Yearly Archives: 2021

Feedburner is discontinuing email subscriptions

For the followers of the blog that keep track of new posts using the email subscription feature I have bad news. The email updates are powered by Google Feedburner, and Google has decided to put this product in maintenance mode which means that only core functionally will remain operational. As you might have guessed by now, email updates are not a core feature and somewhere next month Google will discontinue email subscriptions. If you want to keep track of new posts you can use the RSS-feed and subscribe in a tool like Feedly (I personally think this is a great way to keep track of various blogs), or follow me on Twitter (but easy to miss a link to a new post between all the other content that gets posted daily). Or you can just take the old fashioned route, and visit the alphavulture.com once in a while to see what’s new.

Merger arbitrage in the Coherent bidding war

On the 19th of January Coherent Inc. (NASDAQ:COHR) announced that it would be acquired by Lumentum Holdings Inc. (NASDAQ:LITE) for $100/share in cash and 1.1851 shares of Lumentum for a total consideration of $5.7 billion. A few weeks later MKS Instruments (NASDAQ:MKSI) kickstarted a bidding war with an unsolicited proposal only to be joined a few days later by II-VI Incorporated (NASDAQ:IIVI). Since then a multitude of improved proposals have been launched, all increasing the purchase price step-by-step while increasing the cash consideration and decreasing the equity consideration.

MKS Instruments dropped out of the bidding war some time ago. Yesterday Lumentum made its latest bid, valuing the company at $6.9 billion with a $220/share cash consideration and 0.61 shares of LITE for a total consideration of $274/share (using yesterday’s closing price). This morning II-VI upped the stakes with a bid of $220/share in cash and 0.91 shares of UUVI for a total consideration of $285/share (using the pre-market IIVI price). Coherent already declared the latest bid of II-VI a superior proposal and while this bidding war is probably reaching its final stages, there is certainly a decent chance we will see a couple more small price jumps.

So now that we have had a quick recap of the story so far, what would you expect the current price of Coherent to be? Surprisingly enough, the stock is in the pre-market trading at $265/share, at a decent discount to both the latest Lumentum bid (~3% spread) and the latest II-VI bid (~7.5% spread). During most bidding wars you see the target consistently trading above the latest bid price because people (almost) always expect that higher bids are a possibility.

In this case it is clear that a deal will be reached to sell the company above the current stock price, and it is certainly possible that both parties have some room left to bid more. So, apparently the market is pretty skeptical about the ability of the eventual acquirer to close the deal. Perhaps regulatory approval could be an issue, since it certainly will be a combination of two sizable companies in the same industry. But at the same time, as an outsider, it does not look too hard to me for this deal to get approved. MKS Instruments will remain as a very sizable competitor, and there multiple other sizable competitors such as IPG Photonics as well.

Perhaps I’m missing something crucial here, but to me it looks like that a bet on Coherent has pretty good odds. If there are no more bumps to the purchase price: fine. If there are more bumps: great.

Disclosure

Author is long Coherent

The curious case of the Garrett Motion rights offering

Garrett Motion entered bankruptcy last year, and is now on the cusp of coming out of it. The company filed an amended plan of reorganization last week that has the support of all major parties. The part of the plan that was strongly contested was the rights offering for convertible preferred shares that will shore up the balance sheet of the company. The COH group that owns 47% of all outstanding shares tried to keep this mostly to themselves, and only after some good work of the equity committee of unaffiliated shareholders the plan got adjusted to share the pie (a bit) more equally.

However, the COH group has pulled out all the stops in creating a structure in which unsuspecting shareholders lose their rights without getting anything in return. If you own Garrett Motion shares as of the record date you are eligible to participate in the rights offering, or tender your shares for $6.25/share in cash. The record date is today, so in order to be eligible for this you would have needed to buy the shares two days ago.

So to repeat: if you buy today, you are not getting anything besides the shares. You cannot tender them for $6.25/share and you will not be able to participate in the rights offering. But the tricky part is, if you sell today, you will also not be able to do that. According to the plan:

The 1145 Subscription Rights are not detachable or transferable separately from the Existing Common Stock held by 1145 Eligible Holders (the “1145 Eligible Shares”), other than those held by Equity Backstop Parties in accordance with the Equity Backstop Commitment Agreement or those held by Honeywell3, Centerbridge4 or Oaktree5 in accordance with the Plan Support Agreement. Rather, such 1145 Subscription Rights will trade together with the underlying 1145 Eligible Shares and be evidenced by the underlying 1145 Eligible Shares, until the Subscription Expiration Deadline.

The only way to keep your rights is to keep your stock till the expiration deadline. Everybody who sells today is throwing away these rights and giving them away to the COH group because they provide the backstop for the rights offering (and there are no oversubscription rights). If you don’t want the rights, you can just tender your shares for $6.25 at the end of the month. Selling your shares for less today is foolish, but nevertheless, the stock traded as low as $4.50/share just a few hours ago. Remember, nothing on the blog is investment advice. But really, do not sell your shares if you already owned them on the record date. In a rational world not a single share of this stock should trade between the record date and the expiration date. But we don’t live in that world, and of course, it does trade….

Garrett Motion Inc price graph

An additional complication is that the rights offering is for a part only for accredited investors. There are the “1145 subscription rights” that give every shareholder the opportunity to subscribe for one preferred share for every existing common share held as of the record date. Accredited investors have an additional opportunity to subscribe for 0.448951 shares for every existing share. It sounds like some law made it impossible for the company to offer more shares to regular investors, but at the same time, it is a very convenient feature for the group that is very motivated to get as much as the preferreds as they can get their hands on.

Disclosure

Author is long Garrett Motion

2020 end-of-year review, breaking the +1000% barrier

After a rocky start, 2020 turned out to be a pretty great year financially. My portfolio returned 19.31% which is more than the MSCI All Country World Index for the 9th year in a row and it also brings the cumulative return to 1015.82%. I think this is an absolutely amazing result, and I did not expect to achieve it when I started investing and I do not expect that I will be able to repeat it going forward. A more than 30% annualized return is just not realistic in the long-run. It helped of course that the past decade was a good one for investors in general, with the MSCI All Country World Index growing by 11.86% annualized. I am also doubtful that passive investors will be able to replicate that return in the next decade, but who knows? Probably more likely than me achieving more than 30% annualized again over such a long time span.

Year Return* Benchmark** Difference
2012 18.44% 14.34% 4.10%
2013 53.37% 17.49% 35.88%
2014 30.11% 18.61% 11.50%
2015 24.23% 8.76% 15.47%
2016 64.97% 11.09% 53.88%
2017 29.04% 8.89% 20.15%
2018 13.07% -4.85% 17.92%
2019 32.34% 28.93% 3.41%
2020 19.31% 6.65% 12.66%
Cumulative 1015.82% 174.27% 841.55%
CAGR 30.74% 11.86% 18.87%

* 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

As you can see in the graph below, a driving force behind the performance of the portfolio was my bucket of special situations such as mergers, liquidations and bankruptcies. But it is somewhat arbitrary what I put in the bucket. My disastrous investment in the Bristol-Myers contingent value rights has its own separate spot, but it could easily have hidden away in that category as well. Somehow the rights are actually not the biggest loser of the year, that is my foreign currency exposure. I expect that most of my readers are located in the US, and probably did not notice it much, but because the dollar lost significant value versus the euro my portfolio was facing a strong headwind. In euros the ACWI was up 6.65%, but measured in dollars the index was up 16.25%. The impact on my own portfolio was comparable with a more than 8% currency translation loss. I usually own very few (if any) stocks that are part of the index, but because of its somewhat similar global equity exposure it is a surprisingly decent benchmark.


Besides the special situations bucket, a very strong contributor was my position in Xpel. It is quite amazing how much a single stock can do for your portfolio when it goes up more than 250% in a single year. I sold a few shares in December, but it remains one of my largest positions (it is only being beaten by my PDLI position). I own a lot of classic value stocks, but my performance for the last couple of years would have looked very differently if I would have owned nothing else. In the previous years HemaCare was a true high-flyer, and now Xpel. It just shows that there is quite a bit of luck involved in generating returns. Passing on a single idea, or making one bet that does not turn out as expected, and your results can look totally different.

To conclude this post, I want to wish my readers a happy and healthy 2021. May this year be better in every single aspect than last year!

Disclosure

Author is long most of the stuff in the performance attribution graph