Argo Group publishes 2016 results

Argo Group, a small alternative asset manager trading in London on the AIM market, is one of the first stocks I wrote about when I started this blog. I bought the company in the first days of 2012 and owning this stock has been a frustrating experience ever since. Thanks to a good 2016 I’m now basically back at my starting point. I bought the stock at 14.69p/share and today it trades at almost the same price at 15.37p/share. I did get two 1.3p/share dividends in the meantime for a total return of 22.3%. Pretty pathetic for a more than five year holding period in one of the biggest bull markets in human history!

While 2016 was a good year it seems that for now the business will continue to muddle through. In the 2016 annual report to company acknowledges once again that they don’t have sufficient assets under management to be profitable without earning performance fees (and this year even with some performance fees the operating profit was negative). But a plan to liquidate the company is absolutely not on the table: they are looking for an accretive acquisition and working on increasing AUM (something they write about for years, but are so far never able to do).

So why am I continuing to hold this stock? Simple: it was very cheap and it is still very cheap. The stock is now trading at a discount of 53.7% to net current asset value, and that’s huge! And it’s not like they are hemorrhaging cash. Last year they had a small operating profit, and this year a small operating loss. While the discount alone is enough of a reason to own Argo they also have an off balance sheet asset that could be quite valuable. Argo has a bad debt provision of US$6.4 million for management fees receivable from the AREOF real estate fund. This fund has a negative equity position, but according to Argo’s management these debts are expected to be fully recoverable: except that the timing of the payments is uncertain and unknown. I’m not exactly that optimistic, but last year the fund managed to pay back US$2.8 million, so there might be some truth there. Given that the book value of Argo is just US$20 million the bad debt provision could be pretty significant.

When you look at the historical financials below it’s also clear why the stock price hasn’t done much the past five year. After some bad news in 2014 and 2015 tangible equity/share is now basically back at the same level as five years ago:

So for now I will hold this stock patiently, but I’m not yet sure how long I should continue to do so. I have owned this now for more than five years, and I can’t wait forever… at the same time: if I would encounter this stock today for the first time I think I would still hapily buy it, so why not continue to hold it?


Author is long Argo Group

Heartland completes acquisition of Founders Bancorp

Founders Bancorp logoAt the end of last year I wrote about the Founders Bancorp merger arbitrage as a creative way to get a free option on the stock price of Heartland Financial. Options often expire worthless, but this one certainly didn’t. Heartland’s stock price is currently $51.25[1], way above the $42.78 level where the option embedded in the merger agreement had its strike. Because of that the value of the 70% stock and 30% cash mix is $24.90: 16.4% higher than the $21.40 price when I wrote about the stock. A great result, except that I didn’t capture most of these gains. I sold early in the year when the option adjusted spread had shrunk for a significantly smaller 7.0% gain. I think that that is still an excellent result though!

[1] I guess that technically the option expired on the day FBCP shareholders had to make their election for the merger, so it would better to use the HTLF share price at that moment in time for the comparison. The additional gains are just noise.


Author has no position in HTLF or FBCP

Beximco Pharma reports results for CY2016

Last time I wrote about Beximco Pharma I told that I sold a bit of my position recently, and today I have the same disclosure to make. It’s a bit unfortunate because the company keeps reporting great numbers, and the latest results are not different. The stock jumped 17% higher today in London, and because of that the discount between the shares that trade in Dhaka and London keeps shrinking. When I entered my position in 2014 the discount was a bit above 60%. In November it was still at 40%, at the end of the year roughly 35% and now it’s just 25%. That is making the shares of course less attractive than before, but it’s still a nice discount.

Beximco Pharma reported 13.4% revenue growth while operating profit grew with 18.2% in 2016. By buying the shares in London you are currently just paying a 13.3x P/E-ratio for the shares compared to the 17.8x P/E-ratio domestic investors are willing to pay in Dhaka. I think both numbers are pretty cheap for this kind of growth. Now that my Beximco position is not oversized anymore I will hang on to my current shares at the current discount.


Author is long Beximco Pharma

American DG Energy merger: attractive with an 19% spread!

American DG Energy Inc. (NYSEMKT:ADGE) is being acquired by Tecogen Inc. (NASDAQ:TGEN) in an all stock transaction. Tecogen is offering 0.092 shares for every ADGE share. What is very surprising is that when the deal was announced the stock price of ADGE barely reacted. ADGE closed just 6.8% higher on negligible volume while Tecogen was offering a premium of approximately 35%. Since then the stock prices of both companies have barely moved and as a result the spread is still an extremely juicy 19%. Note that, because both stocks are fairly illiquid and can have a wide bid/ask spread putting an exact number on the spread is hard, and entering a position at this price might be even harder. I decided to pay up for my ADGE shares.

With a spread this big your reaction is probably “there must be something serious wrong here”, at least that was what I thought. But after reading the preliminary proxy statement there isn’t a whole lot that I can find that would worry me. What is unusual is that both companies are already very closely related. They are already located at the same address, the have the same two co-CEOs, the same big shareholders and they are sharing board members. From the S-4:

Senior Leadership Overlap

  • John Hatsopoulos is the co-Chief Executive Officer of both Tecogen and ADGE.
  • Benjamin Locke is the co-Chief Executive Officer of both Tecogen and ADGE.
  • Robert Panora is the President and Chief Operation Officer of Tecogen and General Manager of ADGE.

Board Overlap

  • John Hatsopoulos is a member of the Board of Directors for both Tecogen and ADGE
  • Charles Maxwell is a member of the Board of Directors for Tecogen and Chairman of the Board of Directors of ADGE.

Ownership Overlap

  • John Hatsopoulos together with his family beneficially owns more than 22% of Tecogen and 20% of ADGE.
  • George Hatsopoulos together with his family beneficially owns more than 21% of Tecogen and 19% of ADGE.

But I don’t see that as a negative in this case, this just means that it makes a ton of sense to merge the two companies. They are active in adjacent businesses and since ADGE has a market cap of just ~$17 million and Tecogen has a market cap of ~$85 million maintaining two separate stock listings is just too expensive. The two companies expect that they will be able to eliminate approximately $1 million in costs annually by merging, which is significant. What I think is perhaps the biggest worry of people interested in playing the merger arb is this:

No Deal Protection Devices; Termination of the Merger Agreement
The Merger Agreement does not contain any so-called “deal protection devices” such as a no-shop provision or a termination fee. Prior to obtaining ADGE stockholder approval, ADGE may withdraw or modify its recommendation to ADGE stockholders with respect to the Merger, terminate the Merger Agreement and enter into an agreement with respect to a competing acquisition proposal with a third party. In addition, Tecogen and ADGE may mutually agree to terminate the Merger Agreement at any time prior to the Merger effective date, regardless of whether Tecogen or ADGE stockholder approval has been obtained. See “The Merger Agreement – Termination of the Merger Agreement by Either Tecogen or ADGE.”

This obviously makes it easy for both companies to change their mind, and cancel the deal, but I don’t think that is a significant risk-factor in this case. There is really just one party here, and that partly must be interested in pursuing the current deal. Why? Because just getting a merger agreement signed and getting a preliminary proxy statement on the SEC site is an expensive process. You’re not going to spend a solid six figure dollar amount, or perhaps even a seven figure amount, if you aren’t serious. Especially if you are also a shareholder in both companies.

So I think that this deal will probably be completed, and I also think it will be completed soon. It doesn’t require any regulatory approvals, and both companies expect to complete the deal by approximately March 21, 2017. Getting shareholder approval should also not be problematic considering the inside ownership in both companies. Insiders own 24.8% of Tecogen and 18.0% of ADGE (and family members related to the insiders own a bit more). They will require some support from outside shareholders, but it is a deal that makes sense and as an ADGE shareholder you get a nice premium, so I don’t see why it shouldn’t happen. The Tecogen Q3 conference call contains a couple of interesting tidbits (not all on the slide) that further demonstrates how closely related the two companies are, and why a merger makes sense.

To me it seems that ADGE is just a stock that is being ignored by the market. Since the deal was announced on the 2nd of November total trading volume in the stock was a bit less than 2 million shares for a total value of roughly $600,000. That’s absolutely nothing for a company with more than 50 million outstanding shares when a big corporate action is announced. If it would be a controversial deal you would at least expect to see some trading action, or a high short interest. In this case, just nothing is happening. Another hint that owners of ADGE and Tecogen might not be keeping track of what their stock is doing comes from the S-4:

After due consideration, the Board of Directors of each of Tecogen and ADGE determined not to require approval of a “majority of the minority” of stockholders of each company as a condition to closing of the Merger due to a number of factors, including but not limited to: (a) a historical pattern of a significant percentage of stockholders of each of Tecogen and ADGE not voting in prior annual meetings, making it difficult to achieve a majority of the minority of all eligible shares for each such company, particularly in light of the significant equity ownership of officers and directors and their families of each company;


Perhaps that I’m missing something here, but I don’t see what… I bought a decent position, and in case I’m somehow missing something I guess the downside is limited. ADGE is barely up compared to the price before the transaction was announced so it also shouldn’t drop a lot in case the deal doesn’t go through. It’s a bit of a weird situation, but I think it’s extremely attractive at current prices. Investors love calling random stuff an asymmetric risk/reward opportunity, but this is really one of those deals. And not in the usual merger arbitrage way with a little upside and a lot of downside! 🙂


Author is long ADGE, no position in TGEN

Tejoori Limited: liquidating with a 40% discount to NAV?

Tejoori Limited (LON:TJI) describes itself as a investment company that invests in ethical and Sharia compliant ventures around the world. Like many companies listed on London’s AIM market the track record of the company is truly terrible. After IPO’ing in 2006 for $4.90/share the stock saw more than 99% of its value evaporate. Since 2015 the stock has been able to recover a bit from a low of $0.03/share to the current price of $0.39/share. The reason for the big recovery is that Tejoori started selling all its assets and last week the company announced that it has signed an agreement to sell its last remaining asset (a plot of land in Dubai) for a gross consideration of US$5.8 million. Last year the company managed to sell two other plots that generated most of the cash that the company now has on hand. Assuming that the sale of the final plot goes through without problems the balance sheet of Tejoori looks as follows:

As you can see, the company has only cash remaining on the balance sheet together with some receivables and some small liabilities. The “other receivables” are related to an earlier sale of some assets, but apparently the acquirer has so far been unwilling to settle the remaining amount. I have applied a 50% haircut to account for this, but being a bit more conservative might also be warranted. The receivable is related to a sale in 2013, so it’s long overdue:

During the year ended 30 June 2013, the Group successfully replaced the Lagoons plots for alternative plots in the Arjan project located in Dubai, UAE. USD 0.6 million of the additional costs incurred on the exchange of plots was payable by the acquirer which has been added to the earlier receivable of USD 3.1 million. However, the acquirer has refused to settle the balance due to the Group. While the negotiations are ongoing to settle the dispute, no impairment has been recognised.

While the company has at this moment basically sold all its assets the big question mark is: will it actually fully liquidate. Tejoori has communicated its desire to return a part of the cash, and given its current small size I don’t see the point of trying to remain in business. In the latest annual report the company wrote the following:

The Company intends to, as previously stated, return to shareholders a certain proportion of the cash generated from the sale of the plots undertaken to date and it intends to finalise these details following the sale of the third Arjan Plot.

The Company is, in conjunction with its advisers, considering the most effective and efficient manner in which to return cash to shareholders and following the disposal of the third plot the Company will update shareholders further. The Company is also, as part of this review process, evaluating the merits of the Company maintaining remaining as an AIM quoted company given the costs associated with the listing.

I expect that the company will fully liquidate after selling the last land plot earlier this year, but it might take some time since they first need to settle the unpaid receivable and if legal steps needs to be taken that might potentially take significant time and money. But I expect that a large part of the money can be and will be returned to shareholders already this year. But since the company hasn’t fully committed to a full liquidation this remains a bit uncertain.

One thing that is positive is the current operating costs of the company aren’t that high. Last year administrative and other operating expenses were $177,500. Presumably this amount could be lowered significantly if the company decides to delist from the AIM. But with ~$18 million in equity and a ~$10 million market cap there is I think a sufficient margin of error. A few years of operating expenses isn’t going to destroy all potential upside.


As a holding company holding only cash (when the last transaction is completed) this is a very simple situation. If you think that this cash will most likely be returned to shareholders you have a great deal, if you think the company will find a new way to light money on fire it’s not attractive. Given what Tejoori has done the last year, and what they have communicated I think it’s very likely that they are going to continue to do the right thing. At the same time, this isn’t a super high conviction idea and since trading costs are also very high on the AIM market I made this a small position. I think it’s still a pretty good addition to my basket of special situations.


Author is long Tejoori Limited