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.
Disclosure
Author is long Argo Group
wrt your last quote and open question – “book value losses incurred by the Funds as a result of the disposal” would be triggered if they (a) own debt issued to the Indonesian company or a related party or (b) own other assets whose carrying value could be impaired as a result of either the ownership change and/or the transaction multiple being assigned. Clearly with illiquid and intransparent assets making up a large part of the portfolio, the market assigns a high discount to the underlying fund holdings so sometimes a realized loss along with increased transparency is better than continued uncertainty.
Hi,
Lumenis (NASDAQ:LMNS) and XIO Completed Merger on Monday.
I owned Lumens stocks and I would like to ask, how long it takes in US
when they pay merger payment ?
Pertti
Has anyone found details of the transaction or historical accounts for TAF?
I found the below article, which mentions a $76m acquisition price. Given the $87.7m in AUM for TAF mentioned in the June accounts this would imply that 87% of the fund is now in cash.
However, this cannot be true as the Argo’s investment in the fund was written down by 24% and the $87.7m figure appears to be come from an audit before this provision (We know this because the annualised performance for the 6 months to June 2015 is only -1.45%). Hence if the $87.7m figure is reduced by 24% you end up with $66.7m of AUM which is below the sale price of $76m.
I must be making some assumption that is wrong here – has anyone else tried to interpolate the figures similarly?
Apologies – here is the article:
http://www.thejakartapost.com/news/2015/10/23/pertamina-gets-grip-ailing-tppi-after-stake-purchase.html
I think the logical explanation is that Argo got $76M cash, but that TAF is not the only fund that owned a part of TPPI. The Argo Special Situations Fund was also written down by 15%.
If you assume that after the write-down TAF consisted of 75% TPPI, and the special sits fund consisted of 45% TPPI (because it was written down less than TAF) we roughly get the right number. Their distressed credit fund could possibly also have owned a piece of TPPI, but we don’t know if it was written down because Argo Group itself doesn’t own any of the ordinary shares.
Thanks for asking this question by the way, hadn’t seen the article nor the US$76M number 🙂
Thanks, that makes sense although I can’t understand how they could make a 75% of AUM investment and still be treated as an asset manager. My background is in distressed debt and can’t think of a single asset manager that would do this. Especially in such a risky venture.
On some Indonesian language forums there is talk of a $100m price having been agreed historically which would match up to the 25% mark down also. However there is no detailed information I can find on the restructuring deal – not even on the usual distressed debt news wires – but EM markets are usually tougher.
with regards to the cryptic footnote, I found this interesting post:
http://uk.advfn.com/stock-market/london/argo-group-ARGO/share-chat
“Argo is selling the common stock of TPPI to Pertamina. (We owned 23% of the TPPI common I think) TPPI is insolvent but the common stock has value due to its ability to control the refinery and restructuring process. Pertamina needs this refinery badly, and I think they will buy our TPPI bonds next or do a restructuring and convert the bonds to equity and then buy the new common stock from Argo. So we have a book value loss on the equity which will be offset by the sale of the bonds above book is how I understand it. TPPI was Argos largest illiquid investment. The funds will be very liquid once it finishes and sells the bonds. ”
Obviously all speculation. I don’t know the poster but he wasn’t posting nonsense in the past.
Interesting