Argo Group announced today the results of the tender offer I talked about previously. As I sort of expected slash hoped, the tender offer was undersubscribed, and as a result the company is accepting all 8.1 million tendered shares at the 26p/share maximum. A great result since the stock was trading around 15/16p before the tender offer was announced. Even though the company bought the stock at a pretty decent premium, the tender offer was accretive to NCAV/share. The big question is whether or not I should try to re-initiate a position in the stock, or that I should be happy to have been able to exit without having to face the ridiculous bid/ask spread on the London AIM market. It’s still trading at a pretty sizable discount to NCAV, but at the same time insiders are also increasing their control of the company. Their stake jumped from 52.7% to 63.7%, and if they would exercise their options for 4.3 million shares they get to 74.8%. Having 75% of the votes is for example enough to delist a stock from the AIM market, so corporate governance, never Argo Group strongest point, might become even more a risk.
Because of the long holding period my annualized return on my Argo Group position, ignoring some opportunistic buys and sells I made throughout the years, is sort of disappointing. It’s certainly not terrible, but a 10.8% internal rate of return is also not great:
Bought first shares
Expected result tender offer
No position anymore as soon as Argo Group pays for my shares
Retail Holdings announced today that a 54.1% owned subsidiary has entered into an agreement to sell their whole stake in Singer Bangladesh for $75 million. Given that Singer Bangladesh is the largest remaining piece of Retail Holdings assets this gets the company pretty close to the finish line with regards to their plan to fully liquidate. Besides Singer Bangladesh they only have a 60.8% stake in Singer India left that is also owned indirectly through the same subsidiary.
While the sale of Singer Bangladesh is nice, the price is very disappointing. Retail Holdings owns (indirectly) a 37% stake of Singer Bangladesh that is worth $91 million based on the latest market price in Bangladesh. Besides this stake, they also own a 20% stake consisting of non-remittance shares and these shares have $15 million in accumulated unremitted dividend distributions. Given the restrictions these shares have with regards to paying distributions to shareholders outside Bangladesh it makes sense that these are worth substantially less than normal shares, but I think they should certainly be worth something. Selling their whole Singer Bangladesh stake for a discount to the latest market price and throwing in the non-remittance shares and their accumulated unremitted dividend distributions for free seems a pretty bad deal. In a best case scenario, with a zero percentage discount, these assets could be worth $155 million, more than twice the agreed upon price of $75 million.
Despite the bad deal the stock is up a tiny bit today, which makes sense. Most of Retail Holdings market cap will soon consist of cash, and presumably be returned to shareholders. Taking into account the $75 million that will be received for their Singer Bangladesh stake, NAV/share stands roughly at $12.40 which means that there is actually a little bit of upside left from today’s share price of $11.66. Guess that shows that buying stuff with a sufficiently big discount does offer some margin of safety, but still: I’m pretty disappointed by this outcome.
Almost four months ago I wrote a blog post about Sorrento Tech, formerly known as Roka Bioscience (NASDAQ:ROKA), thinking I probably got screwed out of a liquidation payment. I bought shares on the last day of trading on December 28, 2017 while the company closed it stock transfer books on the same date, probably giving no thought to the fact that it takes two days for trades to settle. In 2018 the company announced its first liquidation distribution, and with a record date of December 28, 2017 it seemed like people who bought shares in the last two days of trading were out of luck.
Not how it should be, because when I bought the shares they weren’t trading ex-dividend, and as the legal owner of the shares I should be entitled to any and all future distributions. But being right is one thing, getting paid what you deserve is something else. Luckily the company proved willing to work with DTC to resolve the situation, and while it took a couple of months, DTC rescinded the original payment last month and made the new distribution payable to beneficial owners as of October 24, 2018. Most brokers processed the new payment instruction on March 1st, but for some reason it took Interactive Brokers a full three weeks more. A little bit annoying, but quite happy that this mess finally got resolved :).
I would also like to thank all the readers that contacted me about the situation with tips and information about their attempts to get the situation fixed. It’s pretty amazing to be able to find people who are in the same situation as you, especially when we are talking about two days of trading in a $4 million market cap company. Doesn’t get much more obscure than that!
My oldest position in my portfolio is Argo Group. I bought my first shares not long after starting this blog in 2012 at 14.69p/share and while there have been a couple of dividends since, and the opportunity to buy more at significantly lower prices, the stock hasn’t exactly been a home run with a current price around 18p/share. Nevertheless, the company remains very cheap, trading at roughly a 50% discount to net current asset value. Argo’s management has recognized this, and reduced the number of outstanding shares with 30% since 2012. But at the same time this has cemented their control over de company as well since they now control 52.7% of the outstanding shares.
Last week Argo announced that it is launching a tender offer to purchase between £2.0 million and £2.5 million worth of shares in a Dutch auction action with a price range between 18p/share and 26p/share. If you don’t have a position yet in the company you can stop reading here, because the offer is only open to shareholders who held their shares on the record date of 6 March. But since I already own the stock I had a decision to make.
Argo Group has a net current asset value of 36.5p per share so I’m absolutely not interested in selling at 18p/share. But at 26p I think it’s a reasonable deal. I get paid a 50% premium to the latest market price, and the company would still be purchasing shares at a 30% discount to NCAV. I’m okay with a deal that’s a win-win for both parties, and at that price the discount is basically split “fairly” between exiting shareholders and remaining shareholders. By tendering at the highest price of the range there is of course a risk that none, or not all my shares, will be accepted in the tender offer, but I think that’s a risk worth taking. If the tender offer is completed at a lower price it would provide a nice boost to NCAV/share anyway, and most likely the stock price will follow. And most importantly, at 26p I’m selling it cheap enough already!
A sort of interesting twist in the tender offer is the fact that the company can pick if they want to buy back £2.0 million worth of shares or £2.5 million worth of shares. At a price of 18p that corresponds to 50% to 60% of the float while at 26p it corresponds to a percentage between 35% and 43%. Given that it’s such a big percentage of the float, I expect that it’s quite likely that the tender offer will go at the maximum of the range. But because the company has the ability to scale back the number of shares they have to buy I do think it’s important to not tender low with the expectation that it will not really matter in the end result.
Long Argo, tendered my whole position at the maximum price
Four years ago I bought a basket of various Italian real estate funds because I liked the combination of a 50% discount to NAV and the fact that these funds all have a fixed maturity date. When I started tracking these funds there were 24 different entities with a total NAV of €4.0 billion. Two years ago that number had shrunk to 21 different funds with a NAV of €2.6 billion and now just 14 funds are remaining with a total NAV of €1.5 billion. It’s taking quite some time to sell the assets of these funds, but they are liquidating. At the same time the average discount of the remaining funds has shrunk a little bit, but is still quite high at 41%:
So far my investment in this basket has worked out to my satisfaction. As of today my internal rate of return stands at 14.7% which I think is pretty okay for real estate. While all the funds I bought have appreciated in price, most of the return can be attributed to just two funds that have now been fully liquidated. While things have worked out for me, just blindly buying all these funds would probably have been a bit less successful. Most funds have been quite successful in slowly selling their assets close to NAV, but some have sold them at sizable discounts. The Obelisco fund liquidated this year, writing down their NAV to zero, and without making a single distribution to shareholders…
Another fund that is close to liquidating is Unicredito Immobiliare Uno. In the latest annual report the management company reports that they have received offers from multiple investors to acquire the remaining real-estate portfolio of the fund. I think it’s quite likely they will be able to sell their remaining assets close to NAV, and thus with the discount remaining above 20% I think it’s an attractive bet. It’s my only new position in my basket of Italian real estate funds, all the other ones in the list below have been in my possession for multiple years: