Yearly Archives: 2015

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

Back in UTStarcom Holdings Corp. (UTSI)

I bought my first UTSI shares in the beginning of 2013 only to exit a year ago when they started to trade higher for no apparent reason. This proved to be a lucky move since the shares are down almost 40% since I sold, and that is after a small recovery the past two months. But the past is the past, what is more interesting, is what is currently happening with the stock.

More than a month ago the largest shareholder of UTStarcom filed with the SEC an amended form 13D in which they disclosed that they would sell their entire stake for $6.081/share to a strategic investor in China. This represented a premium of more than 200% compared to the previous market price. Today a Chinese news article notes that the transaction has closed, and more importantly: that the buyer intends to take the whole company private. The Chinese buyer bought a 31.6% stake for ~$72 million and the news article notes that the buyer expects to spend another $150 million to buy the whole company. This implies that they are going to offer the same $6.081/share deal to remaining shareholders (translation by Google Translate):

“Said is also more clever, UT headquarters in the United States just in our headquarters in the United States near future to integrate more convenient. Brand and personnel completely belong to us, there will be no changes, the only change is the CEO, it will initially expected by me served. “Gu Guoping said.

Gu Guoping absolute control of UT Starcom also being planned, it is expected to Fiji News about $ 150 million to that end expenditures.

Why the market has barely reacted to these events is mind-boggling. If there is a going private transaction in the near future UTStarcom shareholders stand to make a return of roughly 170%! Like I said, mind-boggling. Sure, we have the usual China risk, but UTStarcom isn’t some shady company with a fraud story. It’s not a great business, but they do have a solid balance sheet with a large amount of cash and tons of tax assets (thanks to a history of losing money…). For a strategic investor, that is active in the same industry, this is certainly a deal that could make sense. And even if no deal materializes the downside is most likely limited given UTStarcom’s cash balance. It could be a bit of a melting ice cube though…

For some more background on the latest developments, I would recommend these two articles by the GeoTeam on Seeking Alpha:


Author is long UTSI

WuXi PharmaTech merger arbitrage

Chinese going private transactions have been a fertile hunting ground for good merger arbitrage opportunities the past couple of years. I would have expected that this opportunity would have disappeared by now, but merger spreads remain big. I recently participated in the going private transaction of China Shengda Packaging Group, and this deal had a spread of ~8% right till the moment it was completed. WuXi PharmaTech (NYSE:WX) offers a similar spread with the stock trading at $43.00 while the going private offer is $46.00/share (less a $0.05 ADS cancelation fee) for a net spread of 6.9%.

The big difference is that WX is not an obscure company with a <$100 million market cap, but a mid-cap with a market cap of $3 billion. This always makes me a bit more uncomfortable, because that means that the big spread isn’t simply the result of the lack of liquidity or a lack of attention. In the case of WX the spread is most likely completely the result of risks associated with Chinese companies. Some perceived risks are probably not an issue while others are real. It’s for example highly unlikely that WX is a fraud, but the recent decline of the Chinese equity indices could be problematic. Relisting the company in China where valuations are higher is probably the idea behind the going private transaction. I don’t think this risk is very big though. Since the definite merger agreement was signed in mid-Augustus the price decline of Chinese A-shares has been relatively modest compared to the drop earlier this year.

What also makes this deal attractive is that the transaction is done at a relatively small premium. If we take the simplistic view that WX will trade down to the undisturbed predeal price of $39.50 if the deal fails our downside is just $3.50/share while our upside is $2.95/share. This means that the market is implying a probability of less than 60% that this deal is going through, which I think is ridiculously low. Financing is in place, the buyer group is well connected in China, there is no regulatory risk and WuXi PharmaTech appears to be a high-quality company. Overview of the transaction:

WX transaction overview

As always, I might be missing something: but this looks like a good risk to take.


Author is long WuXi PharmaTech

How hard (or easy) is it to outperform?

It’s not supposed to be easy. Anyone who finds it easy is stupid.
Charlie Munger

I started writing a post about how the recent market volatility provides a good moment to reflect on your skills as an investor, but I realized that the more interesting topic – that is somewhat related – is how easy or hard it is to outperform the market. I think this is really the most important question that every investor faces since the answer has huge implications on what kind of strategy you should follow. While this is a very fundamental question I don’t think there has ever been a good definitive answer. Are markets almost perfectly efficient and is your best bet an index fund? Do you need 150+ IQ points and read 500 pages/day to have a shot at out performance? Can you have an edge with an average or below average intelligence, but with a contrarian mindset and enough time? Can you be successful if you are really smart, but when you lack the “magic” psychological profile?

What kind of people should consider what kind of strategy?

Usually, this is a question that isn’t even asked when people ask for investment advice. Ask for investment advice on and everybody is going to advise a portfolio of low-cost index funds. Ask the question somewhere else and they probably recommend their own strategy; which could be buying owner operators, compounders, cheap value stocks, magic formula stocks, swing trading, forex trading, and whatever else exists.

Some of these strategies are probably not a good idea even if you are a genius and have a massive amount of free time (hint: forex trading) while other strategies could be executed by anybody with little effort. But being able to differentiate between a good and a bad strategy is also a skill. Some people might stumble on when they start out as an investor and go for some value strategy while other might stumble on a forex trading site and go that route. If your process for choosing a certain strategy is flawed the possible alpha of that strategy is not really your alpha. And if you are really smart and could generate alpha, but go for a passive indexing approach because that strategy sounded more convincing it’s also proof that investing is hard (unless of course it’s a conscious decision but you, for example, go for indexing because you have a lack of time or interest in investing) .

When I started investing I wasn’t at all convinced about my ability to beat the market, but I knew that there was a large amount of evidence that retail investors underperformed their benchmarks by large amounts by structurally buying high and selling low. I figured if they are able to underperform by such a wide margin I should be able to do well by just trying to do the opposite. That’s easier said than done, but on a day like “black Monday” I thought that the correct course of action was pretty obvious: buy stuff when you see ridiculous trading activity. I bought, for example, some Retail Holdings – because that is a stock that I know – at ~$16 because someone was selling at any price and no-one was buying. In some ETF’s there were even bigger opportunities, but I was too late to that party.

There is actually some research that suggests that intelligent investors are better at buying low and selling high. It doesn’t really sound like a surprising result, but it’s not easy to research since your broker usually doesn’t know your IQ. But in Finland nearly every male of draft age is IQ tested, making an interesting paper possible. Especially this graph that shows when people in the 1995-2002 period were buying tech stocks is pretty neat:

Buying/selling in tech stocks during bubble by IQ group

So I think if you are reasonable smart (maybe 120+ IQ?) and have enough time to research strategies and stocks active investment is perhaps worth a shot. I don’t really think that having the right mindset is extremely important because I think that is largely created by having the right knowledge (for example knowing that selling in a panic is almost the worst thing you can do). But I wouldn’t be surprised if many people think differently, and I also wouldn’t be surprised if I’m wrong about this. Anyway, enough rambling. To sum it up; I think that what people should do really depends on their intelligence, education, available time, their personality and probably other factors that I’m missing. There is no strategy that is a good fit for everybody. Indexing isn’t the right strategy for everybody, nor is value investing.

You have to be brutally honest with yourself about what is the right strategy is for you.