Chris Tell's  Instablog

In 1945, after WWII ended the United Nations was formed. Its mandated purpose was to:

"promote and facilitate cooperation in international law, international security, economic development, social progress, human rights, civil rights, civil liberties, political freedoms, democracy, and achievement of lasting world peace."

Now those are noble goals, to be sure, and admittedly they set the bar pretty high for themselves. However, 68 years later the UN is an abysmal failure, and it's abundantly clear to anyone that is paying attention that literally every single principle mentioned in their charter is being consistently and repeatedly broken, oft-times by the founding nations themselves!

What about that peace mandate? There are currently over 36 wars being waged globally, so you be the judge…

As a "quasi" world government, the UN is able to extract money by force (do government's have any other play book?). The result has been the Mother Ship expanding like kudzu, spawning in its wake organizations such as the WHO (World Health Organization), the ILO (International Labor Organization) and dozens of other useless, bureaucratic nightmares. Mind you they have grown exponentially whilst achieving less and less with each passing year. In the same way that Amtrak "successfully" operates solely via grotesque theft from the US taxpayer, so too the UN will keep sucking in tax dollars and engorging itself like a video game-playing fat kid downing chips and sodas 12 hours a day. The only difference being that the fat kid makes no assertions that he is bettering human kind.

Rest assured, new "problems" in need of meddling will be found, ensuring more capital is "urgently needed" mis-allocated, or outright wasted. The UN is one of the most opaque, diplomatically immune, unaccountable to its funders, (largely the US tax payer) entities in the world, and much like any other bureaucracy views the tax dollars which fund it, not as a privilege to be earned, but as an "entitlement".

I've personally seen some of the most ill-conceived UN-sponsored projects, debacles that no sane person would dream up, get implemented. They all came complete with false, UN-created reports which were cobbled together in order to enlarge the scope of said "assistance" program. These "programs", I might add, are typically just transfer of payment mechanisms from "poor people in wealthy, developed countries", to "unbelievably wealthy, corrupt politicians in poor countries".

These NGO folks are driving around Africa, Asia and most of the poor countries of the world in their air-conditioned Land Cruisers, spending money they don't deserve on projects that most third graders would scoff at.

We saw it plain as day in Cambodia last week. They've got it good…and they know it. I met a woman on the plane from Phnom Penh to Siem Reap who worked for the WHO. What a joke. She was "living" in a $250/night resort, being chauffeured around in, you guessed it, a Land Cruiser. She was agitated when I met her because her Cambodian driver, who is likely getting paid the minimum $70′ish per month, forgot to pick her lazy butt up at 6 AM and shuffle her to the airport. She had to take a taxi… God forbid!

NO way they let the party end! Sadly, and almost unbelievably, many of these same individuals believe in what they are doing, which just accelerates the growth of these parasitic institutions. Make no mistake, they ARE parasites.

The UN's existence is absolutely destructive, period. Remember, before you send me email from Ohio telling me I'm wrong, I grew up in Africa, I have seen this crap first hand. I won't argue that many well-intentioned successful projects the UN may have had in the early days don't exist, but those days are long gone, and certainly on balance and for the enormous amount of capital squandered this institution now simply leaves in its wake a destructive, powerful, bureaucratic force. The fact that today the UN has any legitimacy left is testament to the Walmart car park ignorance of an intellectually indifferent, media-fed populace.

So what's the answer?

Undoubtedly what has had the greatest impact throughout man's troubled history on this ball of dirt, has been harmony created by trade. Centralized, top-down administration of principles, when forced on people of differing beliefs, whether they be religious (Hindu, Muslim, Christian, etc.), political or otherwise has a spectacular failure rate. Free trade and the free flow of goods and services - allowing individuals to choose how and with whom they trade - has had THE highest rate of success, bar none.

Let's take multinational corporations for example…they are everything that the UN pretends to be. They are filled with people from various cultures working in countries scattered across the globe, they are characterized by people of all religions, race, ethnic groups, and they are all trying to help each other rather than obliterate each other. Whats more is they are producing goods and services which the market desires and turning a profit doing so.

Why? Because the free market works. It is in essence people acting of their own free will to further their own objectives. It's not selfish, it's human!

Humans are self-interested animals. That should be apparent. Let's get over the concept that we're inherently chivalrous, philanthropic, self-less spiritual beings with our sole reason to exist being to better the lives of everyone else. Bull$%&#. For the most part we are always going to look after #1. Doubt me? Next time you're on an airplane and the stewardess (sorry, flight attendant) gives you the safety demonstration take note of who she tells you to put the oxygen mask on first (hint: it's YOURSELF!). The reason for this should be obvious, but if not I'll spell it out: We are incapable of helping others if we ourselves are not safe, secure and stable… This same "safety" principle extends to economics and personal finance.

Multinationals work on the premise that humans ARE self-interested. Thus they produce products which they believe cater to the self-interest of consumers (also humans, by the way). They are forced by the market to adjust their actions, products and business practices all over the world, almost in real time.

McDonalds in New Delhi serves curried burgers. In Asia you can buy a green tea and red bean ice cream sundae, and get seaweed seasoning for your fries. In Japan they will sell you shrimp burgers. Even in Hawaii the traditional "orange drink soda" is replaced with fruit punch!

I would suggest that McDonald's has done more to "promote and facilitate cooperation in international law, international security, economic development, social progress, human rights, civil rights, civil liberties, political freedoms, democracy, and achievement of lasting world peace" than the UN ever has…and this from a company that sells God awful cardboard masquerading as food!

- Chris

"None of us is as good as all of us." - Ray Kroc

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

That I had to be educated as to who Coats Inc are is a shameful disgrace… But then I'm used to being ashamed and disgraced, I like tomato and peanut butter sandwiches, and THAT my lovely wife tells me is shameful, AND a disgrace.

So who is Coats Inc.? A recently closed CPAN deal of ours involved a small, rapidly-growing company with a leading edge proprietary technology. This company recently signed an exclusive multi-year research and development agreement to create a new range of products. The agreement was signed with - you guessed it - none other than Coats Inc. Thus began my introduction to the company.

Founded in Scotland in 1755, Coats today must be one of the oldest continuously operating companies in the world, if not the oldest. Coats is the world's leading industrial and textile craft business, and rank second in global zips. In fact 1 in 5 garments around the world contain Coats threads. They are the undisputed market leader supplying threads to companies such as Adidas, Marks and Spencer, and Abercrombie and Fitch. Today with Revenues of £1.12B annually it is a cash-generating machine.

Coats itself is wholly-owned by a New Zealand conglomerate investment firm called Guinness Peat Group Plc (GPG:AX). GPG keep a listing in Australia, NZ and the UK. Now this is where the story gets interesting, as GPG has been trying to figure out how best to release value to its shareholders, and to that end the decision to wind down and sell off its assets was made over a year ago. There has been a bit of internal hostility as well, but that isn't the topic of this missive and really par for the course in internal shake-ups of this nature.

By the end of 2013 the one remaining asset which GPG plan to retain, is that of Coats, the thread maker mentioned above.

I've always maintained that conglomerates rarely get priced correctly by the market. It is often to difficult for investors to accurately value their many businesses and when they are publicly-traded shareholders often do not get rewarded for the companies value. In short, what can at times happen is much like government accounting…

1 + 1 DOESN'T equal 2

I believe that that is the case with GPG right now. Let's start with looking at GPG's assets. Currently GPG still owns stakes in the following: Tower Insurance; Ridley Corporation (agri-producer); CIC (Australian property developer); Prime Ag (Agri-investor); and, Tandou (Agri-business). These businesses together are valued conservatively at £216 million. GPG also has a cash position of £275 million.

GPG trades at £0.32p, or a market cap of £486 million. This makes sense, except that Coats is wholly-owned by GPG. Coats is therefore being valued at ZERO.

Lets take a look at Coats then. It is an extremely large business in its own right with over 70 factories around the world and 20,000 staff.

It is the largest holding of GPG, with a book value of £150m, £46m in profit, and £97m in cash from operations.

Insiders buying

Looking further I see that Waldemar Szlezak has recently been appointed as a non-executive director. Now Waldemar, some of you may recognize the name, is managing director of private equity at Soros Fund Management. Looking through filings which I corroborated with news releases, I find that Quantum Strategic Partners Fund has recently taken an 8% stake in the company.

Rob Cambell, GPG's chairman this month alone purchased 323,298 shares.

On the obligation side GPG has to deal with a £125 million pension scheme obligation at Coats. This is non-recourse to GPG, however they certainly have sufficient capital to deal with this regardless.

The question investors needs to ask themselves is if the pile of cash which is on the GPG balance sheet, plus that which will come in from the subsequent asset sales planned, combined with Coats is worth more than the current share price? Clearly Quantum and Rob Cambell believe it is.

One other notably interesting little titbit is that GPG has a £1.9 billion unused tax loss sitting on its balance sheet. That is HUGE. In essence GPG could sell Coats for less than its true value, use the tax right-off and simply return that cash to shareholders. Who knows what they will do, but it certainly looks intriguing to me, as well as being undervalued based on book value alone.

In full disclosure (not that it matters since this is a free blog and hey you get what you pay for), I have a bid out now to pick up some shares in GPG.

- Chris

"I contend that financial markets never reflect the underlying reality accurately; they always distort it in some way or another and the distortions find expression in market prices. Those distortions can, occasionally, find ways to affect the fundamentals that market prices are supposed to reflect." - George Soros

Disclosure: I am long GPGPF.PK.

After recent discussions with some of our subscribers it occurred to me that many of our readers may find some very common industry terminology daunting and/or confusing. Mark and I recently participated along with our CPAN members in a deal whereby we had the opportunity to take up pre-emptive rights, which is what brought the topic to the fore.

What exactly are pre-emptive rights?

Sometimes called subscription rights as well, these are pretty common in private equity and VC (Venture capital) deals. A pre-emptive right gives you as an existing shareholder the right to acquire new shares issued by a company. For example, after a round of VC financing by Series-A investors, if the company decides to issue new shares to potential Series-B investors, the Series-A investors will have the right to acquire shares up to their pro-rata shareholding. This helps ensure that Series-A investors can, if they so choose, retain their voting power even if the company decides to issue new shares in the future.

Pre-emptive rights allow early investors to ensure that they have the ability to retain their ownership share on a pro-rata basis and not be diluted. These rights do not need to be taken up, and act more like an option contract than a futures contract in that respect.

Why would an investor want this?

This gives us, as investors the right to participate in subsequent financing rounds to the extent that is required to protect our percentage equity stake. If the company is executing and doing well, this provision can be immensely valuable. When the company then goes to raise capital for its institutional round of financing the dilutive effects of that raise are mitigated by early stage investors taking up those pre-emptive rights.

I will say that I've had deals whereby VC's come in and attempt to kill the pre-emptive rights previously agreed upon. This is incredibly frustrating for all parties. The founders find themselves stuck between a rock and a hard place as they don't want to annoy seed investors (you/us) and they don't want to annoy the VC's either and risk losing the deal.

My own personal attitude when this happens is that the VC's can go to Hell, suck eggs and eat s#!^, but I'm a nice guy, so I'm not sure how others deal with it. We do our damnedest to NEVER deal with unethical people, and when VC's try to do that it is unethical…plain and simple. Of course if the rights are written into contract then they're enforceable, and as early stage investors with those rights you can enforce and should enforce them.

From the founders perspective what they need to consider is the company they keep. Angel investors and VC investors are often much, much more than simple shareholders. This is a partnership and it's certainly not uncommon for angels and VC's to play a significant part in the strategy of any young business. In other words early stage investors are not always passive. Do you as a founder really want to be keeping company with people who are unethical and willing to run roughshod over existing shareholders if given the chance?

What about "anti-dilution provisions"?

Anti-dilution (not to be confused with antediluvian) provisions allow for early stage investors to retain their percentage ownership in a company in the event that future financings would dilute them. Shares, options and convertible securities are adjusted so that the holder of these securities receives additional securities.

It is typical that anti dilution rights apply to financings done at a lower valuation to that which the investor has originally participated at. Where financings are done at a higher valuation what typically happens is that the angel or early stage investor, though diluted in percentage terms is realising an accretive dilution. This is often where pre-emptive rights become valuable. Just remember that the shares, options or convertible securities originally purchased are worth more even though the share count has risen in the event of a subsequent capital raise at a higher valuation.

We hope this little "cheat sheet" on these relatively simple terms helps. If you have any questions fire away!

- Chris

"If you are not willing to risk the unusual, you will have to settle for the ordinary." - Jim Rohn