Category Archives: Portfolio

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.


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!


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

Exited my position in the BMY-RT CVR

Almost exactly a year ago I wrote about the merger between Celgene and Bristol-Myers Squibb (NYSE:BMY). To make things interesting, the merger consideration included a contingent value right (NYSE:BMY-RT) that would payout $9/right if, and only if, three separate drugs would get approved by the FDA before their respective deadlines. I have not written about the CVR since, because I did not have much to add compared to all the information that was already out there.

Initially my position in the CVR was miniscule, since it was just a small part of the Celgene merger consideration. Over time I continued adding to my position, and earlier this month I hit the 5% mark, making this probably the highest amount of risk I have taken in a single name. I have frequently positions sized bigger, but most stocks don’t have (a realistic) potential to go to zero overnight on bad news. And because I don’t just want to share stories of success here, I felt obliged to post an update on this name since it is now probably my biggest loser.

Yesterday was the big day because liso-cel had it’s PDUFA date. Unfortunately, the news was bad. Because the FDA was unable to inspect a manufacturing facility in Texas due to corona travel restrictions it decided to defer action. The news did not came as a total surprise, since a week before Bristol-Myers Squibb already told the market that the FDA did not inspect the facility, and that it had told them previously that it would be required. Written like this you would probably question why I was still in the name, but the FDA did inspect the main facility in Bothell, Seattle. Maybe you should not try to ascribe too much logic to the actions of a bureaucratic organization, but I did not think it was far fetched to assume that the FDA had a plan to meet the PDUFA deadline.

Obviously that was not the case, and since the CVR has a deadline of 31 December 2020 for the approval of liso-cel I don’t see a realistic path forward for approval in time. The press release does contain a single line, that might have given people some hope:

The company is committed to working with the FDA to progress both applications to achieve the remaining regulatory milestones required by the CVR.

You could make a case that the company did not need to put this line in the press release, and if they would have thought that meeting the regulatory milestones would be completely impossible they would not have put it. At the same time, it is an empty statement. Bristol-Myers might be committed to do it, but the thing that matters: is the FDA committed? I think they would like to approve this as soon as possible, if they can, but they don’t give a s*ht about the CVR deadline. The biggest deadline they would care about would be the PDUFA deadline, and they missed it. The FDA also did not provide a new anticipated action date, which probably means that they don’t have a concrete plan with a clear timeline on how to do the final inspection.

Given that we are close to the end of the year with Thanksgiving and the Christmas holidays coming up as well I just don’t see how this remaining inspection can be done in time. The inspection would need to be scheduled, could take a few days to a week, the company would need a few weeks of time to be able to respond to the results of the inspection and then the FDA would need to make a decision. Theoretically it could be done, but it just seems very far fetched to me. Corona cases have been going up in Texas, so if they didn’t want to go in October, they certainly would not want to go now. If they would have thought a virtual inspection could be a viable option, they would probably have done that already so they could meet the PDUFA date. And with vaccines around the corner it seems that just waiting a few months could solve all issues.

Because of that I’m actually very surprised that the rights were yesterday still trading at $1. Assuming that the rights would trade between $5 and $7 if liso-cel gets approved (high-end might be a bit optimistic, since ide-cel approval is still pending) the market implied probability of approval before the end of the year is between ~15% and ~20%. I think that’s very optimistic, and would personally put it below 5%. I hope I’m wrong for the patients that need this treatment even though it would make me look double stupid for selling. But I am pretty happy with my decision to do so, and I am also still happy with my decision to buy as much as I did. Sometimes things just don’t work out, even if the odds are in your favour.

And yes, I know, if liso-cel does not get approved in time, there might still be some litigation value in the rights. But I highly doubt that is meaningful. Getting a decision to defer action from the FDA because they don’t inspect a facility because of corona is beyond any doubt not the fault of Bristol-Myers. And given the size of the CVR, with a potential $7 billion payout, Bristol-Myers can spend a lot of money on lawyers before a settlement would make financial sense.


No position in the rights anymore

XPEL: still not your classic value stock

A bit more than two years ago I wrote about my decision to take a position in XPEL, Inc. (NASDAQ:XPEL), calling it anything but a classic value stock. At the time it was trading at a 37.1 P/E ratio and a 10.0x P/B ratio, making some readers question if I was suffering from style drift. I don’t think these comments were particularly surprising given that I often blog about classic value stocks such as net-nets. But my style has always been one of being willing to buy anything at the right price. Sometimes that is one of the most ugliest stock you can imagine, while other times its a rapidly growing company that is just too cheap.

In my initial write-up I posted a simple valuation model, looking forward two years to see how the financials of the company could look like if it would continue its trajectory of high-growth. I should have made this post a couple of months ago when XPEL released its results for the second quarter, but didn’t think about it, so instead you will get a comparison to numbers that are actually moved two years and one quarter in the future. Putting the current numbers side-by-side with my model from two years ago looks like this:

XPEL 218 financial model compared to actual numbers

As should be expected, reality never fully matches a model, but I think it is actually pretty amazing how close this very simple model got. Revenue turned out to be a bit lower while gross margins turned out to be higher. But in the end, my expected earnings/share number is to the cent identical with the actual results. With the caveat of course that these results were achieved three months later than the model predicted, but also with the Corona crisis happening.

Of course, thanks to its continued growth, the stock is now even more expensive than it was two years ago. Instead of trading at a 37x P/E ratio it is now trading at a whopping 54x. So there has been some multiple expansion, but most of the gains that the stock made the past years are not because of that. The multiple went up 46% while the stock went up 400%, from $6.54/share to $33/share. Given that there are no signs of revenue and earnings growth slowing down, I think we can make a pretty similar model as two years ago that once again makes the stock look pretty decently priced. A bit more expensive than two years ago obviously, but not by a whole lot. I do expect that the multiple will contract in the future, but the growth in earnings should be able to counteract that and then some. But I don’t think the stock will be able to repeat the performance of the past two years. At least, that is not my base case.


Author is still long XPEL

PDL Biopharma: liquidation in the final innings

PDL Biopharma (NASDAQ:PDLI) announced at the end of 2019, after a strategic review, that the company would cease making investments and pursue a strategy of monetizing their existing assets. This year the company has made a huge amount of progress. They completed two separate spin-offs, sold another operating division, reached a big settlement on some outstanding notes and sold a small part of their royalty portfolio. If every company could be as quick in implementing a liquidating as PDLI I would be a happy camper. PDL Biopharma is now about to enter the final phase of its liquidation process, and will file a certificate of dissolution with the state of Delaware on January 4, 2021 after which the stock will cease to trade.

Thanks to the flurry of transactions done this year the company is now a greatly simplified entity, and yesterday they published for the first time a balance sheet under liquidation basis of accounting. Because of this all costs that are expected to be incurred during the liquidation are added as a liability on the balance sheet, making it easy to estimate the total amount of liquidation distributions we can roughly expect. As you can see below the company has, proforma for the Lensar spinoff that occured after the end of the quarter, net assets in liquidation of $382.3 million.

With 114.2 million shares outstanding this translates to $3.35/share while the stock is currently trading around $2.35 which implies a potential upside of more than 40%. Of course, just by looking at the balance sheet above you know that most of the value resides in assets that are less certain than cold hard cash and we have to account for the fact that the remainder of the liquidation could take a significant amount of time. But at the same time, I don’t you don’t need to do a deep analysis to know that with a spread of more than 40% between net assets and price any potential return will most likely be pretty okay. Unless, of course, you believe the value of the assets on the balance sheet are all wildly overstated and deserve a huge haircut. I don’t think that they do, but some of the receivables certainly carry credit risk and might not be paid in full. I will breakdown the remaining assets below:

  • Receivables from asset sales
    These are the receivables from the sale of the Noden operating subsidiary. It was sold for up to $52.83 million, of which $12.2 million was paid at closing. The remainder will be paid in the next three years in quarterly installments, and there are two additional contingent payments of $3.25 million in total, and a small VAT reimbursement receivable. The carrying value on the balance sheet is slightly lower, but not by much, than the sum of all possible payments.
  • Notes receivable
    These notes are the ones involved in the settlement mentioned in the introduction. PDLI loaned out money on a secured basis to Wellstat, but they defaulted. After a bunch of legal proceedings they reached a settlement under which Wellstat would pay $7.5 million at signing and either $5 million in February 2021 and $55 million in July 2021, or $67.5 million in July 2021. Obviously there are some risks here giving the background of litigation, but paying $7.5 million shows a decent commitment to the settlement in my book. The carrying value on the balance is also discounted compared to minimum of $60 million outstanding.
  • Royalty assets
    With a value of $227 million they are by far the biggest asset, and will for a large part determine the outcome of this liquidation. The company is looking to sell the royalties, but if its unable to find a buyer that is willing to pay a good price they are considering putting it in a liquidation trust and let the cash flow to shareholders. I’m perfectly fine with that. The royalties are generating solid cash flows, $17.6 million in the last three months, and $42.6 million in the last nine months. Because almost all royalties are from a single drug (Glumetza) the stream of cash is not the most stable. It is declining as well because of competition from multiple generics that have been on the market for some years. But just based on historical cash flows the valuation seems to be in the right ballpark, and it is certainly not going to be a zero. They will generate some solid cash flows.
  • Income tax receivable
    This is a “little” present from the Trump administration. These are mostly losses that they can now carry back to previous years when they were a significant tax payer. While I can imagine that it will take some time before they get this money from the IRS, I think this should be a low risk asset that will almost certainly payout.

The liability side of the balance sheet does not need a whole lot of discussion. The only item that could perhaps generate a windfall profit, but also could turn out to be more costly, are the uncertain tax positions. The company is under audit for the tax years 2009 through 2015 by the California Franchise Tax Board and for the 2016 tax year by the IRS. In September the company reduced the carrying amount of the uncertain tax positions by $4.4 million, so that shows that there is the possibility for (hopefully, positive) surprises there.

Given that the last payments from the Noden sale will not be received before the end of 2023 it is clear that this liquidation will take time to complete. Additionally, the Wellstat notes will only be paid halfway in 2021, it will take time to get the tax receivable, and it will take time to sell the royalty portfolio. To get an idea what kind of impact the timing of these cash flows will have on the eventual internal rate of return that investors can expect I created the following simplistic cash flow model. There are some small assets that I ignore, and the timing of these cash flows are not necessarily the timings you should expect as an investor in the stock.

Simplistic cash flow model PDLI liquidation

You might have noticed that there is $83 million of cash on the balance sheet. I have made the conservative assumption that this whole amount will be fully reserved to pay for the known liabilities, and not used for an initial liquidation distribution. Since the total liabilities are $106.5 million I have also adjusted the cash flow from the Wellstat payments downwards by $15 million, adding a few million as a reserve for unknown liabilities as well (common in a liquidation). The $5 million liability “cost to sell assets” has been deducted from the potential proceeds from the royalty portfolio sale.

As you can see, this simplistic model throws out a more than satisfactory 27% IRR. You can recreate it and play around with some assumption, but you will see that there is quite some room for bad news before returns turn negative. Reduce the Wellstat payment by $45 million and the IRR is still 14.5%. Set all the Noden payments to zero? 17.5%. A 50% (!!!) haircut on the royalty portfolio? Still a 1% positive return.


PDL Biopharma is at the moment one of the idea’s I’m most enthusiastic about. I think it is easy to see how this liquidation can generate great returns while multiple things most go horribly wrong before you start losing money. That’s the kind of bet I like to make. But perhaps I’m missing something, and in that case I would love to hear from you!


Author is long PDLI