That’s a 25% write-down! My educated guess is that their TPPI stake is now approximately 65% of the Argo Fund, and with the sale of this asset almost completed there is now a large amount of liquidity:

Argo Group Limited (“AGL”), the independent alternative investment manager offering a multi-strategy platform for investing in global emerging markets, announces that certain funds it manages (“Argo Funds” or “the Funds”) have reached an agreement for the sale of a significant investment they hold in Indonesia (“Indonesian Investment”). The transaction conditions precedent are now fulfilled and the Funds has received a part of the sale consideration with the balance due over the next two weeks.

Because of the previous illiquid nature of the Argo Fund it has a large amount of accrued management fees outstanding ($5.8 million!) that now can be paid to Argo. With a market cap of $10.2 million (based on a 10.18p share price) that is big news. In addition to this the company also owns a $13.8 million stake in their own fund that is now mostly liquid as well. If we simply add these two numbers we get a total value of $19.6 million, implying a liquidation value that is almost twice the current market cap, and it gives zero credit to their other assets and (potential) earnings power. I still see a lot of value here, and I think the completion of the sale of their Indonesian investment will act as a catalyst since the company has indicated that they intend to resume their annual dividend and/or implement a share buyback:

Once the full sale consideration has been received by the Funds, the Board will consider a resumption of annual dividend payments and or a potential return of capital to shareholders via a share buyback subject to a review of AGL’s future strategy and working capital needs.

What the following, from the same press release, is supposed to mean, no idea…

The disposal of the Indonesian Investment improves the liquidity of the Funds and creates an opportunity for further transactions with the same counterparty that could in the future mitigate the impact of the book value losses incurred by the Funds as a result of the disposal.

TPPI refinery


Author is long Argo Group

Synergetics USA merger arbitrage: get a CVR (almost) for free

Synergetics USA, Inc. (SURG) is a tiny manufacturer of medical surgical devices with a $168 million market cap that is being acquired by Valeant Pharmaceuticals International, Inc. (VRX), the well-known, and somewhat controversial, pharmaceutical behemoth. VRX is paying $6.50 per share plus a CVR that could pay out an additional $1/share if certain sales milestones are achieved. Because the CVR will be non-tradable, non-transferable and is hard to value you have all the right ingredients for an attractive special situation.

SURG Ophthalmic products subject to the CVR

Since the CVR is non-tradable and non-transferable there are going to be a lot of people who would prefer not to own it. It will be totally illiquid and is going to be an accounting headache for funds. At the same time valuing a CVR is pretty hard. The reason for a CVR in a merger is usually because the buyer and the seller couldn’t agree on the value of some asset. And if the two parties who are most knowledge about the subject can’t figure it out, who can?

I don’t think I can. But that doesn’t mean that I have no idea how much it is worth since the CVR itself is a big hint since it is the product of the negotiations of two knowledgeable parties. This probably means that milestones are set at levels that are reachable, but not easy. So my guess would be that when you see a CVR with a payout between $0 and $1 the intrinsic value is somewhere between $0.25 and $0.75, and probably close at the low-end of that range because I think the second milestone is usually an optimistic target.

If we assume that the value of the CVR is $0.25 the absolute spread between the current price ($6.57) and value ($6.75) is just 2.7%. That doesn’t sound like a lot, but I think that the probability that this deal will close is almost 100% and since it will close in roughly two weeks time tying up some cash in this stock doesn’t carry a large opportunity cost. VRX is acquiring the company using a tender offer that will expire next week on Wednesday, October 14.

Thought that this was a good spot to put some idle cash at work :).


Author is long SURG