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Event Driven Q&A Forum 148 comments
Any event driven/arbitrage questions?
Where can an investor go that the price system cannot keep up?
Certain event driven situations allow investors to exploit profits from securities where the price system itself fails. With many investors seeking to profit from the efficient, priced-in aspects of the market - from well-known, well-loved, often rehashed ideas about famous securities - what is left?
What scraps have fallen beneath the floorboards such that we can underpay for value due to some aspect of a corporate event that the price system fails to properly discount?
Please ask any question on your mind regarding specific tickers (especially M&A, spin-offs, conversions, litigation, rights, warrants, liquidations, and the like) that have substantial value that is mispriced by the capital markets. Alternatively, I would be happy to answer anything about risk, sizing, or research.
I will make an effort to respond to any question in either the comments below this post or sent directly.
If you want to learn more about these types of opportunities, you may want to read You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits. I apologize for the title, but the author of this book actually is a stock market genius, so he has earned the privilege of writing silly titles.
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This post has 148 comments:
I'll kick things off. I've been reading Fortune's Formula (after seeing you write about it).
I'm on the chapter that talks about how warrants are often overpriced so Ed Thorp used to short the warrants and buy the underlying stock. I think he further maximized value by having some sort of formula worked out to know how much of the stock to buy. The book didn't really go into detail on this formula.
Anyway, I was wondering if you had any thoughts on the warrants space and whether it's still a good place to go fishing for similar shorting opportunities. Or, maybe things are different from when Ed Thorp was around.
On a different note, my fav spinoff idea for 2013 is NWSA.
Thorp is a master with warrants. We spend a lot of time and energy researching and analyzing warrants, especially when they are part of the consideration paid in mergers. We discussed a bit about our KMI warrant investment here: http://seekingalpha.co....
Warrant pricing can still be all wrong, but such circumstances are rarer than the era discussed in the book.
Regarding HIG itself: HIG is weighed down by variable annuities it wrote - especially in Japan. It guaranteed a rate of return, and rates in Japan are 0% and might be for a while. This is a big liability, and/or opportunity, depending how you view it. Note the liability floats somewhat with USD-YEN. Yen down, HIG's liability is less. And vice-versa.
http://1.usa.gov/TASLxn
http://seekingalpha.co...
I keep hearing about "reverse conversion" option plays being an arbitrage situation when options are overpriced - something like you short the underlying stock then buy a call and short a put with the same month same $ amount. I'm not an options player but it seems this can be used as an arbitrage situation or a method to create synthetic shares to keep the lid on a particular stock. Any thoughts?
Short Stock is -100 Delta.
FREE Synthetic Long Stock with +100 Delta is created by buying call from premium obtained by selling the put of same $ amount & month. Strikes can be chosen in many different ways.
Thanks a million for reminding me. I have not used it for long time, because I avoid trading unsure direction trades (some Arbitrage Situations). But will start using from this moment onwards, if I create an unsure Arbitrage/unsure situation Trade.
Options are many times overpriced before Earnings or significant events & that is the best time to create this model IMO.
Best example to create this trade was on AAPL, where I was unsure of AAPL movement following Earnings but created only Long trade & created a Loss. It was dum to use it on AAPL but I have done many dum mistakes in past. Fortunately my Dum mistakes have dropped by 80%.
To feel better, I know that I had Many Earning winners in last month including IBM. I will use it in every unsure direction situation in future.
R/C are referred to as "locks" by option market makers. As market makers trade they are buying options below theoretical values and selling options above theoretical values. If a market maker buys calls on his bid he will short stock on a delta neutral ratio. The mm will be hedged directionally (still holds volatility risk) until he can complete the reversal by selling the same strike put on his offer or even fair value and selling stock against the put delta neutral. This series of transactions should leave him long synthetic stock from a price below his actual short stock position and have "locked" in a profit. Option flows will dictate how easily a mm can enter r/c positions. Executing a reversal at one strike and conversion on another strike will cancel the stock positions and leave the trader with a "box" position. Executing a reversal in one month and conversion in a different month is called a "jelly roll".
Basically, r/c positions are legged into by market makers over the course of trading by capturing the spread or vig. Put-call parity will keep prices in line for market takers and they would need to take directional risk to leg into the trade. R/C could be mispriced if expected dividend or stock borrow changes. The most common time to see r/c trades occur is at expiry. Market makers will have risk if a stock pins to a strike on expiration day. They will not know how many long options to exercise because they don't know how many short options they will be assigned on. This could leave a directional stock position for the first trading day after expiry. To limit risk a trader holding the reversal will look for another trader holding the conversion to cross with at even. The cross will eliminate both traders positions and pin risk.
Hope this gives some answers and practical examples. Watch for an upcoming blog from me on options books.
http://bit.ly/Qh8H24
which can be arb'd with mispriced options. I don't analyze these much though...
Selling puts has worked out great for me on NXY, NYX, CLWR, SHAW, JEF and a few others over the past year but i'm not sure if it will continue to work over a longer period of time. I'm sure something like the Anheuser-Inbev/Grupo Mondelo lawsuit today could be semi-catastrophic but i was curious of your opinion.
In the case of Mondelo, we thought that the chance of this suit was about 75%, which clearly changed how we structured that trade.
Other than that, it looks like they will deply $200m for 13% return over 54m shares for roughly 0.37/share of annual cashflow to common after preferred dividends but before expenses. SG&A will come down now that they don't manage the CDOs. Why do you like it Chris?
However, off the top of my head- I look at the numbers the same way you do, but I'd add the property mgmt business ($9m/yr which offsets some SG&A). Also, I get a higher net equity figure than you do after the sale and the release of some of the CDO assets. Based on a price/FFO of 8 (average price/FFO of LSE & LXP) I'm getting closer to $4-$5/share.
I'm looking forward to seeing their balance sheet on a deconsolidated basis with the CDO assets released to "check my math" though!!
Also, by having half of it's assets being leased by BAC, there is some concentration risk. Even if you or I don't see it as a huge risk, there will be many that do.
Just my $.02.
•Mergers and acquisitions – One company purchases another
•Spin-offs – A company splits off portions of its business into new, independent companies
•Demutualization – A mutual bank or thrift converts to a public shareholder owned institution
•Restructuring – When a company reorganizes its operations, ownership structure, etc
•Litigation – Investing in a company based on the outcome of a legal proceeding
•Legislation – A company is impacted by new or changing legislation
Until the book arrives - Look inside streetinsider.com for FREE for some details to get the feel. For extensive Details $495/yr (Sign up for FREE membership. Please do not pay for annual membership without finishing Greenblat's Book described above)
For Mergers and acquisitions look @ M&A Insider (4th column in top bar). When you open the column - 5 categories exist (Merger News, Rumor News, Merger Arbitrage, 2013's Top Deals, Top 10 of Top 50 Takeover Targets (remaining 40 need membership)
Column 2 in top bar is SI Premium - when you open the column, vertical Column is seen on left side of the page.
1. Company News section has subsections (Hot Corporate News, Litigation, Hot Management Changes, Management Comments etc)
2. Dividends subsections (Hot Dividends, Hot Stock Buybacks)
3. EPS subsections (Hot earnings, Hot guidance)
4. My favorite-Insiders/Hedge Funds subsections (13Ds,13Fs, 13Gs)
5. M&A subsections (Hot M&As, Private Equity)
6. Market Movers (your preferred choice is here- in Insider's Blogs as Options, Options EPS Action. Trader Talk)
7. Rating Changes with many subsections.
To understand the concepts, you must complete the book, cover to cover. Then you will get better & better with Time, in finding VALUE in the events & create 50%/yr profit in future (Book is written for anyone to create 50%/yr profit) but it will require a lot of work. Greenblat speaks very clearly that Market rewards the hard work (reading in great details, to find value of profit creating wisdom inside the events, >40 hrs a week work) of the person, as 50%/yr profit.
Here's a link to the preliminary information statement:
http://1.usa.gov/11KBgtF
Do you see anywhere management options/stock grants? I haven't been able to find any.
http://1.usa.gov/TAZzev
They're offering Casey's and Couche-Tard as comparables. There's a chart of the EV:EBITDA ratios of those two companies in relation to VLO's, but I'm confused about how to interpret it. If anyone thinks they know how to read the chart, please let me know.
I found an updated information statement filed 1/6/2013 as an exhibit to a registration statement:
http://1.usa.gov/YyaUec
From the IS about capex:
"Our cash flows have been strong over the three years and nine months ended September 30, 2012, and we have generated positive cash flows from operations during this period. We have used some of the cash generated from operations to invest in our business, incurring capital expenditures of $90 million and $78 million in the first nine months of 2012 and 2011, respectively, and $130 million, $105 million and $64 million in 2011, 2010 and 2009, respectively. (p.64)"
Here's a comparison of capex and depreciation for 2011, 2010, and 2009 with the depreciation figures in parentheses:
2011: 130 (113)
2010: 105 (105)
2009: 64 (101)
2010 the were equal, but there was a significant variance in 2011 and 2009. I don't if the years in which there was a noticeable differential resulted from store growth, but I would suspect it. I haven't gotten far enough into it to have a sense of CS's history of maintenance capex versus growth capex.
There's a discussion of executive compensation beginning on p.87. Hope this helps.
Am I oversimplifying the graph by just thinking that the "differential" is just trying to show how Valero's multiple is too cheap for the retail? Looking at TTM (i know I'm mixing these up); Casey's EV/EBITDA is 8.7 vs. Valero's of 4.4 makes a "differential" of 4.3; which is close to that graph.
With 2011 EBITDA at $280M (and assuming no growth) and $1.05B of debt and an EV/EBITDA of 8, and assuming they stick with 100M shares, I'm getting a valuation of around $12/share. Should be a bit higher due to higher 2012 EBIDA presumably. thoughts? Their $.25 div/share gets us to a yield of about 2%, which seems reasonable.
Thanks for pointing to the comp. section. I had read that with glazed over eyes before. So, it doesn't show me that they're getting significant options/stock grants in this spin at this point. Perhaps more info later??
Aside from the research what attracted me to CST is the 'red-headed stepchild' nature of this spinco:
CST is 'retail' not 'refiner' category so lots of CFA types think its toxic waste and will be ejected from many portfolios asap. Its also going to be sold without regard to value by SP/Vanguard/Ishare funds. Possibly 3mm+ shs will hit the market, quickly. Finally, with the ratio of 9:1 distribution it will be a rounding error in many porfolios and sold quickly, esp if the price erodes.
It throws off lots of cash and VLO did them a favor with a sweetheart bond to give them cheap debt for 10 years. There are probably growth opportunities via purchase or remodeling of existing stores. The SEC filings hint around that but were not explicit.
So my conclusion is its relatively expensive right now esp with no growth strategy articulated yet. down 5$ or so it would get interesting. This is a stable business that throws off a lot of cash.
Rgds, AT.
AT
Incidentally, Fairholme was a forced seller late last year of the participation warrants related to the SHOS spin-off from SHLD for some reason. They were dumping on the open each morning. I was preoccupied and not paying attention at the time, but I did know someone who was buying hugely discounted blocks from Fairholme's price insensitive selling. Rumor was that Fairholme wanted to avoid having to make a 13-D filing for the rights. Who knows.
SevenCostanza- Thanks for your input. You make me feel 'less' crazy.
TheCompleatAngler- Have you looked at ERA? It's bothering me that I'm missing something- beyond just being pricey there has to be something more to the story that I've overlooked...
XTXI manages the Limited Partnership XTEX. XTEX is in the process of a significant expansion that will enable it to significantly increase its distributions to investors. The higher its distribution is, the larger Crostex Energy's cut is as a General Partner. And XTXI's cut is supposedly set to soar in the future.
Both Credit Suisse and Eugene Robbin of Cove Street Capital believe that XTXI's dividend yield cold rise from today's 2.8% to over 6% in the not so distant future. We're that to happen it would mean great things for the company's stock price in today's yield hungry environment.
Anyhow, I'd love to hear your thoughts on XTXI if you've looked at it.
Thanks and have a great weekend.
We know it well.
This was a sensational opportunity at the end of 2008. It traded as if it were in distress without it being particularly distressed. While it has largely recovered, it is still somewhat of a bargain. Good assets. Good growth potential. Fine investment. It knocked my socks off when the distribution was >50%, but it is still okay today. Cash flow is stable. Pipelines are natural monopolies; pricing power is always good.
What about investing in SPAC?
We have owned SPACs at discounts to their cash value. We have also shorted quite a few of the companies with origins in SPACs once they buy operating companies.
Thanks
Sorry for the multi-faceted question and I realize some of this may be to early to know.
-New Residential will be to NSM as HLSS is to OCN. It will own MSRs initially, and may branch into other residential-focused investments. It will pay a $.56 a year dividend. If it gets priced to a 7% yield like HLSS, that's an $8 share price.
-Newcastle will own the CDOs and senior housing portfolio. It will pay a $.50/year dividend. Its assets are ~90% CDO-related and 10% senior housing-related. The senior housing portion deserves a ~5% yield based on comps, the CDO part probably deserves a 8-10% yield. A weighted average would be somewhere in the 7.7%-9.5% range. This gets you to a price range between $5.25-$6.50. (On an asset basis, I get to just under $5/share - $800m in recoverable CDO principle, $76m in the senior housing, $112m debt, and $30m cash versus 172.5m shares.)
-The sum of the two upon the spinoff and subsequent repricing would be $13.25-$14.50, versus a most recent share price of $11.20.
This analysis was mostly spoon-fed to me by the company here:
http://bit.ly/VFkpM1
The options look quite cheap...
It trades in the pink sheets and it's closing on BXG for $10 in cash at some point in the near future. BFCF already owns 54% of BXG.
Interesting thing is that BFCF trades at $2 and change but it has book value of about $4.
The purchase of BXG has several moving parts though so I'm not sure how to value the post-transaction BFCF.
Anyone know anything else about this one?
Would be interested in learning more if you've done any analysis.
I'll knock the dust off of it if it drops below $7.50. (Obviously it will now proceed directly to $20/share). Anybody else take a look? No position.
"Prior to the distribution, Crimson relied upon Leucadia for debt financing and equity contributions for all of its liquidity needs. These needs included $86,018,000 for the acquisition of Seghesio Family Vineyards in May 2011 and $19,200,000 for the acquisition of Chamisal Vineyards in August 2008. As of September 30, 2012, the aggregate amount payable by Crimson to Leucadia and its affiliates was $151,874,000, all of which will be contributed to capital before the distribution. As a result, in future periods Crimson will not record interest expense relating to this borrowing. Crimson’s positive cash flows from operating activities have improved during the last three years as a result of growth through winery acquisitions, increased sales from new product launches, improved brand recognition of its existing portfolio and increased higher margin direct to consumer sales. Crimson would have reported greater cash flows from operating activities for certain periods presented in this information statement if the interest expense paid to Leucadia were excluded."
There's probably seasonality in the business, but as a shortcut let's take the 9 months of 2012 out to a full year. Using their pro-forma numbers (i.e. adding back in that interest expense) you get $.25/share in net income. They record about $5m/yr depreciation. Ignoring maintenance for now, that gets you to ~$.45/share in FCF. PE of ~35, P/FCF ~19. Doesn't really get me too excited. Incidentally - this trades about the same valuation of TSRRY - so it seems the market is at least consistent in valuing these wine growers.
Hat tip to Warren's Alter Ego on some info... I'd be interested in any of this groups thoughts...
http://nyti.ms/10AxRCr
Of note, the NYT report quotes the president of an investment firm UTR, which is a 2% holder of OUTD, asserting that he made a bid for the company that placed a higher value on it than Hindery's did, but the BOD nonetheless rejected it. UTR has also asserted that OUTD's BOD rejected other offers for the company that were superior to Intermedia's in price and deal simplicity. I subscribe to the notion that there are multiple parties who would be eager to pay a higher price to purchase OUTD than either of the publicly disclosed offers that have been made. The market for cable channels is very strong as larger content providers and cable networks have been widely reported to be desirous of augmenting their content portfolios to gain leverage with distribution partners or to gain more value out of their distribution infrastructure as the case may be. Deal making in this regard has already begun heralded by Comcast's purchase of GE's minority interest in NBC Universal, OUTD's deal with Kroenke, etc. Now that the BOD has signaled that it is receptive to other bidders, perhaps they will appear. I think that OUTD's management had a bias towards doing a deal with Intermedia because of their long familiarity with Intermedia and its management based upon their six year history of mutual flirtation. I presume that Kroenke's proposed break-up fee of merely $1M indicates that Kroenke is making its bid as a defensive tactic because it views Intermedia's offer as being unacceptably low and not because it has strategic long term interest in ownership, as Intermedia does. Also, Kroenke's bid was not preemptively sized. In exceeding Intermedia's bid by just shy of 10% and given the cost saving synergies and other value an industry player would benefit from by acquiring OUTD, my estimation is that Kroenke's bid creates a low hurdle for Intermedia or anyone else to pass over to acquire OUTD. The hurdle is just high enough to change the BOD's judgment about which bid is superior and just low enough to make the economics of a deal with a higher bid still tantalizing to Intermedia.
Small Ohio-based bank. Growing nicely in Ohio and Florida. They were under two MOUs but they've gotten out of one in December and expect to be out from the other any time now.
Management has talked about re-instituting a dividend once that happens. Also talk of a possible tender offer.
Constellation Brands Statement Regarding Discussions with DOJ
VICTOR, N.Y., March 15, 2013 - Constellation Brands, Inc. (NYSE: STZ and STZ.B), Anheuser-Busch InBev (Euronext: ABI; NYSE: BUD), Grupo Modelo, S.A.B. de C.V. (BMV: GMODELOC), and Crown Imports LLC have made substantial progress in their discussions with the U.S. Department of Justice toward resolution of the Department of Justice's litigation, relating to AB InBev's proposed acquisition of the remaining stake in Grupo Modelo it does not already own, based on the terms of the revised transaction announced on Feb. 14, 2013.
Today, the companies and the Department of Justice jointly approached the Court to request an extension of the stay on their current litigation, currently due to expire on March 19, 2013, to April 9, 2013. The parties agree that an extension of the current stay will likely enable the parties to complete their discussions. If the parties reach an agreement, they will file a proposed consent judgment and related documentation with the Court. There can be no assurance that the ongoing discussions will be successful.
About Constellation Brands
Constellation Brands is the world's leading premium wine company that achieves success through an unmatched knowledge of wine consumers, storied brands that suit varied lives and tastes, and more than 4,400 talented employees worldwide. With a broad portfolio of widely admired premium products across the wine, beer and spirits categories, Constellation's brand portfolio includes Robert Mondavi, Clos du Bois, Kim Crawford, Inniskillin, Franciscan Estate, Mark West, Ruffino, Simi, Estancia, Corona Extra, Black Velvet Canadian Whisky and SVEDKA Vodka.
Constellation Brands (NYSE: STZ and STZ.B) is a S&P 500 Index and Fortune 1000® company with more than 100 brands in our portfolio, sales in about 100 countries and operations in approximately 40 facilities. The company believes that industry leadership involves a commitment to our brands, to the trade, to the land, to investors and to different people around the world who turn to our products when celebrating big moments or enjoying quiet ones. We express this commitment through our vision: to elevate life with every glass raised. To learn more about Constellation, visit the company's website at http://www.cbrands.com.
CONTACTS
Media
Angela Howland Blackwell: 585-678-7141
Cheryl Gossin: 585-678-7191
Investor Relations
Patty Yahn-Urlaub: 585-678-7483
Bob Czudak: 585-678-7170
For a $110 mil single investment into a complex pharma company that involved an unusual security and a lot of variables, that was about a whole quarter of a year, spending half of my time.
I think those two examples bracket my research. Most are somewhere in between. But I can go eighteen hours on a topic, so part time is still nine hours five days a week and a couple on the weekends. The ratio of research input to investing output is easily 10,000:1 in terms of our focus/time/energy. Even our money -- we spend a lot on research. If I want to know anything about a subject, I want to know everything about it.
Bloombergs are pretty helpful. Their terminals are addictive and expensive, though.
Occasionally, we hire investment banks. We are not that excited about doing so and prefer to do our own valuation and strategic thinking, but they can be useful for their relationships.
Industry-specific consultants are helpful at getting me up to speed. If it is pharma or tech, a PhD or two around can help on IP issues and can speed up the process of getting smart on products. Survey data can be $25-50k per pop.
We subscribe to every conceivable research service and publication. I am not enamored with sell side research and prefer one-off, for-pay independent research. I really like trade publications, which I get for about every industry (the wife raised an eyebrow regarding my "Women's Wear Daily" at one point but was pretty sure it was investment related).
Travel and industry conferences take time and money too.
We love data. If I'm going to know anything about something, I want to know everything about it. One of the funny things about using people to help on the investigative side is that we end up knowing all of this stuff about management teams by the time that I meet them. So, when we are meeting, I try to not mention anything that would look too strange to know... but we probably know.
For me, my research is also sort of like Dumbo's feather: I start by getting all of the data that one could conceivably get. So when positions move against us, we can be comfortable enough in our own thinking to stick it out where appropriate.
This toad has some warts on it (negative Free Cash flow, questionable management), but I'd be interested in any of your views. I've initiated a small long position.
Based on my math - there are 8,170,000 shares less than 1,683,000 shares in ESOP = 6,487,000 shares. $5M / 6.487 = $.77/share.
The balance sheet looks good enough that he should be able to borrow the $5M. I expect the deal to close.
I got the 5.06M shares from the 9/2012 quarterly financials (http://1.usa.gov/ZGLjCk) on page 4.
But now that you say that I do see the ESOP's Year end 13G show a total of 6.5m on the footnote of page 2 http://1.usa.gov/ZGLjCm.
The press release is a little unclear to me whether the $5m is inclusive or exclusive of the ESOP's shares, although it's clear that it won't be buying those shares. So, on 6.5m total shares at $5m; the 5m outside shareholders will get $.77. If I'm reading the Press release incorrectly and the $5m is exclusive of ESOP holdings, we could get the $.99.
I'd be interested in others views
CONE market cap = $521M
Am I missing something?
Steve
http://on.mktw.net/15u...
any thoughts on two other stocks which have been in the news lately? (CLWR and ELN)
I currently own and really like COV. I believe they are leaders in most of the medical areas where they compete. The small pharma spinoff is interesting but I don't know much about their pipeline. It's interesting to note that the spin, which will be called Mallinckrodt Pharmaceuticals, is the sole legal source for cocaine in the United States. Talk about a high moat business! That said, COV apparently tried to sell the pharma business at one point but couldn't find a buyer.
This post on stockspinoffs has more info: http://bit.ly/10MpQEt
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