ICLTF - Limbach Holdings

[Haasje]

One value investing idea that's making the rounds is Limbach Holdings. I stumbled upon an investment that is much better than Limbach Holdings as it basically grants exposure to Limbach but at much better terms. The CEO of Ballantyne's (activist investor) said this about the company's ICLTF investment:

 

"The way I think about that is that Ballantyne Strong invested $3.5 million of its cash into Itasca Capital for 31% ownership post the recapitalization of Kobex with their tender offer, the 85% tender offer. So, once that tender offer was concluded, we owned approximately 31% of Itasca Capital weaving Ballantyne Strong. Itasca Capital took that capital that was in the company and invested it into 1347 Investors LLC to get the benefit of the promote. So, we are the most senior equity position in 1347 Investors LLC. There is junior tranches below us and they potentially have more upside, but we actually have perhaps better protection to the downside. So, we have a 12% accretion on that investment plus approximately 44% of the upside in the Limbach shares plus included in that 44% is the promote shares that Kingsway was generous enough to contribute to this deal.

 

With that structure, we were able to buy on a fully diluted basis, as you can see from the Form 4s and 13-D amended that was filed today, over 50% of the shares of Limbach, which we believe is very undervalued based on the projections for revenue and EBITDA that the company gave in its roadshow that basically values the company at about a little over 5x EBITDA and with the public comps of Limbach trading at north of 8x EBITDA to some as highest 12x EBITDA. So we think once that value comes to fruition, our $3.5 million investment that we made on behalf of Ballantyne will be worth multiples of that $3.5 million we invested. So I actually think it's one of the most interesting and creative investments I have ever made. And I am really proud and I am going to be really proud to update you on that over the next couple of quarters."

 

 

How the idea fares will be determined by the success of Limbach Holdings (OTC:LMB), Read the original analysis of Dane Capital Management LLC on SA: https://seekingalpha.com/pro/checkout/3994330?notice=pro Latest update: http://seekingalpha.com/article/4010797-limbach-near-term-catalysts-close-valuation-gap

 

There's a Value Investor Club write up of the warrants here: https://www.valueinvestorsclub.com/idea/LIMBACH_HOLDINGS_INC/138935

 

I'm confident the downside of the investment case looks pretty good because it owns $10 million of preferred stock with an 1% per month accrual that eat first on liquidation and the authority to block any capital coming in above them.

 

On the upside it's not quite clear to me what Itasca Capital is entitled too but I have a strong sense it is a very interesting package.

 

To me it looks like this:

 

If Limbach Holdings goes bankrupt ---> Itasca Capital goes bankrupt

 

If Limbach Holdings goes down 50% ----> Itasca Capital still makes out great because of the preferred

 

If Limbach Holdings goes up 50% ----> Itasca Capital is going to rip

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[sculpin]

Thanks for posting back in December. Very good book value growth in ye statements....

Itasca Capital earns $8.9-million in 2016

 

Itasca Capital Ltd (C:ICL)

Shares Issued 21,810,626

Last Close 3/13/2017 $0.85

Wednesday March 15 2017 - News Release

 

Mr. Larry Swets Jr. reports

 

ITASCA CAPITAL FILES YEAR-END 2016 FINANCIAL STATEMENTS

 

Itasca Capital Ltd. today filed its audited consolidated financial statements for the year ended Dec. 31, 2016, and the related management's discussion and analysis, both of which are available under Itasca's profile on SEDAR.

 

The company reported net income attributable to common shareholders of $10.2-million, or 47-cent earnings per share, in the fourth quarter of 2016, compared with a net loss attributable to common shareholders of $2.5-million, or a six-cent loss per share, in the fourth quarter of 2015.

 

For the year ended Dec. 31, 2016, Itasca reported net income attributable to common shareholders of $8.9-million, or 28-cent earnings per share, compared with a net loss attributable to common shareholders of $2.9-million, or a six-cent loss per share for the year ended Dec. 31, 2015.

 

As of Dec. 31, 2016, Itasca reported total shareholders' equity of $23.7-million with a book value per share of $1.09 based on the 21,810,626 issued and outstanding common shares.

 

Significant events during 2016 included the following:

 

A strategic change in the management and direction whereby Itasca retired 54.2 per cent of the total outstanding common shares pursuant to a substantial issuer bid in June, 2016, and invested $12.9-million in Class A interests of 1347 Investors LLC in July, 2016;

Change in unrealized gain from the investment amounting to $10-million, $9.7-million of which was recorded in the fourth quarter of 2016.

Management comments

 

Larry G. Swets Jr., chairman and chief executive officer, stated: "Since our transition in June of last year, the board and management have been focused on creating value for our shareholders as measured by growth in book value per share. We are pleased with the results thus far and believe the 75.3-per-cent growth in book value per share from 62 cents to $1.09 in the most recent quarter reflects that effort. We remain pleased with our investment in the Class A membership interests of 1347 Investors LLC."

[KJP]

I previously looked at this but could not understand the capital structure of 1347 LLC.  Going from memory, Itasca's Class A Units in 1347 appear to have the following economic rights:  (i) 12% preferred dividends; and (ii) 44% of distributions after other units have been paid.  Has there been any disclosure about what "other units" there are in 1347?  I have not yet read Itasca's annual report to see if it has any additional details about this issue.

[sculpin]

Details are in the year financial statements...

 

Accounting

Itasca owns 47.62% of the total outstanding voting interests of 1347 LLC. Since Itasca owns greater than 20% but less than 50% of the outstanding voting interests of 1347 LLC, it exerts significant influence over 1347 LLC but does not control 1347 LLC. The Company has also considered the provisions of IFRS 10 - Consolidated Financial Statements in order to assess whether control exists even though it owns less than majority of 1347 LLC’s outstanding voting interests and has concluded that it does not exert control over 1347 LLC. Under the provisions of IAS 28 – Investment in Associates and Joint Ventures (“IAS 28”), 1347 LLC is an associate of Itasca (thereby making 1347 LLC a related party to the Company), but Itasca does not account for its Investment in 1347 LLC on an equity accounting basis. Instead, the Investment is recorded by the Company at its fair value through profit and loss under the provisions of IAS 28 pertaining to investments in associates held by or held through entities similar to venture capital organizations, mutual fund or unit trusts.

 

The fair value of the Investment is calculated based on an internally developed valuation model (“Model”) that takes the net equity of 1347 LLC (based on fair valuing the Limbach securities held by 1347 LLC) and distributes that net equity to all classes of membership interests based on the distribution waterfall in the Operating Agreement of 1347 LLC. In other words, this fair value calculated by the Model represents the amount that Itasca and other investors of 1347 LLC would receive if 1347 LLC were to settle all its assets (Limbach securities) and liabilities (external debt) at the given fair value and then distribute the net proceeds to investors in accordance with its Operating Agreement. Management considers such distribution estimate at any given point in time a proxy for the value at which unrelated and willing parties would trade such an investment, hence such distribution estimate represents the fair value of the Investment in 1347 LLC.

 

Investment in Class A Interest of 1347 Investors LLC – at cost Unrealized gain

Investment in Class A Interest of 1347 Investors LLC – at fair value

Itasca has not received any distributions from 1347 LLC during 2016.

December 31, 2016 $13,516,363 10,011,903 $23,528,266

Pursuant to IFRS 12 – Disclosure of Interests in Other Entities, below is the summarized financial information of 1347 LLC as of December 31, 2016 in US dollars:

December 31, 1347 Investors LLC 2016

Total current assets

USD$52,616,275 Total non-current assets - Total current liabilities USD$14,098,640 Total non-current liabilities - Total Shareholder equity USD$38,517,635

 

Total comprehensive income during the investment period in 2016 USD$24,944,496

The current assets of 1347 LLC stated in the table above include value of securities of Limbach amounting to USD$52,255,342. The Limbach securities held by 1347 LLC include 400,000 shares of Limbach 8% cumulative preferred stock with USD$25 principal value per share, 2,843,515 common shares of Limbach, 198,000 USD$11.50 strike warrants of Limbach and 500,000 USD$15.00 strike warrants of Limbach. The current liabilities of 1347 LLC stated in table above include USD$13,250,000 external debt that incurs interest at the rate of 13% per annum. Additional terms of Limbach securities and debt of 1347 LLC are available in the public filings made by Limbach and 1347 LLC.

 

[KJP]

Thanks.  I was asking about the 1347 waterfall, rather than the amount of Limbach securities that 1347 owns.  But I see that the waterfall is also disclosed under the "Terms" heading right above the disclosure you quoted.     

[Haasje]

There's about $10 million USD of payouts before the 40% profit share that I don't think were visible before. I'm somewhat dissapointed about those distributions but still like the overall risk/reward profile a lot.

[writser]

Took a peak. My own cliffnotes - don't take this too serious.

 

As far as I can see the VIC write-up missed that there is 13.25m of 13% debt in 1347 LLC. Also, the 10K suggests there are only 500k + 198k options in 1394. The VIC article assumes there are another 150k. Finally, the payouts for class B (3m), C (2.33m) and D (5.17m) interests accrue, I assume also at 1% per month (couldn't find that in the annual). So class A interests have a roughly 44% claim on total 1347 LLC equity (with the first $10m + accrued interest secured but that only matters in a downside scenario).

 

Assuming 1347 LLC converts all the preferreds they have 3.6m LMB common shares and some options, worth ~54m all together. Makes Itasca's stake ~C$1.10 -C$1.25 per share but you can argue the preferreds are worth more. Looks kind of interesting but there's a lot of leverage involved along the way. Also I don't like the intransparant structure of the whole deal.

 

I'm also wondering how high future corporate overhead will bet at Itasca in the future. SG&A for q4 was only ~80k, would be impressive if they keep it that low.

[Haasje]

Took a peak. My own cliffnotes - don't take this too serious.

 

Makes Itasca's stake ~C$1.10 -C$1.25 per share but you can argue the preferreds are worth more. Looks kind of interesting but there's a lot of leverage involved along the way. Also I don't like the intransparant structure of the whole deal.

 

I'm also wondering how high future corporate overhead will bet at Itasca in the future. SG&A for q4 was only ~80k, would be impressive if they keep it that low.

 

Imo the preferreds are 20% worth more than book value but it's not a big deal to value them at book. There's some leverage, but Limbach is delevering, and Itasca's claim on 1347 is a senior one. That in turn is backed by the prefered in 1347 LLC.

 

I think your guesstimate is very accurate of where fair value of Itasca is.

 

When we leave out one important consideration which is that Itasca offers an assymetric position. Exposure to the downside is less severe compared to common Limbach while exposure to the upside is superior to common Limbach. In effect it is a superior long Limbach to Limbach Holdings itself.

 

If Limbach goes up, Itasca will go up more and if Limbach goes down, Itasca will go down less (unless Limbach goes to zero).

 

That means it could be a very interesting pair with a related short position.

 

Not sure how overhead at Itasca will look like but I expect it will be very low going forward given the holdings by Kyle Ceminara through Ballantyne Strong and Larry Swets through Kingsway. They will be taking no salary here and it looks like both want to build up their respective investment companies and put up great track records.

 

I agree the whole structure is bothersome but from looking into Kingsway it looks like Swets really enjoys to create such situations.

 

 

 

 

 

 

 

[Sunrider]

(Having only glossed through this thread) How about just buying the warrants if you want a leveraged position?

[Haasje]

Because warrants < bonds + free warrants?

 

[writser]

If Limbach goes up, Itasca will go up more and if Limbach goes down, Itasca will go down less (unless Limbach goes to zero).

 

If Limbach drops 25% to $10.5 Itasca's stock + option package would be worth ~$31m. Let's say preferred is still worth the same, roughly par. Total portfolio would be 41m minus 13.5m debt is 27.5m. Class A interest would be ~45% of that so roughly 12.4m. That is ~C$0.76 per Itasca share down from C$1.06, down 28%. Itasca actually drops faster in value due to the leverage at 1347 LLC. And the debt at 1347 LLC costs 13% p.a. as well so your interest would actually be worth less. The class A protection only kicks in when LMB common stock is down so much that B,C and D interests are impaired. At that point I'm not even sure you are happy owning LMB preferreds (and you have lost quite a bit of money already). If you think LMB is a great company this looks like good value but I don't like borrowing money at 13% to buy into a heavily leveraged contruction company.

 

Also, the whole structure of the deal is very murky. For example, if the class B, C and D interests are impaired, do you actually think Itasca will pull out all their money for minority shareholders and let the whole shebang collapse? Nah .. They'll probably vote in favour of a dilutive deal to try and salvage the company.

[Sunrider]

Because warrants < bonds + free warrants?

 

Uh - but that's not what I understand ithasca to be given writser's comments? Am I missing something?

[Hielko]

My take on the company: https://alphavulture.com/2017/03/20/itasca-capital-asymmetrical-exposure-to-limbach/

[sculpin]

http://www.omaha.com/money/omaha-based-ballantyne-strong-is-improving-under-new-ceo/article_5ecd4497-08b6-51e5-85f6-aed5128f10a0.html

Another holding of Ballantyne Strong under Cerminara is Itasca Capital, a defunct Canadian mining company. Ballantyne Strong owns 32 percent of the shares outstanding; the company has no operations. But assets include a stake in a Pennsylvania-based company called Limbach Holdings, which is a heating, air conditioning and building engineering company.

[Foreign Tuffett]

Definitely worth reading for anyone following Limbach

 

https://seekingalpha.com/article/4128046-limbach-materially-undervalued-misunderstood?uprof=45&isDirectRoadblock=false

[CanadianMunger]

I took a look at this one a while ago (LMB).  Did not pull the trigger b/c:

 

a)  CEO seemed overly promotional

b)  I'm unsure how deep we are in the construction cycle - management has been trying to increase service revenues, however the business is to a large degree cyclical

 

-CM

[wisowis]

Limbach down 27% today on release that they are no longer in compliance with their credit facility, cutting their FY2018 EBITDA guidance in half, delaying their 10-Q.

 

https://www.businesswire.com/news/home/20181115006090/en/

[Foreign Tuffett]

Limbach down 27% today on release that they are no longer in compliance with their credit facility, cutting their FY2018 EBITDA guidance in half, delaying their 10-Q.

 

https://www.businesswire.com/news/home/20181115006090/en/

 

Wowsers . Looks like the special purpose acquisition company (SPAC) under-performance phenomenon strikes yet again.

[writser]

Yeah. Horrible. I like the illiquidity / obscure structure / discount of Itasca capital but I absolutely am not comfortable with the underlying company. Though at a first glance ICL was trading cheaply yesterday, the class A interests in the LLC Itasca owns should retain their value even despite the drop as there's still ~$15m of collateral. Haven't looked at it in a while though - I might be off.

 

And on the flipside, I'm not sure management has the right incentives (or guts) to redeem their class A interest at this point - it would shareholder capital but would mean effectively pulling the plug out of the LLC. And management probably has some interest in the other tranches too, one way or another. I'd say there is a decent chance ICL will go down with the ship.

 

Also, hedging LMB exposure isn't exactly trivial either given the convoluted upside / downside of the LLC and the lack of an option market on LMB.

 

Probably a bit too unclear for me at this point. Also difficult to calculate / estimate the exact value of the class A interests given accrued interest and redemptions so far - disclosure is limited.