The first half of 2020 was without a doubt the most action packed start of any year since I started this blog, but you would not know it if you would look at the table below. After hitting a low somewhere in March, both my portfolio and the global stock market staged a remarkable recovery, and I’m back in positive territory while the stock market isn’t that far behind. During the depths of the coronacrisis I was pleased with how my portfolio managed to withstand the carnage. At the lowest point I was down approximately 13% for the year while the MSCI All Country World Index almost hit the 30% mark. I have written many times that I expect to do relative well in periods of market stress, and it’s good to see that that was not just wishful thinking. March 2020 was a portfolio stress test unlike anything I have had experienced before.
* Return in euro’s after transaction costs, net dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s
While my portfolio managed to survive the crisis (so far) I have to admit that I didn’t really do that much to capitalize on the opportunities that (in hindsight) were available. I was a cautious buyer because I thought that the economic impact of the coronacrisis could be severe and it would be hard to predict how it would impact various companies. To be honest, that’s probably still true, even though it doesn’t look like it anymore.
But I couldn’t resist picking up some shares at the depth of the crisis, and as you can see in the graph below, especially the special situations bucket performed admirably. Mergers were trading at historic large spreads, and while plenty of deals got cancelled or renegotiated most worked out quite satisfactory in the end. The only stock that caught me with my pants down was Stein Mart (NASDAQ:SMRT). I had not read the fine print of the merger agreement sufficiently careful, otherwise I would have realized earlier that drawing down the revolver too far would cause a material adverse change, giving the buyer an easy out.
As you can see, most of my portfolio is still down for the year. The two main exceptions are Viemed Healthcare and Xpel, two stocks that I would classify as reasonable priced growth. The sea of red below consists mainly of classic value stocks, and it is not a coincidence those have all performed poorly. While the stocks I own are in general too small to be part of any index, it is quite remarkable how much value stocks are underperforming this year. The Vanguard Value ETF is for example down -15.55% year to date while their growth ETF is up 11.44%.
Does that makes sense? I really don’t know. You could make an argument about how lower interest rates make companies with their value further out in the future more valuable, or maybe the coronacrisis will be the final nail in the coffin for struggling companies. But as long as I continue to buy cheap companies with a solid balance sheet I think things should work out in the end. We will see what the second half of 2020 is going to bring!
Author has a position in most of the stocks mentioned in the overview
Last month I wrote how I happily exited my position in Asta Funding around $12.50/share while the company was planning to go private at $11.47/share because I was skeptical that RBF Capital’s attempt to extract a higher price would be successful. Apparently their 8.8% position provided enough negotiation leverage, and the merger agreement was amended yesterday to a price of $13.10/share, marginally higher than the $13/share offer of RBF Capital itself. As part of the deal RBF has entered a voting agreement to vote all its shares in favor of the merger. At this point I think the deal is basically a done deal, and I would expect shares to trade close to the $13.10 price. And if not, Asta Funding would remain an attractive merger arbitrage candidate.
Thanks to a stroke of luck I bought back my position last week already when a large seller showed up, but otherwise I think I would still have been reasonable happy with my decision to sell early at $12.50. The new offer is basically the best case scenario that is playing out, and the missed upside would have been just a couple of percentage points.
Author is long Asta Funding
When I wrote about Asta Funding last month I thought it was a nice little arbitrage with little risk, but also limited upside given that the spread was just 3.8%. While surprises when doing merger arbitrage are usually bad news, I got lucky with Asta Funding. Their largest outside investor, RBF Capital, announced that they thought that the going private offer of $11.47/share was significantly too low and that they would oppose the deal. A month later they upped their game with a going private proposal of their own at $13/share.
The stock is now trading at $12.50/share, but given that 61.8% of the outstanding shares are owned by Asta Funding insiders this proposal has a very low chance of becoming reality. However, with a 8.8% stake RBF Capital owns a decent bit of the float and getting a majority of the minority to approve the proposed transaction might become difficult. 8.8% of the shares is just 23% of the float, but there are always a bunch of people that just don’t vote (and effectively vote against the deal) and there might be more than a few holders sympathetic to RBF Capital’s argument that the going private price is a lowball offer.
But it is far from certain that RBF Capital’s efforts will lead to a significantly improved offer from Asta Funding insiders. There are many alternative scenarios possible. Insiders could simply abandoning the going private proposal and go back to business as usual. Alternatively RBF Capital could just be posturing for an eventual appraisal case that would offer no free ride for other minority investors. And of course it’s totally possible that a lot is said and done and in the end the original proposal goes through. When the stock was trading close to the buy-out price of $11.47 I was happy to hold on to see how things would play out, but at the current prices I think the market is pretty optimistic so I decided to exit.
Author has no position in Asta Funding anymore
The first company I wrote about on this blog in 2011 was Asta Funding (NASDAQ:ASFI). Looking back, an ambitious start since it was certainly not a stock that was easy to analyze. I sold it in 2014 for a marginal profit, but Asta Funding always stayed on my radar. Last year it looked like the story would finally finish when the CEO of the company submitted a non-binding proposal to take the company private at $10.75/share. With insiders already owning a majority of the outstanding shares and the company having a book value of $13.71/share (of which a large part consists of cash, US treasury bills and equity securities) it was a deal that made sense and until recently the stock traded at a tight spread to the proposed offer.
However, last month changed everything. Merger spreads exploded everywhere, especially for deals that were not yet definitive. I had my doubts as well about this one, even though it was a good deal and the large cash balance would make the company pretty immune to the impact of the coronavirus. To my surprise Asta Funding announced last Wednesday that not only did they sign a definitive merger agreement, the price was also increased to $11.47/share, making this one of the very few new deals that were inked in the past few weeks. In normal market circumstances you would expect a cash deal like this with no regulatory risks and no financing risks to trade at a spread of almost nothing.
Of course, we are not living in ordinary times. But for a deal that was signed this week that doesn’t really matter. You would not expect the buyer getting cold feet because he knows exactly what he is getting into, and of course, the merger agreement explicitly states that the impact of a pandemic cannot be a material adverse effect. Many deals that were signed in the months leading up to the big outbreak outside China also have this clause. While many of them are probably also interesting arbitrages, here we not only know that legally the acquirer will have a tough time of walking away, but also that he doesn’t have any interest in doing so.
With the stock trading at $11.05 while it is being bought for $11.47/share the spread is currently 3.8%. Not bad for a deal that I think is extremely low risk, and will most likely be completed before the end of June. I couldn’t resist picking up some shares, but kept my position size reasonable small. There are so many interesting merger opportunities that it is hard to pick which ones to buy, and while I think this one has a low risk, the reward is also not super big.
Author is long Asta Funding
In 2016 I participated in the merger of Glacier Water with Primo Water (NASDAQ:PRMW), calling it at the time the merger arbitrage of the year. It was a somewhat complex deal with the payment composed of a mix of cash, stock and warrants and with a part of the stock portion of the deal locked up in multiple escrow tranches. At the end of 2017 I received the last Primo Water shares from escrow, making the merger arbitrage marginally profitable, but with some warrants remaining with an expiry date in December 2021 anything could still happen.
That something turned out to be the acquisition of Primo Water by Cott (NYSE:COT) this year in a combination of stock and cash. While the deal provided a nice boost to the stock price of Primo Water, it unfortunately also means a premature end of the warrants. In the merger the company will convert the warrants to stock, based on the $14/share cash consideration of the merger. I wonder if this is actually legally correct, because in the warrant agreement I don’t see anything about the possibility of terminating the warrants early in case of a corporate action. If I have a reader that is an expert in this subject matter I would love to hear from you.
That said, it is at this point just a theoretical discussion to satisfy my curiosity. With Primo Water trading above the $14 cash consideration that would be used to calculate the merger consideration for the warrants I decided to exercise them early, and sell the stock. That creates the following final picture of the results:
||# of PRMW shares
||Net cash flow
|Buy 1 GWSV share
|Cash merger consideration
|Initial share payment
|1st escrow release
|2nd escrow release
|3rd (final) escrow release
|Exercise warrants and sell stock
As you can see the end result is okay, but not very spectacular. Unfortunately Primo Water proved to be a mediocre business with an equally mediocre growth in share price. When I bought Glacier Water in 2016 the stock was trading at $13.81. Now, more than 3 years later, while the stock market has exploded upwards PRMW is barely above $15/share. And that is after receiving a decent merger premium. So it’s easy to imagine how this could have turned out different, but truth to be told, it was also clear in 2016 that Primo Water was priced high.
No positions anymore