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Alex B. Gray is the founder and editor of the Scavenger Report newsletter and the website. The Scavenger Report is a research-focused investment newsletter for the independent-minded investor. The website also contains independent research on individual... More
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  • Investing Vicariously Through Kaiser Group Holdings, Inc. 0 comments
    Sep 27, 2010 8:41 AM | about stocks: KGHI, LTM, CLUB

    How many times have you wished you could invest with the big boys in special situations only available to an elite few.  Imagine being able to invest with the now infamous John Paulson when he was shorting the subprime mortgage market.  Mr. Paulson made both himself and his investors very wealthy during a time of chaos for most investors.  Kaiser Group Holdings, Inc. (OTCPK:KGHI) may provide the opportunity to have a piece of that action.  I will discuss these investments after a little background on KGHI.  

    The Background

    KGHI was formed in late 2000 for the purpose of owning all of the outstanding stock of Kaiser Group International, Inc. as part of a Chapter 11 bankruptcy reorganization plan.  Through Kaiser Group International, Inc, KGHI owns 50% of Kaiser-Hill Company, LLC and 100% of Monument Select Insurance Company.  

    Kaiser-Hill Company, LLC (Kaiser-Hill) serves as the general contractor performing closure activities at the US Department of Energy’s Rocky Flats site near Denver, Colorado.  Kaiser-Hill is in the closeout phase of this project and this phase is cost reimbursable only.  Additional fees are not expected to be earned during the closeout phase.  Kaiser-Hill has been paid all fees except for a small retained amount.  In turn, Kaiser Hill has withheld approximately $3.2 million in distributions until audit and certain administrative issues are completed and resolved.  KGHI expects to receive its 50% portion of $3.2 million withheld by Kaiser-Hill.  

    Monument Select Insurance Company (Monument) is a captive insurance firm.  Monument has not issued new policies since October 1, 2000, but did form a subsidiary, MS Builders Insurance Company (MS Builders) in late 2004, to allow Monument to offer derivative captive insurance services to third party clients.  MS Builders has yet to write any policies.  

    Kaiser Group International, Inc. also has ongoing litigation related its subsidiary Kaiser Netherlands B.V. concerning a steel mini-mill it constructed for Nova Hut.  Nova Hut was awarded approximately $4.1 million by an arbitration panel.  However, KGHI does not believe Nova Hut has recourse to collect this award.   Nova Hut is actively pursuing the collection of the award.  In a separate, but related legal matter, Kaiser Netherlands B.V. was awarded a $2.6 million cash settlement in arbitration and was relieved of an obligation to pay retention to a subcontractor in the Nova Hut project.  KGHI  believes the ability to collect this settlement to be uncertain, but it is actively pursuing its collection.  Kaiser Netherlands B.V. voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code in April 2008.  These legal issues will continue to negatively impact cash flow.

    Lastly, on April 30, 2007 with $6.1 million KGHI established a Voluntary Employees’ Beneficiary Association (“VEBA”) to fund retirees’ future medical and death benefits as part of the Kaiser Group International, Inc. bankruptcy.  Once the fund has been in place for 5 years, KGHI is required to perform an actuarial analysis of the projected net present value of benefits remaining to be paid out.  If the remaining fund balance is not sufficient to pay the estimated present value of future benefits, KGHI will be required to contribute any shortfall.
    While I believe it was imperative to share this background information, it is important to note that none of the above mentioned subsidiaries are currently producing any revenue and are not my catalyst for investment.  However, they do carry some contingency issues that could negatively impact the Company’s cash and investments.  

    The Vicarious Investments

    Over the last two years, KGHI has made some potentially shrewd investment decisions to deploy its existing capital.  

    Bally Total Fitness Holding Corporation

    In July 2009 KGHI purchased, at discount, secured term loans made to Bally Total Fitness Holding Corporation (“Bally”) for $11.7 million.  KGHI converted the secured term loans to equity in September 2009.  This conversion gave KGHI ownership of approximately 10% of the common stock in Bally.  In March 2010, KGHI increased its investment in Bally $500 thousand by purchasing additional shares and warrants.  Assuming the total Bally investment represents approximately 10% of Bally, that puts a estimated market capitalization on Bally of approximately $120 million.  Considering Bally operates over 300 locations nationwide, makes this investment look very good on the surface.  For comparison purposes, Life Time Fitness, Inc. (NYSE:LTM) currently operates 86 locations and sports a market capitalization of $1.64 billion.  On the flip side, Town Sports International Holding, Inc. (NASDAQ:CLUB), which operates 109 fitness centers primarily in the northeast has a market capitalization of only $62.5 million.  These comparisons are just to give you an idea of the value the market is putting on fitness companies.  However, neither LTM or CLUB is exactly comparable to Bally as LTM tends to have larger and newer centers and CLUB only has centers in a few states in the northeast. In addition, much more research would be required to understand Bally’s current operations and financial condition since emerging from bankruptcy.   

    Paulson Gold Fund, LP

    In June 2010, KGHI invested $10 million as a limited partner in Paulson Gold Fund LP (Paulson).  This fund is run by the aforementioned John Paulson who made a killing a few years ago betting against the housing market.  While anyone can invest in gold and gold related investments, it takes a minimum of $10 million to become part of this elite partnership.  Several reports say the fund was up approximately 9% in August 2010 after dropping nearly 6% in July.  So far, September has been a very good month for gold which should bode well for the funds September performance numbers.  

    The Conclusion

    KGHI just may be your way into investments you would otherwise be excluded.  While it is too early to tell if the investments made by KGHI over the last year will bear any fruit, I do find them very interesting.  If the economy and markets improve Bally should excel if it can grow in a very competitive fitness center membership environment.  If so, it may open the door to a public offering allowing the value of the KGHI investment to be realized.  If the Fed and other countries continue to print money and pile on the debt further devaluing currencies causing long-term economic issues, the Paulson Gold Fund should provide some growth and act as a nice hedge.

    In December 2009 KGHI appointed investment banker Michael E. Tannenbaum who has been involved in the financial community for many years.  This may have and certainly should in the future, give KGHI access to more investments like Bally and Paulson.

    KGHI also invested approximately $5 million in a mutual fund that seeks long-term total return by investing in bonds and other types of credit instruments.  In addition, KGHI still has approximately $22.5 million in cash and CD’s or nearly $16 per share and a book value of $35.87 per share that should provide a floor under the stock price.  Total liabilities are negligible at only $1.226 million.

    An investment in KGHI is certainly not appropriate for all accounts, but for those wanting to take advantage of investments generally reserved for the big boys, KGHI can give your account access.  Of course, it is not without risk as expenses and a lack of revenue continue to eat away at the cash balances.  For the first six months of 2010, KGHI has reported a loss of $1.738 million.  Also, the two investments in Bally and Paulson account for nearly 43% of the $51.886 million in total assets.  If either investment has a negative outcome, it could have a material impact on KGHI and its stock price.  Also, KGHI is very thinly traded and only limit orders should be used when trading this security. 

    Disclosure: The author is long KGHI.PK at the time of this writing

    Stocks: KGHI, LTM, CLUB
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