Diary

Buffett's portfolio strategy
I present a summary of a webpage that I saw about Buffett's early days. For the period 1957-1968, the DJIA returned 9.1% pa, compared with 31.6% pa for Buffett's partnership, and 25.3% for his Limited Partners. His method of operations for 1969 are broken down into the following ratios:

• 30% Controls -rarities, but of significant size. It happens where a cheap security does nothing for a long time, allowing a significant accumulation, allowing some or complete control of the company's activities.
• 20% Generals (Private Owner) - quantitatively undervalued stocks first, with considerable attention paid to qualitative factors second. There is often little to indicate immediate market improvement, and the shares lack glamour. He likes good management, a decent industry.
• 11% Generals (Relatively Undervalued) - companies trading relatively cheaply compared to securities of the same general quality.
• 23% Workouts -  sell outs, mergers, reorgs, spinoffs, etc.. The risks aren't primarily due to general market behaviour, but to unexpected developments. The profits and holding periods tend to be small per deal, with the occasional substantial loss. It produces steadier profits than generals, with the expectation of big relative gains in bear markets, and contrariwise in bull markets. The blog author warns that there will be blowups.
• 16% Misc/US T-Bills

The page also point the reader to futher information about workout opportunities.

Diary: ng., gfs, special situations, , value investing, rights issue

Today I'd like to look at rights issues, and see if I can learn anything from them. First off, let's look, with perfect hindsight, as to what happened with NG.. Investopedia has an article explaining rights issues.

NG.: National Grid - multiutilities - 635.90p/£22.6bn
NG. is a big blue chip international electricity and gas company. I'm going to present something of a chronology of events below.

31-Dec-2009 NG. trading at 679p

14-May-2010 (a Friday). NG. at 618p.

17-May-2011 An RNS declares that it has 2.617m shares in issue, of which 0.141m are in treasury, leaving a balance of 2.476m shares with voting rights.

20-May-2010 (a Sunday) Announces a fully underwritten 2 for 5 Rights Issue to raise approximately £3.2 billion, net of expenses, through the issue of 990,439,017 New Shares at a price of 335 pence each. This implies that there were 2.476m (= 5/2 * 0.9944) shares in issue prior to the rights issue - although that figure disagrees with what's on Sharelock Holmes - which is pretty confusing. I'll use a value of 2.476. Assuming full take-up of offer, this implies a share price of (618*2.476+335*0.990)/(2.476+0.990)=537p

04-Jun-2010  (Friday) Shares bottom out at 487.60p on massive volume. This implies a discount of 9.3% (=1-487.6/537) of "fair" value (assuming that the 537p is "fair").

14-Jun-2010 (Monday) Announces result to rights issue: 94.2% take up of new shares, exact amount 932,648,512 issued. "The Board of National Grid believes the proceeds from the rights issue will allow the Group to fund a significant increase in UK capital investment and continue to deliver attractive returns to shareholders, whilst maintaining single A credit ratings for our UK operating companies in a more volatile economic environment." According to my sums, this should imply a value for ths shares of (618*2.476+ 335*0.933)/(2.476+0.933) = 541p


18-Jun-2010 (Friday) The shares trade at 516.50p, implying a discount of 4.5% (1- 516.5/541).


21-Oct-2011 Shares trade at 630p, having risen 27% since 18-Jun-2010. FTSE has only risen 5.7% during the same period. It was this kind of initial observation that got me excited about the possibilities of rights issues. However, looking at the charts further, it seemed that there was a close correspondence with the Footsie, and were neck-and-neck until about late Feb 2011, whereupon the shares outperformed the indices significantly. There was high volume of trading on 25-Feb-2011, although I don't see any real news.


So all-in-all, a disappointment. It was not the rights issue that created an exceptional opportunity (it looked only a 10% discount to fair value, which is debatable, and more like a blip than anything else). It's what happened after 25-Feb-2011 that created the outperformance. Oh well, at least I looked. Looking at some other rights issues might be advantageous, but it seems that for these larger-cap type shares, there wasn't much in the way of an inefficiency to be exploited. A 10% "maybe" isn't that interesting.


GFS: G4F - Support Services - 242.3p/£3.4bn
All of the NG. analysis was a prelude to looking at GFS. What it does:

which along with its subsidiaries is engaged in the provision of secure solutions including manned security services, care and justice services and security systems, and cash solutions, including the management and transportation of cash and valuables, as well as undertaking of other outsourced business processes in sectors where security and safety risks are considered a strategic threat.

I seem to recall that in the 80's (??) that it was involved in the transport of prisoners, and some of theme escaped. Way to go! On 17-Oct-2011 it announced:

Acquisition of ISS A/S for £5.2bn and £2bn rights issue. ... The Acquisition has a compelling strategic and financial rationale

yada yada yada.  On the day of the announcement, the share price dropped  from 283p on  Fri 14-Oct-2011 to 222p at close on Mon 17-Oct-2011, i.e. down 21.6%. The market, she no likey.  It has since recovered to 243p. It is a 7 for 6 rights issue at 122p, and they aim to raise £2bn. So a "fair" price for GFS might be (122*7+283*6)/(7+6) = 196p, although that does ignore any value from the acquired business. I'll keep an eye on this one, but I don't have any enthusiasm.

Diary: SBT

I had planned initially to write about a growth share. Instead, I came across this little idea that I would like to share. It's amazing just how many ideas one can come up with when you start to look at things. I'm certainly not lacking for quantity. Quality, though, that's a different matter.

SBT - Sporting Bet - Travel and Leisure - £303m/46.8p
In a nutshell: "Sportingbet Plc is engaged in the operation of licensed betting and gaming operations over the Internet." I know, sounds risky with a lot of competition just aching to eat your lunch. There's the whole sporting tax to worry about, juicy returns attracting competition, and issues over legality in the US and some other places. On with some numbers: PER 7.5, ROE 20%, net cash £120m, EV/EBITDA 3.6. Analyst forecast 2012 earnings to be down 10% over 2011, which probably explains why the stock is getting crucified. Analysts reckon 2013 earnings will grow by 20%. Anyway, leaving aside what analysts think, it looks like an interesting magic formula stock if the politicians don't murder the profitability. But wait ... there's more ... and the real reason I'm posting this ...

In June 2011, Ladbrokes, the £1bn veteran betting company, made a preliminary takeover approach for SBT, at 70p, it's third attempt in recent months to strengthen its internet gambling capability (link). An analyst at Evolution suggested 80-90p might be the ultimate price. Now, here's the interesting bit. SBT derives about 20pc of its revenues from Turkey, which was "believed by many in the sector to be an illegal market".

With me so far? Now, Reuters reported yesterday: "Online gaming firm Sportingbet is close to agreeing the sale of its Turkish gambling business to GVC, clearing an obstacle to Ladbrokes' takeover of the company". The article says that Ladrokes has until 17 Oct to "put up and shut up" under new takeover rules. A poster on II notes, though:

The fear is that if the Sportingbet deal goes the same way as 888, Ladbrokes's online strategy would be left looking threadbare. But the chances of a deal happening are increasing and, even if the complexities make the October 17 deadline impossible to meet, there should be no problem in getting an extension from the Takeover Panel, says the Times.

"SirBob" on the LSE board writes:

' if we sell the turkish arm we will have 75% of our business in regulated markets. We must remember he is trying to get the best price for the shareholders and will be trying to say to Lads, we don't NEED your bid .

"Maxwell2" responds:

I agree with SirBob. Originally, Ladbrokes were in the position of complete power, they were demanding the sale of Turkey etc and using it as a price chip. Hoeever, now the GVC deal is done (and it is in reality), they now need to finalise the ladbrokes final price. They will have agreed figures some time ago before they looked at Turkey but it could only have ever been a range. McIvers comments will have been to try and retake some of the bargaining field from Ladbrokes and negotiate the upper end of the price range previously discussed. From my experience in corporate finance this is the kind of statement that companies are advised to make and in reality how such a deal would be done.

 Also worth noting is that SBT published an RNS for its y/e 31.7.11 on 05-Oct-2011. EBITDA was up 11%, where it noted its broad geographic base:

This has been a year of significant progress for the Group both in terms of financial performance and corporate developments. Agreement with the US Department of Justice in September 2010 was followed in August 2011 by the acquisition of Centrebet in Australia and the passing of regulations in two of our largest markets, Greece and Spain. Sportingbet is now well positioned to maximise the growth opportunities available to it as the global online gaming market continues to develop. We already have market leadership in around 50% of the territories in which we operate.

As the online gaming industry matures, governments across the world are recognising the significant potential contribution from online gaming tax revenues as a means to reduce national budget deficits and the need to bring in regulation to protect the consumer and provide a stable trading environment. We welcome these moves and have been exploring ways of increasing the percentage of our revenue derived from regulated markets.

The market seems well-pleased with these results. Anyway, that bit is just gravy. My main point was that I see a significant chance of takeover (rather than just rampant speculation) at a huge premium, on a company that looks good on valuation terms and returns on capital, with the potential for growth.

I have taken a small position in SBT, as I very much want to expore "special situations". I am very new to this arena, but I'm noting that there could be some good opportunities for enterprising investors in what I choose to call "second-chance takeovers" (DLAR - De La Rue - was another such possible example that I mentioned awhile ago), and I'm increasingly believing that there's also opportunities in "placings by proxy" and loathsome rights issues. More of that tomorrow, I hope, where I want to expand upon my thinking about these types of situations.

Wish me luck!