Updates Sierra Rutile, American Farmland

Sierra Rutile

The 36 GBX merger consideration has hit the account yesterday. There was some hiccup in the meantime, but I just waited it out. Dams can be a serious issue for a mining corporation. Would be really interested into how serious Iluka was with going through with the merger. Was this just a way to get more cheap shares for some insiders? You can see the price drop in the chart.

12/6/2016: Announcement merger will go through

11/29:2016: Iluka: "non-satisfaction of the material adverse change condition"
"Iluka has also indicated that it will not proceed to closing the Merger on 29 November 2016, as expected."

American Farmland

At the time of establishing the long/short position for the blog, the situation was as follows:

American Farmland Co

AFCO

7.94

-9.97%

11.07%

8.82

Farmland Partners Inc

FPI

11.890

34.58%

3/30/2017

now:

American Farmland Co

AFCO

7.58

-3.70%

3.84%

7.87

Farmland Partners Inc

FPI

10.740

14.15%

As you can see, the spread has shrunk. I have exited the whole position for the blog. It is difficult to accurately reflect the long with short for the portfolio page. For now I will leave it out. 

Merger arbitrage:American Farmland

The idea is from the excellant Alpha Vulture Blog. I recommend reading his articles and comments.

It is an all-share deal.

"The parties currently expect the transaction to close during the early part of the first quarter of 2017, subject to customary closing conditions including the approval of the stockholders of both the Company and AFCO. However, the Company can provide no assurances that the AFCO Merger will close on the expected timeline or at all." 8k

The cost to short is about 20% and the expected IRR is about 35% with a conservatice closing date assumtion of 3/30/2017.

American Farmland Co

AFCO

7.94

-9.97%

11.07%

8.82

Farmland Partners Inc

FPI

11.890

34.58%

3/30/2017

For the blog I went long AFCO and shorted a similar dollar amount of FPI to hedge. This way the merger spread is unhedged. There were few shares of FPI availabe to short. This is a trade I like. Just set and forget as long as the cost of the short does not rise too much. Luckily IRR was higher then cost to borrow by a wide margin.

Long AFCO, Short FPI

Merger arbitrage:Sierra Rutile

Sierra Rutile is trading at about 33.5 GBX.
The bid of 33 and ask of 35 results in a spread of 2, which is quite wide on the London stock exchange (SEAQ).

Today Germany cleared the deal, which is now expected to close "on or around 29 November 2016".

The merger consideration is 36 GBX. It looks like Sierra Leone will not tax minority shareholders.

"The GoSL has confirmed that no other amounts will be payable by Iluka, SRL or any other SRL Shareholder in respect of capital gains tax or other taxes payable under the laws of Sierra Leone in connection with the Merger."

Upside is 7.46%. With the merger expected to close that shortly the IRR is really good, if the merger closes.

Long LON:SRX.

Post Mortem on Cleco

Cleco
In the comments, I was asked to update my thoughts on Cleco. I happily comply with this post. Shortcut: In the end this roller-coaster-investment worked out fine.

It is really important in this kind of arbitrage situations not to invest when everyone expects the deal to close at the lower end of the timeframe given by management. I had no clearcut expectation when this would close and entered the position at about an 11% discount with an upside of 12% on 11/12/2015 for the blog. These are gross and not annualized returns. It is at times not worth it to go for high annualized IRR with low absolute return given the risk involved. For example writers an seekingalpha often tout annualized returns, but ignore the downside risk. For me it is important how far the stock would fall when the deal breaks. With Cleco we had a profitable company, but for me it was overvalued as a standalone and so the price would drop if the deal breaks.

When we look at the chart, the timing was great at the beginning. Then the unexpected happened. I wrote:

"I have decided to hold on to the position after the sale was rejected by the commision. The hearing was webcasted and I listened to it. Should have sold the position with a small gain as soon as I realized a negative outcome is probable. The decision process looks very non fact-based to me. Although the decision to reject may be right. It looks like it played a role that the buyer was not American..."

 It might have been a mistake not to increase the position at the trough around $45. Although I thought short-term downside was limited from there, I was just not comfortable holding more of a company, which could get problems with decentral electricity generation and definitely is not in a growth market (those are long-term problems). The price was not low enough. On the other hand compared to interest rates the cashflows did not look too expensive. I did nothing. Best would have been to sell after the 40c dividend and buy-back in March, but that is easy to say with hindsight.
The end result was an IRR of about 31% in dollar terms (as you can see on the portfolio page).

I just added the gross dividend to the take-out price. The correct calculation would have been to add the dividend with the date one would have received it, which would have increased the pre-tax IRR slightly.

In the end I should have sold the position during the webcast. It was a mistake and more luck than skill that Cleco worked out for me in the end. Of course, the professional full-time arbitrageurs are no better either. (I even like to avoid stocks most favoured by professional arb funds, when looking at special situations like merger-arb.) One gets uncorellated returns and that is exactly what I wanted in this relatively expensive market. OK: It would be best to have only positive, uncorellated returns and never negative ones, but I am learning and avoiding a lot of fees by investing myself.

Updates on Positions

Asseco Central Europe

Asseco Poland is tendering for the remaining  6.49% shares of Asseco Central Europe, they do not currently own.
The tender offer price is 23.5 PLN.
This compares to a 52w high of 26 and a current bid of 23.8.
I see no reason to tender my shares at this price. The premium is not there. If Asseco Poland wants to delist the shares so be it, but they will still have cost to provide for minority shareholders. Better for them to pay more.

tender price	23.5
bid	23.8
ask	24
52 weeks high	26
P/BV	1.12
P/E	10.3
Dividend yield (%)	9.4

The company still has more cash than debt. Although it is not as cheap as when bought around 16 PLN.

IMW Immobilien

IMW immobilien is tendering for its own shares at €7.50 per share. The company is still delisted, but share traded on the local Hamburg stock exchange for a short while around €7.50.
The offered price is too low. Their residential real estate in Berlin has increased in value, but this does not show up in the numbers. Book value per last report is €111 million using the conservative German HGB accounting, but economic value is higher. Remember the rents are at the low end of the spectrum and it is impossible to built new objects economically at such rates. This means the rents will increase sustainably for their kind of real estate. I sold all my shares above €9 before repurchasing. Fundamentals for their properties just kept improving and now comes this offer. I would be fine with many other shareholders accepting, so they can pay a real price next time for the rest and still make an unjustified killing for themselves in the future. After all it is dumb German money. So who knows how much shares will be tendered.

KWG Komunale Wohnen
The bok value per 3/31/2016 reached €10.95. I think this is the minimum one should get for the shares. operations are improving and costs are shrinking.

In April/2016 Conwert acquired 7.5% shares via their tender offer for €10.80 per share and reached 87% of shares.

In the meantime German DAX constituent Voniva expressed their intent to take-over Conwert.  Conwert shareholders are to receive 74 Vonovia shares per 149 Conwert shares.

conwert Immobilien Invest SE

VIE:CWI

16.200

1.40%

-1.38%

15.98

Vonovia SE

ETR:VNA

32.170

With Vonovia's shares falling over the last month, the current ofer is €15.98 and the spread is negative (ignoring potential dividends).

When Vonovia acquires Conwert the more synergies to be of benefit to KWG. This will lower cost of debt via cash pooling. Banks are simply willing to lent larger sums at lower interest rates. I do not like this, but for now this are economies of scale for such capital intensive companies like real estate companies.

Hornbeck Offshore
My last blog post is from June. I just did not have the time and the blog did produce almost no feedback except spam comments. So I did not update. In the meantime I have sold my HOS shares for more than double the current price of around $8 at a loss. For now the equity is in distress. It is more like a call option on higher and stable oil prices, which would increase activity in the Gulf of Mexico. The publicly tradable bonds could be the fulcrum and trade at equity like yields. I may rather buy the debt here if at all. The company has Jones act vessels. Could even benefit from Trump.

I have some other positions in my portfolio. Please let me know if you are interested in me keeping to write posts.

Bought Flybe

Flybe

With the Brexit share prices have come down. I like the regional airline Flybe at the current price of 39.5 GBX.

Bought Essex Rental / Updates on several position / re-entered UMS United medical

Essex Rental

Essex Rental (ticker:ESSX) is up 30% on higher than average volume today. There is a write-up on seekingalpha. I have not much to add. The company has two subsidiaries. One is worth zero and the other more than the current market cap of Essex Rental. Because of the price action today, I believe now is a good time to initiate a position. Technically the debt of the worthless sub should be non-recourse. Maybe someone knows more. This is a specualative position and liquidity is low. This has to be sized accordingly.

Update Cleco

I have decided to hold on to the position after the sale was rejected by the commision. The hearing was webcasted and I listened to it. Should have sold the position with a small gain as soon as I realized a negative outcome is probable. The decision process looks very non fact-based to me. Although the decision to reject may be right. It looks like it played a role that the buyer was not American...

Update Medisana

As expected the money has arrive in the bank account. This was a nice gain in a short time period.

Medisana

€ 2.80

€ 2.70

2/25/2016

3/3/2016

3.70%

Update SPIL

The offer might not go through. Good that is a just an odd-lot. The downside should not be high. SPIL is not expensive at this price. The position is at a small loss. If this gets slaugthered as a broken arb I may increase the position

Spil

$7.55

$7.56

1/15/2016

yes

-0.13%

Update KWG Komunale Wohnen

At last Conwert has come out with a offer to acquiry shares of KWG. Because of the complex land transfer tax in Germany the company does not tender for all remaining shares. It is important not to get over 95%. The price on offer is €10.80. This was one of the more successful position with an IRR of 26.2% since the start of 2014.

KWG Komunale Wohnen

€ 10.56

€ 6.36

1/6/2014

yes

66.04%

Update Apple

As written this was a short-term play. As you could have seen on the portfolio tab of the blog, the position was already sold again. Yes, I think Apple is still undervalued... It is just that I also want to hold some cash. Since 2012 I went with near 100% stock at all times.

Apple

$101.96

$96.20

1/15/2016

3/4/2016

5.99%

Update snow

Same with SNOW. The tendered odd-lot was accepted and the position eliminated. I am not bullish on SNOW as a core long position because the maintenance capex looks high to me.

Snow

$9.00

$8.51

1/15/2016

2/11/2016

5.76%

Update Dream Global

Obviously with the current decision of the ECB and the low interest rate environment German Real estate is still very attractive. DRG has started to rise. There is also a write-up on seekingalpha. Not much to add here. This a big position and I intend to trim a little bit at higher prices.

Dream Global Reit

CA$ 8.68

CA$ 8.30

12/2/2015

yes

6.18%

Update Pfandbriefbank 

Dt. Pfandbriefbank

€ 9.49

€ 8.66

2/5/2016

yes

9.58%

 This is a typical case of being early. Six days after purcase on 2/11 the stock was as cheap as €7.43. I did not dare to increase the already full position. That is the disadvantage of a bank stock it is not good to average down because you will get diluted at the buttom in most cases. Although this time no one already knew more...

Just look at the chart:

I am very happy with the results this year sofar. This also reminds me of the time when I bought a Greek stock in their crisis. The next day it was down 10% on one day and I felt terrible about my timing.

Re-entered UMS

UMS was already part of the blog portfolio:

UMS

€ 10.15

€ 9.40

9/5/2014

9/22/2014

7.98%

UMS

€ 10.88

€ 9.52

9/5/2014

4/28/2015

14.29%

Liquidity is very low but with patient limit orders, it was possible to built a small position for the blog again.

UMS

€ 3.31

€ 3.25

3/11/2016

yes

1.85%

If everything goes according to plan, it would look like this:

UMS

FRA:UMS

3.31

-8.06%

8.76%

3.6

liquidation

pre-tax IRR

46.00%

5/31/2016

Please fell free to comment and do your own homework as always!