Wednesday, October 12, 2011

Diary: CTN, Special Situations

CTN - Clearstream
CTN offer goes unconditional. Shareholders should get their money in 14 days. There wasn't a better bid in the end. CTN was easily my biggest coup this year. The companies where I have made the most money quickly have been taken over. Two years ago it was Cadbury's, where I made about 50% in 6 months. Last year it was Bluebay Asset Management, where I made about 75% over about 4 months. On CTN, I'm making about 55%. If only I knew in advance which companies would be taken over. The share has been very volatile throughout the year, and without the takeover, I would probably only be up a little. However, I did have faith in the company, and I figured, with patience, it would ultimately be worth a lot more. I'm far from being a stock-picking machine, though. My worst performer this year is Pace, down nearly 50%. I was down on the company earlier this year, but now I still consider the company to be in a growth phase. Clearly, you've got to ride out some volatility in these things.

Special Situations
As I said a couple of days ago, special situations is something I want to try to get some competency with. I think that if an investor want to try to do exceptionally well, this is one area that they are likely to do it. I think general value investing is OK, you'll do a bit better than the markets (maybe 4-7% pa), but no better; unless you're "Mike Burry good" at spotting misvaluations.

The inspiration for special situations comes, of course, from Greenblatt's "Genius" book, aka "The Great Book With The Terrible Name", and whose real title is "You Can be a Stock Market Genius". I read the book last year, thought it was quite interesting, and promptly put it back on my bookshelf. Demergers (aka spinoffs) seem to be fairly uncommon in the UK, and it's difficult to access their merits. The way I looked for them is by searching an RNS site (Investegate is my favourite) for "demerger" and "spinoff". There do not appear to be that many of them. One that I did take a peek at was GDL (Greka Drilling), which floated in mid-March 2011. To be honest, I didn't like it, as the company seemed way over valued in relation to earnings. Since floating, it has had some gyrations. It is down 16% during its life as a public company, compared with -10% for the Footsie. So there's little to distinguish it. It did bottom out in mid-June at 23p, and promptly surged to 55p - but I don't see how one could have known these optimal buy and sell points in advance. As I mentioned last week, Frog Kiss wrote a post that said that spinoffs are no automatic way to superior profits.

Second-chance takeovers This one wasn't metnioned by Greenblatt, but I thought might be promising: companies which were the subjected to a takeover, things went wrong, but there looks to be some wrinkle where a takeover deal could feasibly be back on the table. I mentioned SBT a couple of days ago. Ladbrokes tried to acquire it, but got cold feet on account of SBT having interests in Turkish online gaming. It didn't look like the takeover was out for the count, though. SBT is in the latter stages of disposing of its Turkish interests, and a plausible explanation for this is that it wanted the takeover to be consumated. Anyway, it was not to be, as Ladbrokes recently announced that it was no longer pursuing its takeover due to possible residual complications over Turkey. SBT's shareholders stood to gain considerably: the share price was around 45p, and the takeover price was around 75p. Not a bad return for a week's wait. Alas, it was not to be, and SBT promptly fell 20% after the withdrawal was announced. So that's strike one for that idea.

It's not a completely dead idea to me, though. I had mentioned DLAR (De La Rue) at a price of 800p. DLAR, if you recall, had prblems with its money-printing quality control, which quickly sent its stock price plummeting. Rival Oberthur made a bit for it earlier this year, but was rebuffed. Under takeover rules, it is allowed to have another go from December. Oberthur has been busy selling off divisions to private equity firms, so it is very credible that it is building up a warchest to make a second go. The last deal offered was at 935p (IIRC), and institutional shareholders said that they wouldn't consider anything below 1000p. So shareholders might very well find themselves the beneficiaries of another approach, presumably significantly above £10. IF it goes through, then of course shareholders are on to a nice little earner. The big risks are whether Oberthur really will make another bid, and what the timeframes are. I shall watch this one keenly. Very difficult - if you're right, then you'll make above-market returns, but you have to balance that against the risk of non-consummation. SBT didn't work out too well. DLAR, we shall see.

Busted takeovers If "second-chance takeovers" are too risky, then there is of course the possibility of me investigating takeovers that failed. As we have seen with SBT, if the market reckons there is a takeover chance, this is at least partially reflected in the share price. If takeovers fold, then there's usually a rush for the exit, as people loose heart and look for something else. My proposition is that share prices are usually set "at the margin", and you may be able to pick up a good deal. That should be pretty simple to determine: look at SBT, it is on a PER of 6, ROE 20%, and net cash of 120m against a market cap of £245m. The share price went from 46p to 37p on Monday (the day the deal was killed), stayed at 37p on Tuesday, and it up 3.4% so far today to 38p. So it's worthwhile me thinking about these kinds of situations.

Rights and placings I reckon here might be another opportunity that I need to investigate further. Last year I had some shares in NG (National Grid), a large international electricity and gas company. They had a surprise rights issue, designed to expand their activities in America. It was unpopular, and I sold out at the time. With hindsight, this was probably exactly the wrong thing to do. The share price became depressed, and IIRC, has done well since then. I think it would be a good idea if i went back over my records and tried to sift through the story on this one. But it does raise the possibility that unpopular rights issues (or indeed rights issues in general) offer an attractive opportunity. I suspect you may have to pick your spots in order to get them right. Something for me to think about. Placings might be another area, which is of course similar to rights issues. Placings are usually priced attractively relative to current share price (whatever happened to the rule that all current shareholders should be treated equally, and have a right to particpate in new offerings?). Whilst not available to private investors, an anecdotal observation by is: "well, you never know". Placing announcements can cause share prices to sink - I noticed that with AFF (Afferro Mining) and CTN (Clearstream) - and sometimes the price sags to near the placing price. Not necessarily always, of course, but there's no harm in looking. CTN was a bit of a gift like that. It was already a GARP company. It had a placing at 48p, well below the then current price, in which the directors participated. This caused the share price to fall to around about the placing level. Investors would have done very well indeed if they had bought at that level.

Something for me to think about. Also, I think I need a way of systematising my approach. Looking through RNSs is an obvious idea, as Investegate even has a filter for mergers and acquisitions. I think it's better to systematise these things rather than just spot the odd one by complete chance.

Any other special situation secrets that readers care to share?

1 comment:

Lewis said...

Agree with you on two in particular - rights issues and takeovers.

In the rights issues case, for instance, it's logical that post-rights issue the company is in a better state than pre; but often the company's diluted share price doesn't really portray that fact.

As for takeovers, as you've probably seen me say a few times, I'm always looking for a reason why there should be a discrepancy between market price and intrinsic value. With small caps, I put it down to lack of institutional ownership, for instance; but takeovers offer a prime example of where the share price is affected by something completely different. The volatility that occurs when that factor is removed can leave the underlying company forgotten except for those who actually take a look at the business as it stands now.