Switch from Feedburner to follow.it

At the end of 2021 Google decided to put Feedburner in maintenance mode which caused the email subscription feature to stop working. After getting some comments from readers I decided to fix this issue, and after a quick look on Google I ended up at follow.it as Feedburner replacement. All existing e-mail subscribers have been migrated to follow.it, and should once again receive e-mail updates when new content is posted. Besides offering a RSS-feed with e-mail subscriptions there are now some additional features available as well such as the option to use filters or a Chrome extension for notifications. Let me know in the comments if everything is now working again as expected.

PDL Biopharma liquidation making progress

At the end of 2020 I wrote enthusiastically about the PDL Biopharma liquidation. At the time the stock was trading at $2.35/share while I estimated approximately $3.35 in liquidation distributions. Last Friday the company paid a third distribution to shareholders, bringing the total amount distributed to shareholders to $2.05/share. While I’m close to recovering my initial investment, I think it’s clear that my 27% IRR estimate was way too optimistic. Based on the third quarter ’22 update remaining net assets are approximately $1.61/share. Even if the remainder of the liquidation is now quickly concluded, and we get that amount in one year time, the IRR is “just” 19%. If we have to wait another full 3 years, which might be more realistic, the IRR drops to 14.5%. While PDL Biopharma seems to follow the golden rule that liquidations always take more time than you expect, I think the end result will be nonetheless quite satisfactory.

Balance sheet before taking 2nd ($24.1 million) and 3rd ($95.9 million) liquidation distributions into account

Disclosure

Author is long PDL Biopharma

Conduril releases 2022 annual results

I have been a shareholder of Conduril for over a decade now, but unfortunately, it hasn’t been a real successful investment so far. I bought my initial stake at €22/share and the stock is currently trading marginally higher at €26.20/share. Although there have been some dividends along the way, they haven’t been enough to compensate for the opportunity cost of holding this position. I believe in buying cheap companies without a catalyst, having faith that something will eventually happen to unlock the value that is there. But assuming I’m right about the value being there in there first place (a big if!), there is still no guarantee that something will happen.

With a more than 10 year holding period I think you can make a good case for throwing the proverbial towel in the ring, but I’m not quite ready to do that. Conduril is still cheap, trading at a 62% discount to NCAV, a 0.20x P/B-ratio and a 5.86x P/E-ratio, but there are also some signs of change on the horizon. In 2022 the company bought back, for the first time in its existence, 10% of the outstanding shares. Given the price the stock trades at I think this is quite accretive to intrinsic value (sadly there is no plan to continue the buybacks this year). Secondly, the chairman of the board recently passed away. He was a major shareholder of the company with a 28.60% ownership stake, and a large transition in the ownership of the company could potentially pave the way for some (hopefully positive) change.

The results for 2022 itself look promising, with earning per share at €4.47, the highest it’s been in the past 8 years. The order backlog is at a healthy level as well, slightly higher than the previous year, and it appears that some of the financial assets on the balance sheet (Angolan government bonds) have been converted to cash. According to the footnotes of the financial statements the remaining bonds have maturity dates in 2023, 2024 and 2026. The majority only matures in 2026, so some patience may be required. Fortunately, I’m a patient investor…

Disclosure

Author is long Conduril

ALJ Regional Holdings merger arbitrage

I first wrote about ALJ Regional Holdings (ALJJ) more than a decade ago, and now that I’m back in the stock it seems only fitting that I write about it once again. When I first got involved it was trading on the pink sheets and Jess Ravich owned 22.1% of the company. After some years in the daylight on the Nasdaq it is back where it started, on the pink sheets, but now Ravich owns 58.9% (more counting a convertible note) and he is looking to increase that percentage further. 

To make that happen the company is planning a merger in which shareholders will be cashed out at $1.97/share. With the stock currently trading at $1.84/share that is a juicy looking spread of 7.1%. Accredited investors have the option to rollover their stake and get unregistered shares in a private company, but given the current course of the company I doubt many investors would be comfortable with such a structure.

In the proxy statement it is not explicitly written that accredited investors have a choice, if you read it you would think that they have to accept the unregistered shares. But I don’t think that this can be true, because it is impossible for the company to verify who qualifies without cooperation of said shareholders. Issuing non-registered shares to non-accredited investors is presumably a risk they don’t want to take. In section 5(b) of the merger agreement we find:

Cash Consideration. Notwithstanding anything to the contrary in this Agreement, in no event shall NewCo be required to issue any shares of NewCo Common Stock to any person that does not provide duly completed and executed Investor Suitability Documentation (as defined below) establishing to the satisfaction of NewCo that shares of NewCo Common Stock may be issued to such person in connection with the Merger and the other transactions pursuant to an exemption from the registration requirements of the Securities Act and other applicable securities laws. To the extent that NewCo is unable, in its sole discretion, to conclude that NewCo Common Stock may be issued to such stockholder in compliance with the Securities Act and other applicable securities laws, including making a determination that such stockholder is an Accredited Investor, NewCo shall be entitled to pay, in lieu of the Stock Consideration otherwise payable pursuant to Section 5(a)(i), an amount in cash equal to the Cash Consideration.

And in section 5(f) about securities law compliance we read the following (emphasis mine):

Securities Law Compliance. No later than ten (10) business days following the Effective Time, NewCo shall use commercially reasonable efforts (including engaging a third-party service) to distribute to each ALJ shareholder who is eligible to receive Stock Consideration (except for those shareholders who has less than one hundred (100) shares of ALJ Common Stock) the documentation, in form and substance reasonably acceptable to NewCo, necessary to determine whether or not such person is an Accredited Investor (collectively, the “Investor Suitability Documentation”). NewCo shall use its commercially reasonable efforts to cause each ALJ shareholder to promptly deliver such Investor Suitability Documentation. For the avoidance of doubt, if a shareholder has not completed and returned Investor Suitability Documentation to NewCo or its agent or representative, NewCo shall have the right under Section 5 to determine that such shareholder is not an Accredited Investor.

So it sounds that in theory the company has the right to choose what consideration to offer in the merger, but that in practice it will be up to the investor because you will get cash if you don’t provide the proper documentation to prove that you are an accredited investor. But perhaps this is causing some merger arbitrage funds to stay away from this deal.

To approve the merger ALJ Regional Holdings needs >50% of votes in favor of the merger, but despite the fact that Ravich owns 58.9% of the shares he cannot unilaterally approve the transaction. There is no majority of the minority requirement, but he is bound by a voting agreement that limits his votes to 40% of the outstanding shares. His remaining shares are voted proportionally with minority shareholders. So the company needs some minority shareholders to vote in favor of the deal, but not that many. If 7% of shares from minority vote yes (~17% of minorities) Ravich will vote 17% of his stake above 40% in favor as well which would add a bit more than 3% of votes. Combine all the votes and you pass the 50% mark.

I don’t think that shareholders will love this deal and approve it with an overwhelming majority. The deal is done at a meager premium to the market price before announcement, it is done at a small discount compared to the price of the tender offer the company did at the end of 2022, and most importantly, it appears to be significantly below fair value. I also doubt that accredited investors will be trilled by the opportunity to swap their shares to unregistered stock in a new private company. But 17% of minority investors voting in favor is not a particular high hurdle, and I suspect that they will reach that number. The low to non-existent premium also reduces the risk for those who want to play the merger arbitrage game. If for some reason the deal doesn’t go through, the downside is presumably not too big either.

It should be noted that the merger is not an iron clad deal, the company can basically decide to abandon the transaction at any point in time if it chooses to do so. Given that the transaction is a sweet deal for Ravich I think it will happen, but there is less certainty than in a normal merger. There are appraisal rights available for shareholders, so perhaps if a large number will go for that route it will throw a wrench in the merger plans. Perhaps going for appraisal is a superior plan to trying to eek out a few percent in the merger arbitrage, although I’m not quite sure if that is even possible for new holders. The record date for the special shareholder meeting is March 31, 2023, and I believe you need to vote against the merger in order to perfect your appraisal rights? Not sure though, since I have never participated in one before.

Disclosure

Author is long ALJJ

Update on my Italian real estate basket after eight years

More than eight years ago I bought a basket of Italian real estate funds based on a simple thesis. As a group the funds were trading at a discount of ~50% to NAV while they were already in the process of liquidating, or were going to liquidate soon, because all the funds had fixed maturity dates. Most of them were supposed to liquidate between 2015 and 2017. Given that I’m still writing about these funds in 2023 shows that the liquidating process hasn’t been the easiest one. Perhaps not too surprising, since these funds were sold to retail investors and sometimes (mostly?) stuffed with crappy assets.

But at the same time, a lot of progress has been made. When I first wrote about these funds there were 24 separate entities with a NAV of more than €4 billion. As you can see above, now only 7 entities remain with a NAV of less than €650 million. Some of that reduction in NAV has been because of write-downs, but most has been achieved by selling assets and distributing cash to shareholders. The average discount to NAV of the remaining funds remains high, almost at the same level as 8 years ago, but I’m less enthusiastic about this investment now than back then. A bit can be attributed to having experienced how long this process is taking, but in general, I’m cautious about what happens in the tail-end of a liquidation. Presumably the properties that are remaining are the least attractive of the whole bunch… 

So at this point in time, I have this part of my portfolio in runoff mode, and while I keep an eye on developments, I don’t plan on adding to this basket anymore. Since my initial investment in 2015 I have achieved an IRR of 12% on the basket which I think is quite okay. It’s not a homerun, but anytime you can make a double digit IRR over a long time period I think you should be quite happy. It will probably take many years more before the last fund is liquidated, but because most of the cash has already been returned I expect that the IRR will not change a lot anymore.

Disclosure

Author is long QFAL, QFATL, QFID and QFSOC.