Tuesday, 28 October 2014

Sold Covidien / Better timeline for UMS special situation

Covidien

Having bought the Covidien at discounts well above 10% I have exited the position completely. The situation looks like this as of now 10/28/2014:



covidien
cash35.1935.19
medtronic0.95663.49

implied value bid98.68

price covidien90.12

discount-8.67%

upside9.50%
medtronic break-even price
57.46

If the spread to the implied value of Medtronic's bid to aquire Covidien rises again, the position will probably be established once again. On the Ideas tab of the blog you can follow my trades in Covidien, which I try to update regularly. As the situation at Shire has shown this type of investment is no true value investment, but more speculative.
I have been long Covidien before the bid of Medtronic and think the long-term downside if the bid does not go through and the market closes for the next 10 years is not huge.

UMS

I have updated my expected IRR due to UMS providing more visibility re the timeline of its liquidation. You can find the CEO's speech in German here. Pre-tax the situation could look like this:


buydividend 1dividend 2
cashflow-9.557.53.6
date10/28/20145/31/20155/31/2017
pre-tax IRR13.54%


If one includes the effect of taxes of the typical German retail investor the situation could look like this:


buydividend 1dividend 2tax refund
cashflow-9.557.53.6-5.8
date10/28/20145/31/20155/31/20173/31/2018
tax on 1/2
0.98906250.9495-1.52975
net cashflow-9.556.51093752.65051.52975
taxrate0.26375


after-tax IRR8.15%



Instead of 2016 for the second dividend I have used 2017 to be on the safe side, because there could be obstacles to liquidate the whole company already on 2016. Additionally I do not know how much of the dividends will be tax exempt, so I have modelled for the dividends to be half tax-exempt. Depending on the individual situation the timing of the tax refund will differ of course. If I am right the situation is more interesting for tax-exempt investors than for retail investors. Liquidity is way lower than for e.g. Covidien and I plan to actively trade around the position. The upside is capped, but the downside is still there in these situations. If the pre-tax IRR falls below 10% I would start to sell.

The current IRR looks promising compared to 5yr Bunds with 0.16% YTM.

As always: Do your own research and use limit orders for UMS.

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