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
I exited my position in Asta Funding (ASFI) last week when the share price made a small jump after the company announced that it settled it’s debt obligations with the Bank of Montreal. Asta Funding was the first write-up on this blog more than two and a half years ago. It was at the time a high conviction idea and it constituted a big part of my portfolio, but unfortunately the performance of the stock was mediocre. While my portfolio gained more than 100% in this time frame my investment in Asta Funding returned just 4.3%.
Looking back I think I was partially unlucky, but also partially wrong. In my initial analysis I overstated the upside potential because I didn’t account for G&A expenses (rookie mistake). This is something I realized long ago, and also taking this in account there appears to be significant upside potential based on the asset value of Asta Funding.
The bigger problem is that management is less shareholder friendly than I thought. My thesis was that Asta Funding was undervalued because of the complex balance sheet, but I now think that the discount exists mostly because of how management is running the company. While I could have spotted some of these issues back in 2011 I think this is also a bit of bad luck. At the time management looked a lot better because they just announced a big share repurchase program that was also (partially) executed after some delays. Unfortunately it now seems that everybody at Asta Funding is getting paid well, except shareholders: they even cut the dividend that was pretty mediocre to begin with…
I still think that at current prices Asta Funding is interesting, but I prefer opportunities where I have more faith in how fair the management team is.
Author has no position in Asta Funding anymore
It’s earnings season again, and that’s always an interesting time for an investor since it’s the moment of truth: is your thesis playing out as expected, or is reality throwing a wrench in the wheels?
Awilco reported results for the second quarter earlier today, and they are excellent. Revenue was 59.5 million thanks to slightly higher contract rates and a revenue efficiency of 97.3%. The company also announced a second quarterly dividend of 1 USD, giving the company a dividend yield of more than 20%. Other good news came earlier this week when the company announced that it signed a 3 year contract for the lease of WilPhoenix, increasing the value of the backlog with 424 million to 860 million. If the stock price stays at the current levels I’m probably going to increase my position slightly.
PV Crystalox Solar
Crystalox Solar also reported today, and the results for the first six months of 2013 seems to be alright. The business is in trouble, but the company does have a lot of cash and it anticipated that it should be roughly cashflow break-even in 2013 after restructuring. Cash from operations before changes in working capital is slightly positive while reported earnings are slightly negative. So that look good to me. The return of cash to shareholders is taking more time than I expected, but according to the company that should happen sometime later this year.
Conrad Industries reported yesterday and the results were simply excellent, and it appears that the company is on track to earn a record amount in 2013. The backlog is up 218% compared to previous year and the new construction site that was build on the land adjoining the Conrad Deepwater facility was taken in use this June. A slight negative is that it seems that the BP claim is being delayed, although that’s not a surprise given the fraud BP has to battle.
ASFI reported results a week ago, and the most interesting development is the settlement with the Bank of Montreal on the non-recourse debt that backs the Seneca portfolio. Asta Funding has prepaid $15 million on the loan, and the next $15 million in of collections will also go to the bank. After this Asta Funding can recover the $15 million prepayment, and further collections will be split 70/30 between ASFI and the bank while the interest rate on the loan has also been lowered. Seems like there is a bit of value after all in the Seneca portfolio for Asta Funding, although it’s not going to be a lot.
Author is long AWDR.OL, PVCS.L, CNRD and ASFI