Special Situations Update

Leavers, Stayers, Newbies

Disclaimer: This is not investment advice. The author either owns or did own shares of many of the companies mentioned below. He may buy or sell at any time without notice and his views may be biased. Please do not rely on the information posted below and do your own research.

As we are more than two months into the new year and there have been a number of changes to my portfolio, I thought it worth to present an update on the special situations bucket in this post as well as a few ideas of what I am looking at. I will not present full thesis on these positions. Also, I will not address position sizes, but note that normally, I try to hold a diversified special situations bucket and that each position is normally 1-2% of the portfolio. Your comments on the positions are highly appreciated.

I am starting with an overview of special situations today versus the last update from November:

Let’s go through these one by one:

No Longer in the Portfolio:

Abiomed was a merger arbitrage play which I just invested on the last mile of its takeover by Johnson&Johnson. The merger closed as expected and we now own some Contingent Value Rights which. We bought ABMD for 374 USD, the tender was for 380 USD, so we were paid a tiny amount and picked up the CVRs. Similarly, there deals in Applied Genetic Technologies (AGTC) and Akouos (AKUS) closed and we also received CVRs here, this time paying 3 Cents for the AGTC CVR and 67 Cents for a CVR of AKUS. None of these will move the needle for the portfolio. I will mark them all at zero, still like to have some lottery tickets.

I also sold 3U Holding recently. The company is expected to distribute a large special dividend (> 2 EUR/share was rumoured) this year. While this may justify some additional upside from here, the prospects for the remaining business are difficult to assess for me and after spending some time, I would not hold 3U as a core position. Therefore, I decided to realize my gains here. 3U was purchased at 3.87 and sold at 4.27 EUR. Turns out I was too early as shortly after my sale, the dividend, at 3.20 EUR came larger than I had expected. Shares are now trading at 5 EUR - bad timing on my part.

Mediaset Espana was and still is a dirt-cheap Spanish media company which fundamentally is worth more than the current share price. Unfortunately, it is a part of the Berlusconi/Media For Europe universe. About a month ago, it was announced that MediaForEurope and Mediaset Espana will merge in a share deal with every Mediasat Espana share being exchanged for one MediaForEurope A share. While the merger itself did not come as a surprise (MFE had incresed their stake in 2022), the nature of the deal without a cash component and at poor exchange ratio was disappointing. At current prices, the consideration is worth 2.87 EUR per Mediaset Espana share, less than 3x EBIT/EBITDA. Still, it seems like the deal will go through and I have no incentive to be a long-term holder in MFE. Therefore, I parted with my shares at 3.26 EUR. I had a lucky timing on the way in and purchased at 2.52 EUR.

LMP Automotive was a “soft liquidation” idea which I picked up at ClarkStreetValue (highly recommended) . The company runs a number of car dealerships across the US and has gone about selling them. The way to get there was not entirely smooth, for example some dealership transactions were cancelled after the hurricanes which struck Florida in October. Also, as the car dealership environment felt choppy towards the end of the year, I lost some conviction in the idea and sold out in January at a small loss (bought at 7.71, sold at 7.60 USD). I might have been too early as in February, LMP declared a special dividend of 4.68 USD/share to which the share price however hardly reacted.

O2 Micro was a take-private transaction of a US-listed, Chinese company by management. These situations are to be considered carefully but this one looked fairly clean. I first entered late last year at 4.20 and later added around 4.65 for a weighted-average price of around 4.40. The deal closed in early March at 5 USD, so this one worked as I had hoped.

Digital Media Solutions, on the other hand did not work at all as I had hoped. The idea was also a take-private of a DeSpac situation by management which had announced a non-binding offer of 2.50 a share. Following Clakstreetvalue’s write-up, I picked up a few share around 1.90 USD. The transaction never really came to the finish line. Instead, DMS announced strategic alternatives and ended up buying another company while terminating the go-private deal. The share price tanked and I lost nearly 50% on this one.

Finally, Bluerock Homes Trust was a tiny position spun out of Bluerock Residential which was taken over by BlackRock. I sold this position close to current prices (22 USD).

Still holding:

I am still a bagholder in ALJ Regional. While the company was delisted from regular exchanges, they are still reporting comprehensively. The company has 26mm shares and another 12mm will be added once the 2021 convertible notes are converted. The company has 1 USD/share in cash, and in 2H 2022 made investments worth 1.20 USD/share in various ventures (see “Recent Investments”) in their report. They also have three operationg subsidiaries, Faneuil, Vistio and Ranew’s. You can buy the company at 1.90/shares as I write this. Also, ALJJ repurchased a big chunk of shares in a tender offer late last year and they may do so agian. Sounds great, right? Well, not too fast. There is a clear history of self-dealing in the company where the CEO is the main investor in the convertible note. You may also not be enthusiastic about the recent investments in Hallador and A-Mark, an energy and a precious metals trading company. So, ALJJ is not for everyone and may not be for me forever, but for now, I am holding on.

Nexpoint Diversified (NXDT) is another survivor from the last report. It converted from a corporation into a diversified REIT last year which took much longer than anticipated. Shareholder communication has been thin since and NXDT has not yet adjusted the dividend as I would have expected (they still pay 0.15 USD/share). Higher interest rates pose risks to all real-estate related assets. On the flip side, year-end NAV should be at least 25 USD/share ( I have not seen it published) while the share price is close to 11 USD. If the company wants to be taxed like a REIT, they will have to change their distribution policy and distribute 90% of their FFO which could easily mean a double in distribution. CEO James Dondero is a controversial leader, yet he has been buying the company’s common shares and, more recently pref shares. So for, I sit tight and wait for a catalyst to play out.

New Positions:

Ibersol is a recent investment somewhere on the intersection between special situation and deep value. I prepared a detailed write-up here.

Muehlhan is a German construction / engineering company focused on wind turbine installation and mainetenance. The situation here is not unlike 3U. The company sold its most significant (EU and US) subsidiaries in early January to private equity while some other country subsidiaries were retained. In my calculation, the proceeds, net of debt, should be at least close to the market cap of the company and maybe a bit higher and,at current prices, you get the remaining business for free. Muehlhan has been explicit that they want to distribute most of the proceeds and I think it is likely they wind up the rest of the company too.

Far Ltd. is an idea that was pitched by Jeremy Raper here and here . Far is a small Australian Oil company with assets in Africa (Gambia, Senegal). The company’s assets consist of (1) Cash (33.7mm USD per 31/12), (2) the Right to receive a Contingent Payment linked to the Sangomar field in Senegal. This payment is up to 55m USD, linked to oil prices and production and the field is expected to produce from H2 2023, (3) rights in two blocks in Gambia which the company is trying to monetize. The assets could be worth 75mm USD (112 mm AUD) in a liquidation scenario, much more than the current market cap of 70mm AUD. The company is returning cash by way of buybacks and has so far repurchsed 4% of the float this. There is some risk if oil prices were to collapse in a deep recession scenario.

Sio Gene Therapies is a liquidation play. This has been written up by both Clark Street Value and the fantastic Alphavulture who I wish would post more often. Not much to add

Carisma / Sesen is another merger I played. It is outlined well at Clarkstreetvalue’s blog . The merger has gone through, I have received the special dividend and the CVR and am now stuck with a tiny 0.4% position in CARM which I will probably exit at some point for better ideas. Not sure I should be doing this kind of trades, they cost some time for little gain.

Other:

I have looked into some other stuff which is not in the portfolio.

In Germany, three interesting special situations are LS Invest AG which is a squeeze-out candidate and might benefit from the tourism normalization , Kabel Deutschland, whre a squezze-out by Vodafone is one potential way to win and Centrotec which sold its biggest segment to Ariston and is trading for less than the value of Cash and shares it received in the transaction. All of these companies are only trading at the Hamburg regional exchange and liquidity is not great. They are worth spending time on if you have access to the Hamburg exchange. Unfortunately, this is not the case for Augustusville as IBKR is not connected to the Hamburg market. I have small positions in all three in my local German broker account.

Also, I am fascinated by the AMC / APE situation. AMC and APE are common and preferred shares in Meme champion AMC Entertainment. As management was unable to issue more AMC common but needed money to strengthen their capital, they issued APE, a preferred share. Now, they are looking to simplify their capital structure by converting both instruments (1 for 1) into one share class. I think shareholders are likely to approve the transaction. Still, AMC trades at 5.50 USD while APE is quoted at 1.75. The issue is that a Long APE/Short AMC is not trivial. AMC is very expensive to borrow and as a meme stock, even before, its price went parabolic. Some shareholders do contest the conversion on court which is why there is uncertainty on the timing. So far, I am watching this with a box of popcorn from the sidelines.

Hope you enjoy the quick flight through my special situations universe. What special situations are you looking at?