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  • Murphy USA: A Low-Priced, Under-Followed Spin-Off With 45% Upside Potential [View article]
    As a quick clarification to my comment, interpret the word "rent" in the broadest sense of the word like an "economic rent". Murphy is in most cases owner of real estate of their gas stations but more often than not they acquire the land from Walmart. So the entry price of the business relationship is very much negotiated in part by Walmart who makes sure they get some "economic rent" out of the relationship in this particular instances as upfront downpayment.. other economic arrangements between the parties may be more subtle through discount programs, merchandise supply arrangements etc. so the relationship between Wal-Mart and Murphy clearly isnt that of a landlord and tenant, but of partners with some carefully calibrated quid pro quo. Its almosts evident that Murphy on its own couldnt acquire land in precisely the adjacent location where Wal-Mart operates, after Wal-Mart has been in many places where it does business for 10-20 years. In many places where Wal-Mart does business other local real estate speculators have taken up land for other suitable projects to take advantage of Wal-Mart cluster effect. I havent studied what % of real estate Murphy has historically acquired from Wal-Mart. There was an agreement entered in December 2012 by Murphy with Walmart and this appears to be a multi year agreement and in 1H 2013 a good 50 MM was spend on Walmart related land purchases. This item runs through capex as opposed to a regular rent expense that would be recurring yearly to a landlord. This reduces the ongoing leverage of Walmart over Murphy but the presumption is logical that Walmart gets upfront what it needs in order to allow Murphy to set up shop next door. Thus less risk for Walmart to pull a few fast ones that would end the relationship but the right pricing to begin with to make the partnership lucrative to Walmart. A simple screening for the Walmart keyword in the Form 10 tells you pretty much all the salient intercompany relationships and transactions having occurred in the most recent past. Whatever occurred between the parties further back in time you may never learn about through the public domain sources. This is typical for any spinoff or even IPO... just as a clarification as to the broad definition I attach to the word "rent". Murphy may be the owner of the real assets but only after substantially acquiring the real assets from Wal-mart. Since the relationship between the parties is ongoing, there are ways for Wal-mart to optimize the progressing relationship on pretty much an arms length basis. If Murphy wants to grow into 2000 more Wal-mart Superstore locations, here are the terms that will be offered.... No sweetheart deals in other words. The December 2012 real estate purchase agreement between Walmart and Murphy sets the tone and the $50 million spend in 1H 2013 was partial payment under that agreement.. more capex payments for real estate to come.. FYI
    Sep 9 01:23 PM | Likes Like |Link to Comment
  • Murphy USA: A Low-Priced, Under-Followed Spin-Off With 45% Upside Potential [View article]
    Pro forma balance sheet should cover the adjustments made to capital structure including cash dividend from spinco to parentco. which would result in the re-levering of the balance sheet. So not really debt free as to the pro-forma covered in Form 10.

    Customer concentration is a due diligence caveat. Hypothetical and real but if you dont risk anything there is nothing to be gained. For me Wal-Mart as corporate citizen has worked out well. My feeling is that these types of gasoline retailing exposures with EPA clean water scrutiny may not be mission critical to wal-mart and there is ways for them to capture their desirable profits through rent arrangements. Some amount of quid pro quo going on here for sure but needs to be enough arms length for Wal-Mart to ring-fence any potential liabilities arising out of gasoline operative aspects. I dont think Wal-Mart wants to dominate the gasoline side of the business precisely because its low margin and non-mission critical. if I look at Vision Centers/Doctors of Optometry with about 2500 points of sale, there are at least some historical case studies of collaboration within Wal-Mart framework. Same for Wal-Mart Portrait Studios/Picture Me, run by CPI Corp. These are though smaller store in store formats.. Not quite the capital intensive and leasehold improvement oriented gasoline retailing and convenience store format.. Is it reasonable to assume that eventually the gasoline retailing oriented points of sales go to 2500 out of a total 3211 Walmart Superstores in existence in US as of June 2013. (Overall US points of sales of all Wal-Mart brands around 4600). This would be a doubling of current retail gasoline footprint. How profits would be shared and what the contractual rent escalations are remains to be studied.. This is not too different from some shopping center situations where landlords receive % points of business activity.. Actually in the case of DVL Inc (DVLN) the company gets to charge Wal-Mart for a percentage of sales generated at the Wal-Mart stores where it is the lessor of real estate. In the case of Wal-Mart / Musa, Wal-Mart is the lessor. I have not made any bad experiences with Wal-Mart grounded in fact that would lead me to believe that Wal-Mart is the bad guy. When I look at DVLN itself there has been a transition over many years at Walmart from Discount stores to Superstores. This has been going on for probably 2 decades and for DVLN it has meant that typically Wal-Mart has cancelled leases gradually as stipulated in contracts and in some cases leases where extended/renegotiated and there has been quid pro quo in past when it comes to cancellation fees.. typical case has been that Walmart exited, a couple of properties in exchange for renewing contracts on remaining. Looks like partners working with each other rather than unilateral actions. DVLN is though admittedly a liquidating portfolio of Wal-Mart properties and namely those tied to Discount stores which within Wal-Mart represents a legacy part of the business. If Wal-mart though was the corporate bully their own financials would look very different.. Wal-Mart bashing is nice and good, but I take their discounts any day and plenty of folks will buy gasoline from them because of every day low pricing.. The murphy USA model will probably have more wear and tear of the pumps because handling more gallons of gasoline per gas station.. so lower margins for sure, higher fixed asset utilization rates no doubt. it may work out OK on balance if the relationship has longevity. Given the particular leasehold improvement aspects to this business, I am sure this is contractually regulated of what happens if Wal-Mart cancels the agreement with them how they are to be compensated for all the gasoline infrastructure leasehold improvements. they evidently cant dig the pumps out of the ground and move them elsewhere. A possiblity remains a future buyout by Wal-Mart when and if they are ready for that. My feeling is that Wal-Mart has set its sights on international expansion where they are underrepresented with about 4200 points of retail. If something in the relationship with Wal-Mart was broken there would be no plans to add 200 points of sales in the near future as has been articulated by Murphy USA... So personally, not planning here for the worst. As regards diversification, MUSA is just one of many investments. Unable to handycap any of the cited risks I made this a normal diversified investment allocation. As opposed to a high conviction investment where I am willing to invest 10-15 or 25% of assets. At this point it gets 2-3%.
    Sep 9 12:18 PM | 1 Like Like |Link to Comment
  • Quick Take On Spin-Off: Murphy Oil (MUR) / Murphy USA (MUSA) [View instapost]
    some of the musa comps trade in the range of 6.7 to 10 x EBITDA.. 8 apart from being a lucky number is close to a midpoint of observed ranges. ... I customarily scribble down EBITDA valuations of companies and while there may be a general disagreement in the investment community what cheap and what expensive represents for any such type of stabilized business, I have seen plenty of businesses being spun-off eventually trading at 11-12 x ebitda numbers. This morning I quickly reviewed for myself the Interval Leisure (IILG) and Marriott Vacations (VAC) spinoffs just to see how they doing cash flow wise, deleveraging wise and EV/EBITDA wise.. VAC trades now at 7.8x EBITDA and this is after adjusting for significant non recurring charges. if you ignore some of the non recurring charges, they trade closer to 12.7x unadjusted EBITDA... of course the spinoff is up 100% in its own right, but just giving you a notion. 6.75x MUSA EV/EBITDA for a reasonably growing and stable entity is cheap in my opinion. its anyone's best guess what exit multiple should be chosen for the scenario where investment could shoot if you have time on your hands to turn coal into diamonds. The scenario of growth through cash flow and stable to improving balance sheet implies EPS growth and this is generally associated with shooting the lights out in a spinoff... Interval Leisure (IILG) is now at 8.75 x EBITDA... significant deleveraging has occurred. since it was spun off 5 years ago. stock roughly doubled, despite a rocky start in late 2008 early 2009. from the cyclical low points it quadrupled actually. I am not saying that time share businesses or spinoffs such as IILG, VAC or cendant spinoff Wyndham (WYN) make ideal comps for gasoline retailing spinoffs. Just provide you a random comp basket of a different spinoff group where you can see what multiples the market eventually deamed acceptable from a valuation standpoint. for the cyclical time share sectors 8x seems for the moment an OK reversal to the mean multiple after clearly any of these stocks were at one point available at much cheaper metrics when the future looked a lot murkier for time shares. As a group healthcare spinoffs tend to get the richest valuations out of the gate. In my own way of looking at companies I customarily look at companies trading anywhere between sub 5 to above 15x ebitda. as a general rule of thumb I would go for anything that looks stable and trades below 5x ebitda. 5 plus to 7x gets my attention especially if I can observer a relative valuation/sector/peer discount.. 8ish to 10 need the consultation of a an astrologer or geomancer to figure which way its headed.. I customarily stay away from names that are too richly priced unless I understand clearly what a pathway to growth might be. Chipotle was never a cheap stock out of the spinoff gate trading really expensive based on a growth plan that did not yet translate into firm visible numbers in the present.. this was easily a 15-20x ebitda story and only be end of 2008 did it get down to a rather reasonable 6-7x EBITDA multiple. I think it didnt get any lower than that ever. now its back to a 20-24x ebitda multiple. Growth of franchise has been very nice for them. so whether 8x ebitda is nice as an exit multiple of moving target type of multiple depends on what happens in the company to which you attache that multiple. for companies that progressively should be stable and debt free I would think its doable. As a point of reference, highly leveraged and disfunctional TA spinoff (Travel Corp of Americal) trades at 6.62x EV/EBITDA.. emphasis added on disfunctional because TA is not a company with a normal governance.. so for MUSA to trade at a TA EV/EBITDA multiple is a complete insult to good corporate governance practices. And TA is probably as close to a comparable to MUSA as it gets, just a bad comp because of all the conflicts of interest that exist with its parent. if I had to give a quick note on the growth profile of MUSA, I would have to note the market penetration and with that I mean the percentage of Wal-Mart Stores where MUSA has a presence. Wal-Mart has a worldwide presence of around 8700 stores of which 4500 are in US in various formats from Discounts, Supercenters to Market format all the way to Sams Club. MUSA has gasoline stations at around 1200 points of sale. So give and take, they have achieved a penetration rate of around 27% of the points of sales of their business partner. Measured vis a vis their supercenters which number around 3100, the penetration rate is about 39%... Either way, plenty of room for growth. After adding 200 retail gasoline stations they probably will come up with a plan to add some 400 more and then after some 300 more.. very reasonably, they could be doubling the points of sale for gasoline retailing over the next 13-15 years. At that point we would be looking at that same evolving 8x EBITDA multiple and say take a 600-800 MM EBITDA base which I assume would come debt free.
    so if you shoot for the lower EBITDA target of 600 MM and 8x multiple you get a 4.8 bilion market cap or a 100 dollar share price. So conservatively you are probably looking at 160-200% appreciation potential over a long term investment horizon of average 14 years. very likely there will be some overshooting going on here. in the base case though over 14 years. you get 12-14% annual returns and that is what I take any day in a spinoff going out of the gates, ceteris paribus, as economists would add. The low penetration rate here may not be as low as Chipotle in 2004/5 when McDonalds hived off the name but the flipside of it is that MUSA has much more revenues and cash flow to show for. thus less of a gamble as to the stability and which way growth could go. Of course if u use such 14 years scenario, same exit multiple and the 800 MM EBITDA per annum base, you get closer to 260% appreciation potential, or 18% per annum return. The downside is that it becomes a turkey,, deleveraging moderately over the years and never evolving beyond 400 MM in EBITDA despite all the hard work displayed.. if the stock stays where it is you would end up with a company trading at 4.5x ebitda and mos everyone would recognize that one as cheap and defensive multiple that probably would attract lots of buyout firms to get a piece of the action. . upside downside evaluation suggests a rather reasonable and assymetrically favorable risk reward. Even in a tough time scenario where EBITDA goes to 250 MM (really difficult to envision), and a TA type dispair multiple of 6.6x, you would still get a 35 buck stock under assumption of being debt free after 14 years of unsuccessful strategic toiling and just hoping every year for a better year, just like TA... MUSA in that sense seems to be priced for perfection. Hope that helps..
    Sep 9 10:30 AM | Likes Like |Link to Comment
  • Quick Take On Spin-Off: Murphy Oil (MUR) / Murphy USA (MUSA) [View instapost]
    My 3-4 year price target on MUSA is in the mid 60s to low 70s with a 8x ebitda multiple on something like 420-450 MM in EBITDA, and slight reduction in absolute debt levels.. I dont expect a linear progression here.. A trading band similar to Core-Mark (CORE) after reorg would be consistent with their stabilized business model that should be devoid of major moments of post spinoff crisis.
    Sep 4 09:45 PM | Likes Like |Link to Comment
  • Murphy Oil: Completion Of Spin-Off Results In Immediate Results [View article]
    The same is true for Marathon Petroleum...

    The growth platform for Murphy USA appears to be one of organic store addition at Wal-Marts. 200 or so stores. EBITDA should over time go from around 350 MM to 420-450 million. I estimate the short term price target of spinoff close to 50 bucks. 45-50 if I had to guess for a 12 month price band. I use about an 8x ebitda multiple.

    As to Murphy Oil, I have done a lot of work on Malaysia some of which can be glimpsed through my comments including an instablog post on MISC Berhad which stands for the Malaysian International Shipping Company.. MISC which trades in Malaysia participates in the Malaysian oil sector opportunities in a slightly different way than Murphy Oil does. MISC supplies floating production storage and offloading platforms (FPSO) including the Gumusut-Kakap FPSO that will be used by the operators of the Gumusut-Kakap oilfields where Murphy participates in Kakap development. Gumusut-Kakap is the second deepwater offshore field in Malaysia after Murphy's Kikeh field. MISC also participates with a 50% interest in the FPSO that serves the Kikeh field which currently produces around 70,000 barrels of oil per day.

    we know from upgrading work at fpso kikeh that output of kikeh will go to 120,000 barrels per day. gumusut-kakap has another 120-140,000 per day capacity of which 50,000 is dedicated to kakap.. All in all and subject to the risks of actually extracting the added hydrocarbon quantities near term production in Murphy fields in Malaysia is set to double from a not small base number.

    Admittedly, there is bigger risk with something in hydrocarbons extraction going wrong or off plan than say in the steady eddy Murphy USA business.

    The reserve life of Murphy Oil isnt that great but they have had a very decent run of the last couple of decades. I give them the benefit of the doubt that they can reinvent themselves, especially if Malaysia production plans are on target.

    Having reviewed both names, I feel most comfortable to assume here both risks. MUR should have more earnings variability than MUSA, albeit I can foresee a distinct case where MUR surprises on the upside. I wouldnt bet against them. I am exposed to them through CET, MUR and now MUSA. CET is the longest holder of MUR known to me other than the founding family itself. Its a very well managed closed end fund in its own right for whatever it is worth.

    Although I take notice that Third Point has exited its position being happy with the short term gain they have made. I believe both post spin investments created by Murphy have the characteristics of decent long term holdings. Murphy Oil wasnt an expensive one to being with with respect to its tangible book value and while I am not an expert on their abilities to reinvent their reserve book, I understand the near term value of book value. Murphy Oil on that basis trades a little bit like a liquidation, ludicrous as that sounds for a company that is labeled by Morgan Stanley as a mini-major or part of that sub-group. The valuation characteristics are not too dissimilar from a Talisman Energy.. But when you look at Anadarkos APC or Encana of the world you have very different multiples and just of the top of the head Nexen (NXY) fetched a very different multiple. Marathon Oil (MRO) provides a different reference point for a company with sluggish international growth profile at about 1.3x book and some amount of restructuring charges diminishing earnings. The multiple at 15-16 x earnings is probably what it is because of some lack of confidence in them... spinoff Marathon Petroleum (MPC) more than doubled and has at times had a bigger market cap than the parent co MRO itself.

    MPC now trades at 2x book value. Its had a great run for sure boosted by shale bonanza and great refining profits. Profits have quintupled since spinoff and there is a view that this may not last forever. The growth profile of MUSA should be more subdued given the different nature of their retailing and marketing operations. MUSA has some similarities with the Sunoco business that was bought by Energy Transfer last year. At least in its retailing aspects. Different animal though as SUN had lots of pipeline assets in addition to 4900 gasoline stations. Valero spinoff CST looks most similar in nature. The final disaggregation of these constituent assets into E&P producers, transporters (pipelines), refiners and retailers of end product is the surprising part.

    The weakness of any of these businesses so created is in their supply agreements. In the case of Murphy USA there appears to have been no special relationship with the parent co on supplying the refined gasoline goods. Unlike with Valero and CST. This reduces the spectre of nasty earnings surprises at Murphy USA because more likely than not things have already been conducted on an arms length basis going into the spinoff. A spinoff that clearly wasn't separated on an arms length basis is Travel Centers of America (TA). The contractual issues there reside not so much in gasoline supplies but in the rents they have to pay to their landlord under sale leaseback arrangements entered with parent. TA wasn't set up to enrich shareholders but more so to let the parentco feast high on the hog. I suspect no such evil intentions on the side of Murphy that lead to their spinoff of MUSA. Just some of the shades of spinoff gray to consider.

    My thesis for now is that MUSA will outgrow to prosperity to make up for any diseconomies of scale felt in the short term. Some of the store count additions of 200 are part of that game plan. They have a very nice captive client base as a Wal-Mart centric business. Their business model very much reflects that everyday low pricing philosophy for which they are compensated with much higher volume.. Lower margins per unit but more overall bang for the buck. That is what I like having made very good experiences with other Wal-Mart centric but more esoteric businesses such as DVLN (DVL Inc), an original landlord to Wal-Mart in the days where Wal-Mart didn't own all its real estate. National Vision (formerly NVI, and today owned by Berkshire Partners) is also a good example of the good operational things that can happen in symbiosis with Wal-Mart. Each DVLN and NVI fell on tough times for reasons unrelated to Wal-Mart and become interesting value investments for someone like me who wasnt around when these firms even had their heydays.. if it wasn't for Wal-Mart, NVI would never have grown to its scale in the early to mid nineties. I am not an expert on the capex aspects that come with adding 200 stores at MUSA. This will in all likelihood drain decent cash. Folks like NVI have been adding 250 stores in 1993 and 400 in 1994, but the presumption is that these eyewear centers anchored within existing Wal-Marts were less capex intensive to begin with. Time will tell how many stores will be added per annum. I'd be happy if the 200 stores can be added over the next 3-4 years. That would in and of itself be a significant acceleration of their business providing some margin of safety to whatever else might happen in their biz.

    Sep 4 09:12 PM | 2 Likes Like |Link to Comment
  • Kinder Morgan companies sink after scathing Hedgeye report [View news story]
    .the real troubles will start when the utilization rate of these pipelines goes down after the shale boom turns into a pipe dream.. One of the notions I have a hard time understanding is all the LNG export wet dreams that are heralded by pundits with great fanfare.. usually the pundits dont get it right.. that at least is my experience from reading through industry expert voluminous reports.. market research its called. it too many articles I have seen the notion that USA LNG exports will create lots of changes in trade flows even substantially affect Russian trade flows say to Europe. This could be somewhat of a politicians or journalist's wet dream. The reality in 3-5 years may look very different and depending what that momentum would be, it may affect KMI in ways nobody wants to envision now that the dividend bells of this pavlovian dog are tinkering.. My chips on the kmi warrants are off and not put back on for a while. I have grown weary of too many pundits heralding the LNG export championship of US or future yet to be championship that sounds a bit like Brazil vying for the hexa or pentacampeonato in soccer.. everytime there is a world champtionship, new T-shirts will be printed.. this time the championship is ours.. There is always some basis for these bold prognostications but plenty of things can go wrong till the finish line. A stock is evidently not a surefire way to put the nest eggs over the finish line. Bankers have no intention to kill the goose laying the golden eggs. That goes without saying. KMI though is a slave to bankers in no small way. One thing I have learnt on momentum plays is not to be married to a position. The whole MLP investment theme in some ways has run its course. YOu have to be a pundit to be able to make sense of what goes on. when the bad news hits, nobody will know why. investing in MLP is not the same as value investing. IN a systemic crack, the whole sector may look overvalued. No amount of relative value fingerpointing will help put the scorched buns out of the fire. toast bread is what's for dinner then.
    Sep 4 04:12 PM | 3 Likes Like |Link to Comment
  • Dell Inc. Bonds: How Much Risk And How Much Return? [View article]
    ARch coal overpaid for Wilbur Ross play, but the whole sector overpaid for the wrong pci type exposures. Walter Energy, Peabody, Yangzhou/Yancoal, they all are guilty of the same crimes of buying assets at the wrong prices.

    My prediction is for default on ACI. They are already proving the point by selling good assets to informed buyers like Trafigura. The assets purchased from Wilbur at one point had as little as 20 million in EBITDA when coal prices were not low.

    The focus here would be on lots of met coal places that come on stream like Mongolia, Mozambique, and not to forget the Aussies and if the US could supply a remote market like China, then anybody with a free trade agreement (Aussie) can supply the US. I hear that shippers offer 2000 dollar discounts on dry bulk vessels..

    This market will turn into a mess and Wilbur sure knows what he is doing.

    Global steel capacity reduction driven by China will be the key factor. and in any given year the demand drop could hit much harder than by just looking at average yearly steel growth trends.

    gluttons should be aware of glut

    ACI is now a met coal play and they just overpaid massively for a company with no competitive edge in the seaborne market.

    Even Arcellor Mittal is getting out of venture with Peabody in Australia (formerly McArthurCoal that Peabody bougth at crazy price)... these guys dont like to be on the wrong side of history..
    Jul 31 10:52 PM | 1 Like Like |Link to Comment
  • Sell Dell: It Rhymes For A Reason [View article]
    absolutely you do real work here and I commend you for this, if this isnt obvious from my comment.

    your article is a very reasonable perspective on DELL.. one that has largely been lacking in the overall debate on DELL/Icahn which is testosterone driven. I was surprised it only attracted 3 comments given that it makes a rather learned argument of the reality out there. The Dell reality without a deal. The one nobody dares to talk about.

    What I read about Dell in financial circles comes mostly through the rose colored lens of sell side, deal centric research. Where things like implied probabilities are tossed up in the air based on junk in junk out science..

    The lofty price targets I commented on is what I have seen in other articles. since you mentioned price targets that Icahn articulated in the low twenties and warrant striking at 20.

    Keep up the TA work..
    Jul 31 04:56 PM | Likes Like |Link to Comment
  • Sell Dell: It Rhymes For A Reason [View article]
    There are even some folks arguing absurd 28 to 30 bucks valuations.. to add injury to insult
    Jul 31 01:14 PM | Likes Like |Link to Comment
  • Bet With The Odds And Consider Dell Now [View article]
    lots of angry words in your vocabulary.. fraud (these guys have lots of lawyers making sure its not a fraud), clowns used in a derogatory context.. clowns are here to make kids laugh even adults.. these guys are anything but funny. other than to myself getting the kicks out of this.

    I analyze the speech and sense lots of frustration. At a minimum I would use stop losses. rather than fixate toward the higher outcome. the more absurd the arguments the less likely a deus ex machina solution will surface. to check all the boxes on your wishlist.

    1 cent per share is possible in bankruptcy, after Lenovo eats their cake.

    This is what happened to Dynergy after two votes were put in place and frustrated by shareholder, including team Icahn.
    Jul 31 01:07 PM | Likes Like |Link to Comment
  • Bet With The Odds And Consider Dell Now [View article]
    premium over value where it traded is all self referential and completely detached from fundamentals. I hope you realize that.

    see what happens at Sprint with reality of fundamentals settling in..the ho hum and bottle of rum adrenaline testo mix will only get that far and it wears off over time.

    it doesn't answer whether 13-14 billion in software enterprise M&A was money well spent at DELL or will be subject to massive future writeoffs. as I certainly imply.

    The huge turnover in shares since June 3 or even earlier is going from an informed investing public (Oakmark et al) to a casino betting speculator guild. None of the mutual fund holders can clain to have done a good job on their investment. Team Icahn is the savior that M. Dell isnt. been there, done that, advising third parties through 13-14 years of event driven research..

    fundamental insights are often thin in arbitrage and hissy fits not few when things go wrong.

    the most famous unconfirmed story i heard is Bernard Laterman (an old line arbitrageur) throwing out a computer out of a wall steet window..(how many floors I dont know) presumably over arbitrage losses suffered. Not sure if anyone heard that one.

    At this point this situation is more than a rolling steam train. catching a falling knife could be more appropriate.

    A good insider quote is Mark Hurd, who doesnt want to have anything to do with it. Well qualified opinion I would say.
    Jul 31 12:58 PM | 1 Like Like |Link to Comment
  • Dell Inc. Bonds: How Much Risk And How Much Return? [View article]
    you cant be assured though that the record date will be changed.. otherwise its going to a vote on Friday at 13.65 with 27% of votes not cast going against the deal..

    Based on past Dynergy swan songs of voting deal down etc. arbitrageurs are not always the rational folk particularly when greed takes the upper hand. dynergy, a icahn play went through 2 failed buyout votes on alternate proposals before going bust.

    I wouldnt discount the possibility here that the consortium group doesnt want it and is just happy with Carl Icahn having his way. Things change and saving face is an art that has to be carefully orchestrated and rehearsed. in the boardroom... The way it looks, Dell made his offer condition on looser record date and looser voting standards. not an either or tradeof. but the word AND swings here.. so not relaxing the voting standard is just one condition not met and there certainly is no offer on the table that would allow to go through with an either or.

    I think the 13.65 offer was withdrawn at 16 hours of the day.. so either the 13.75 deal is doable or no deal. there may not even be a vote.. if withdrawn means what it means in my dictionary.

    Lots of deals are withdrawn rather than let it go to a vote. This is called cancelling a deal based on mutual consent and there is a special section how the termination fee looks when a deal is cancelled based on mutual consent among the sponsoring parties.

    If this was a Bertold Brecht theatrical drama we would now be awaiting the Deux Ex Machina to bring about a happy end.

    This has the potential to become a very ugly mess.. if a record date is reset, but no voting standard relaxed this will be asking for another dispatch to all record holders of offer documents. Some people being entitled to voting materials under resetting of record date have never received it in mail or email form. Thus this would entail more than just the casual short term vote convening..

    my only question and concern is in the meaning of the offer withdrawn that I saw some 10 days ago in the renewed proposal. and if withdrawn means withdrawn, then there may not be be a second trial of votes.

    in troubled times like these, critical information sources are hard to find. the sell side so far has focused on the upside scenarios and whether Dell would support etc... the interim question is if this will implode like a supernova..Personally I am not willing to play that semantic gamble. Other long term investors like Oakmark said goodbye a long time ago and Southeastern itself sold 50 million shares tongue in cheek while supporting Icahn on his lonesome crusade. there are no medals in my opinion for capital market bravery.

    Since I saw no commentator gloss on the meaning of the 13.65 offer being withdrawn at 16 hours of the day where the 13.75 proposal was tabled with the changed voting standards I kind of assume that no offer will go to a vote unless it is the one that the M Dell and Silver Lake have been suggesting and which they may well know that is never acceptable to the special committee.

    art of saving faces... that maybe what is going on here.. reading contracts is all about the meaning of words and semantics. If Silver Lake and M. Dell have disagreements about termination fee, imagine the many interpretations outsiders can have on the same set of convoluted docs that come down to them, without being equipped with a staff of expert lawyers to advice..

    nuff said.. glad I am out.. and not tempted to be back in. As researcher I get to advise clients in the strangest of situations and often times they set up positions on a spur of the moment. on a hunch.. buy first, ask questions later. A deal saved is a deal saved.

    My feeling is that lots more will be written about this once more of the ambiguity starts to surface.. Right now with stock more than 1 buck down I see no bold opinions published by the street on the basis of advising OPM (other people's money)... I may have to check my inbox again if some bold strategies to play DELL have surfaced.

    Buy first ask questions later is something Icahn can do accepting a 300 MM portfolio loss as rounding error and it will just be the start for renewed campaigning.. to remove board etc.. but all the board will claim is that it balanced all interests and fiduciary duties.. who will fault the board for not relaxing the voting standards..

    looks like a perfect face save to me, in light of the circumstances.

    This is all about the art of saying NO.. IN my case NO to fantasy dollars based on non-fundamental strategy of making sense of expensive, uneconomical past software and enterprise type investments. look for those goodwill assets to be written off and coverage ratios to weaken.. Dell in restructuring mode will not be nice. its not about victory in arbitrage but preserving capital.

    Cipla Medpro in South Africa was a good spread.. shareholder vote came in favorably in a very controversial shareholder vote, and still a 4% spread remained with one month to close. that is what I call a favorable risk reward. As opposed to wanting to guess which way the fight for value goes.

    There is still a remote chance that any sort of deal will or can be revived. And one cannot rule out that M.Dell's interest to pursue this has vaned. He realizes well that without a deal, this can easily go back to trendline of 8. What are the chances that Icahn et al will
    throw the towel and Southeastern.. but the ongoing insistence of best and final offer means that saving faces will be difficult for that camp. That is what you get in a match of titans. M. Dell isnt stupid either. Otherwise he wouldnt be where he is today at age 48 or 50?

    We can assume he is well advised and that limitless leveraging up of DELL is not what he has in mind. Fairly straight shooting from him I would say. Well advised no doubt. But still leading with lots of uncertainty in their markets as the author of this article points out and as even Jim Chanos has attested in his short Dell thesis.

    What is the short interest by the way? increasing or decreasing? this could be a nice feast for the hyenas..

    When the dust settles, investment strategy will just be revealed as a theory.. social science theory rather than a hard proven natural science. There are no clearly articulated thesis that this is a hard core value investment that can stand up to anything other than relative value analysis. M. Dell though isnt interested in breaking it up. Chances are there wouldnt be a buyer willing to pay more than what they paid for select unprofitable assets purchased.. This may end up like sun microsystems... nice computers, nice servers at a distressed price, vis a vis IPO price.
    Jul 31 12:41 PM | Likes Like |Link to Comment
  • Dell Inc. Bonds: How Much Risk And How Much Return? [View article]
    Donald.

    Thanks for sharing this very useful analysis. it provides a complementary perspective on a much loved equity name..much loved with arbitrageurs. not so much loved with less adventurous equity investors who care about leverage.

    you touch on a few very valid points and since it is all empirical there is no point in disputing anything. Thanks for sharing. that's all.

    There are lots more of these LBOs/MBOs that go bust than the average equity investor is even aware of. Possibly you have written about this before and I'd be interested in such perspectives.

    I give quite some credibility to M. Dell that the stock could be worth just 8 bucks if any of these deals fall apart. that would be a continuation of the equities trendline.. vs. grand extrapolations that Dell is worth 28.

    Dell reminds me a big of Dynergy where 2 failed buyouts later the entity was reorganized in chapter 11. different biz model but just as competitive.

    A few operational setbacks and customer defaults on all their receivables portfolios and indeed this thing could be looking very ugly on its own, even before considering any buyout debt shoved on top of it.

    Dell as it is today has grown dependent on low margin government contracts and it appears that they just lost one such contract. not great.. and stuff of future earnings that no current arbitrageur will have to worry about if fairy tale visions continue to paint blue blue skies.

    Part of my analytical interest is to study deals that fall apart. M&A deals. The psychology of the typical arb is that warning flags are ignored. While cheerleaders with 28 dollar price targets get the so called attention.

    I was surprised that Jim Chanos changed course on his short Dell thesis.. That one is in and of itself worth revisiting.

    My feeling is that M. Dell himself wants to abort the deal and isnt quite unhappy about the locked in horns of different stakeholder groups..

    I sold my dell above 13 just to not participate in this coin toss wager. cant gamble client money on such outcomes..

    Do you have any opinion on Kinder Morgan Inc and Partners ratings. Made a great investment in their warrants but with any hyped wall street darling story the tough part is to catch the momentum swinging in the opposite direction.
    Jul 31 10:08 AM | 1 Like Like |Link to Comment
  • Contrarian M&A: A Deal That Falls Apart For The Right Reasons Is A Good Deal To Buy [View instapost]
    Back at MYR 5.80 for the record.. .momentum is swinging in favor with lots of upgrades happening.. after everyone was bearish no 6 months ago.. . mind you not . not all arb deals that fall apart are good ones, but the ones that have real and reasonably stable cash flowing businesses that fall apart for the "right reasons" is something I'd go any day.. valuation disputes in companies trading close to book value that are cyclically out of favor as a tendency would have lots of upside if the momentum can be properly gauged.. MISC Berhad has quite a number of businesses slightly pulling in different directions so its not exactly a pure play on any particular cycle.. The positive momentum comes from a realization that many of the enabling infrastructure projects in Malaysia are coming close o completion and will start to produce revenues anywhere from Q3 2013 to Mid 2014.. FPSO Gumusut-Kakap was delivered June 24 to client Shell/Conoco/Murphy and should be hooked up as soon as the oil and gas processing plant in Kimanis and the pipeline from Kimanis to Bintulu and the Bintulu LNG export trains are up and running.. as of latest reckoning around December 2012 all these projects were 90% plus completed.. They need to undergo though testing and validation until they are put into commercial service.. I certainly expect there to be lots of excitement in this story.. Malay analysts have a price target of 6.40 but my longer range target on this is 8 MYR... stay tuned as contrarian arbitrageurs.. (on my current watchlist but staying out of harms way is DELL I want to see lots of eggs in the face, just the way I like it.. This situation reminds me a little bit of Dynergy and two unsuccessful M&A bids later the biz filed for bankruptcy.. Dynergy was in my opinion a valuation dispute that was not worth it due to excessive leverage... I try to stay out of the way of excessively leveraged companies where Private Equity firms are haggling it out over price.. a Management Buyout looks more interesting from the assymetry.. for as long as it falls apart.. A lot of arbs appear to be under water on Dell getting it at prices from 14 to close to 14.40 that will not make them whole at 13.75... instant cut reaction woudl be to vote down just like it happened at Dynergy and if this happens, watch out below.. Recently where was the falling M&A knife of EBIX where I am invested prior to the bid at 13 bucks. the deal with goldman was at 20 and after the deal collapsed for accounting reasons it went as low as 9 and change.. with a recovery now to 11 and change.. 2 bucks under water versus my original cost.. I had not really counted here on the buyout.. but was just starting a small position at 13 when things happened.. This is a stock that has had lots of short seller scares. my original small position set up was not yet enough researched to as of yet bother to write on this M&A blow up... Shortselling in software and business process outsourcing cos is nothing new. And the accounting practices in creative rollups evidently attract shortsellers . so EBIX is more than just a blowup that fell apart.. it got its own little accounting/IRS tax investigation intrigue.. something to put on the radar screen..I got attracted to it because of the substantial M&A where I saw them involved and some of their transactions seemed to make sense from an overhead reduction, accretion point of view.. with the failed M&A deal and the tax intrigue it has become even better, particularly since they have a business.. At this point though I am jsut involved with 8 shares.. my lucky number to put things on watch list.. The good thing is that they have a business that is doing well. The bad thing will be the distraction and noise responding to investigation. and the cost of it. Shoudl there be any sort of settlement, the price even increases. IN the past there have even been cases where execs of good businesses were indicted, and forced to be removed from the boards of public companies and such.. This is where the price of the operating business could become really cheap, plagued by all this intrigue.. History though is not always a good guide of how things will pan out.. if you have a stable operating business with substantial cash flows the idea that it can become a much lower sub 5 buck penny stock doesnt always naturally follow. The shortseller argument though is that this could happen and there are certainly no guarantees that it will not intermittently happen. for such a state of affairs to become permanent, the company has to reveal itself as a real fraud, which by my own assessment isnt the case. I havent seen any case that I am aware of where companies have been killed by IRS over tax questions of the past... Just sharing a bit of my work in progress radar screen.. there have been a few other deals that fell apart and some have an interesting look and feel.. Guoco 53 HK fell apart and this was trading at 90-91 HKD at deal vote time in mid April.. this was a minority squeeze out and minorities voted it down. with NAV north of 135 by some estimates.. they were lookign to buy it out for the cash value just the type of valuation disputes that look interesting. with the deal falling apart it went as low as 83 HKD by early June whereupon they implemented a spinoff deal that already became effective July 17 distributing a UK listed gaming biz Rank Group to shareholders. this was worth 5 HKD per share. The stock has recovered to 90 HKD.. all in all a 95 HKD package now.. definitely above where the name traded at the time a vote was contamplated and a lot higher than the low point.. The Guoco controllers have tried to do this squeeze out before almost 10 years go. they are disciplined savvy and value conscious.. They control Hong Leong Bank.... a the time of their last squeeze out attempt they tried to squeeze out for 58 cents and didnt get anywhere.. unfortunately for shareholders some disenchanted large shareholders subsequently sold to them. so the control level of the family has only grown over the years.. at this point we are almost in a final push for control.. I wouldnt expect them to wait for another 10 years with their next buyout put, but in the meantime I dont expect them to waste shareholder money either.. NAV per share should increase.. Currently Guoco is building a stake in Bank of East Asia which now sits at 15%.. Banking is something these guys understand. This doesnt look like it will be something that will burn a whole in the wallet.. admittedly I missed to take action on this in the low 80s.. i expected though the deal to fall apart.. because the cash consideration was just way too low vis a vis NAV.. 893 HK China Vanadium Titano also fell apart in a 2 HKD deal.. also in late april.. this one also occured at dscount to book and significant discount to IPO price not too many years back.. This was also a move by the controller to squeeze out minorities and this almost always does sit too well with HK investors.. although arbitrageurs get fatally attracted to these types of deals. This particular name is now trading at 1.11 HKD significantly below the deal price.. There have been a number of expansion projects going on at their iron ore mins. Since I expected for this deal to fall apart I havent really updated any of my models to know with precision what to expect from the significant mining capex that occured in prior years and that has yet to bear fruits on quantities produced.. time to reread my files at current trading prices .. There are huge overcapacities in steel production in China and certainly not the sweet spot.. the byproducts Vanadium and Titanium occuring in their mines are though the prime contributors.. If the idea is to get involved in such deals at pre-arbitrage prices rather than during arbitrage, this is a worthy target to explore particularly since the buyout disagreement with minorities solely focused on price.. Nobody in Hong Kong is fondly in love with this business and taking it private would make a lot of sense.. but the proud HK investors decided to overwhelmingly vote it down in the separate minority vote where things counted. More to come in the future... Difficult to write any of these foreign names up on this site other than through instablogs..
    Jul 25 07:18 PM | Likes Like |Link to Comment
  • The Truth About Robin Raina's Ebix: Part I [View article]
    How many of their employees are actually in USA. Indian IT and offshoring firms use lots of tax havens to earn the high return on investment that they deserve. Wipro uses a Wipro cyprus sub among other entities.. Would be funny if all the returns on intellectual capital ended up in the coffers of the greedy feds. The verdict in the short term remains that the deal is off. This was an unexpected development anyway from my perspective. got in before the deal with a tracking position. If their business is stable enough, they will slow down the pace of acquisitions,. do nothing at all for a change and just see how cash flow pans out, and let the cash flows speak for themselves. I dont mean to rationalize here.. time will tell if it is a buyback stunt or whether they have substance. the experiences in part cited by this author like Sinoforest or Bre-X are very different type of animals than what we are dealing here. Bre-X was a gold mining junior project in Indonesia with fake geological reports. The mother of all mining frauds.. Probably long long before the author even was around. The company MFC Industrial and predecessors took over what remained of the Bre-X shell (canadian javelin). Lovely little story for anyone interested in digging deep into corporate history archives.. Its just part of these scare tactics that shorties conjure up to repeat success stories of the past. Only time will tell what is fact and fiction.. Schick Technologies (now Sirona Dental) took a very very long time to rehab its smeared reputation.. This was a highflying company in dental digital radiography software market. Mr. Schick was even barred as CEO from serving as a director but nevertheless managed to stay around at the NY based company that bore his name..For a while it looked like the shorts were going to get the better part of that company.. but eventually the hard work and industry of these entrepreneurs paid off.. And this was a company with much lower revenue base where all the allegations brought against them by SEC and others weighted much stronger against them grinding stock almost to dust.. Today as a 65 buck stock, I think they more than vindicated their vision and even landed a M&A coup... Somehow as an outsider it seems so convenient to judge entrepreneurial firms by what is not readily apparent from the outside... Why should Indian and other foreign offshoring ops be treated as a cost center and not profit center? A very US centric perspective to say they should be paying US Fed statutory rates at the top bracket, although you are not making that point.. but you certainly imply that the FEDS have a case or multiple cases.. You have to look at the 10-12 year chart of a company like Sirona to see the opportunities afforded when good companies get trashed. The full heat of the action may not have trashed them yet... if the author says a price target could be 8 to 0.. well it got very close to 1 with Schick/Sirona..They flirted at one point with a 12-15 million market cap and this was around 0.5x sales in the early days of their corporate history.. as a real company that this company was. EBIX is very much a real company as well and although I dont know their products I have bumped into IT staff of theirs on the way to work in the place where i live in Brazil. The buyout news here sounded like a Deus-Ex-Machina. The real opportunities should be created through the parallel investigations which no doubt will be a nuisance. But mustn't mean the end to the story.. as an operative business. In my own experience whatever these guys can be faulted on, if at all, once the dust settles some interesting phoenix could rise from the ashes. I was just putting a magic share tracking position of 8 shares in place to track this thing over the coming month and then the buyout news hit. like the proverbial deus ex machina.. I think this may at this point have further downside. just like Schick/Sirona had. Schick had though the dubious reputation of being an overvalued and overhyped software IPO stock trading at 10 x sales before its descent. Once they paid their dues they spend a 2, 3 more year in the naming and shaming gutter and off they zoomed.. This is not suggested as a parallel experience with identical circumstances. Merely an illustration of the extreme points of optimism and pessimism of an entrepreneurial company that turned out quite viable when measured over a 16 year history as a publicly traded US company that it still is. And this company had no foreign ops to show for.. Just NY software biz. Much hated, maligned and ridiculed at the time by the shorties. History turned out to be very different than what they thought and in the end they landed the coup of luring the Siemens dental biz into a reverse merger. If anyone was still short by 2005, this hammered the nail into the coffin of shorts..
    Jun 26 09:30 PM | 3 Likes Like |Link to Comment
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