NEWS - Newstar Financial

[writser]

I bought a small chunk of Newstar Financial (NEWS) over the past few days. Merger play. Increased my position significantly today as they announced the EGM is on December 21, making it quite likely the deal will close in 2017. Stock should be up today unless I am missing something. Buy for $11.71, receive $11.44 in a month and you pay $0.27 for a CVR that is estimated to pay out $0.30 next year and $0.70 around 2020 .

 

This ticks a lot of boxes I like. Not subject to financing conditions, small deal for a reputable buyer (GSO, a Blackstone group subsidiary), large holders on the board, insiders own stock, deal is not at a huge premium to undisturbed price, no interest at all on SeekingAlpha, Twitter and similar media and there is a huge incentive to get the deal closed this year:

 

1. the payout of the CVR increases slightly if the deal closes in 2017.

2. the proposed Republican tax bill would close some 'tax reclaim loopholes' starting in 2018 if enacted, potentially making the CVR worthless.

 

Obviously the latter is a risk but the board is aware and has been trying hard to close the deal this year. Given that all regulatory permissions are granted, they should be able to close the deal immediately after the vote, i.e. a few days before the end of 2017. Uncertainty and duration of CVR payout and the fact that the CVR is not transferable might make this deal unattractive for some market participants. No spectacular spread but IRR should be around 30% at current prices. Decent place to park some cash for the remainder of the year.

 

As always, insights are appreciated.

[Jurgis]

Hey. I think you covered this elsewhere, but let me ask in context of this case.  8)

 

Assume one invests something like $20K into this. This gives about 1707 shares of NEWS. Then the possible gain is about $.70 per share, which ends up being ~$1195 or 5.9% return on original investment in 3 years (I did not annualize). I guess your argument is that you get back most of the original investment in a month, so it's not fair to calculate the return this way. (Although I still don't understand how you get 30% IRR). But you still have to tie a lot of cash if even for a month. And your argument - which I don't dispute - that this is the reason why the opportunity exists and not many investors pile in. Also on absolute terms, unless you pile in something like $100K+, the absolute return is very low. But then piling in $100K may become problematic in getting position at cheap price. And it ties even more cash.  And it exposes even more cash for unexpected catastrophic risks (e.g. suddenly company discovers fraud and merger falls through and you lose XX% on your big cash investment). :-\

 

Anything I am missing in terms of pros/cons?  8)

[writser]

Anything I am missing in terms of pros/cons?  8)

Nope! I guess we just don't agree on the attractiveness. IRR is easy to calculate in Excel or whatever:

 

today: -11.70

year-end 2017: 11.44

year-end 2018: 0.30

June 2020: 0.70

 

Gets you to ~35%. Not that that number is the holy grail. I prefer to look at it as buying a CVR for ~25 cents on the dollar. Yeah, you have to park some cash for a few weeks but I'd say the chances of the deal failing are very small and the undisturbed price before the deal was announced was actually higher than today's price. After the deal announcement it traded around 12.20 for a few days and I'd say that is where it should trade now. I wouldn't recommend going all-in but I'm not too afraid of going broke here.

 

And yeah, piling in a few million or so at attractive prices would be difficult.

[Jurgis]

Thanks.  8)

[JayGatsby]

It's up since you posted. I'll keep an eye on it. I did some quick digging and agree with your analysis. Hard to say on timing, but I like that there doesn't seem to be any financing risk. Will keep an eye on it and see if it drops back to 11.70-11.75.

 

Edit: Just traded at 11.99. Opportunity may be gone.

[Foreign Tuffett]

It's up since you posted. I'll keep an eye on it. I did some quick digging and agree with your analysis. Hard to say on timing, but I like that there doesn't seem to be any financing risk. Will keep an eye on it and see if it drops back to 11.70-11.75.

 

Edit: Just traded at 11.99. Opportunity may be gone.

 

I like the idea, as both sides of the transaction (buyer and seller) look to be very incentivized to get the deal done this year due to the potential tax refunds being shared between the parties. Also, the shareholder structure makes the shareholder vote look easily achievable. No financing or antitrust risk.

 

It's trading around $11.75 again if anyone is still interested in getting involved.

 

 

[LightWhale]

Writser, by the SEC files, seems like Capital Z Partners disposed of 4m stocks yesterday,  that's 10% of the company. What do you read into it?

[writser]

On December 8, 2017, Capital Z III Fund made a pro rata distribution, without consideration, of all shares of Common Stock owned by it to its respective partners.

 

At a first glance, looks like they are simply dissolving the partnership. Probably due to tax reasons and/or the CVR being non-transferable. I don’t read too much into that but don’t take my word for granted.

[LightWhale]

Makes sense. So the disposed 4m shares under Cooper belonged to the fund, the acquired 50k shares are his part of the distribution, with the rest going to other partners, and that's why the A/D price is at $0 

[JayGatsby]

I like the idea, as both sides of the transaction (buyer and seller) look to be very incentivized to get the deal done this year due to the potential tax refunds being shared between the parties.

Could you clarify this? Maybe I'm reading wrong, but it looks like 100% of the tax refund goes to the sellers via the CVRs. How does it benefit the buyer to close this year?

[JayGatsby]

Traded down to 11.61 today, presumably on momentum on the tax bill.

[LightWhale]

Any news on NEWS?

the spread is growing.  If we take 10% annual rate of return as the ballpark figure that the market should require to compensate for risk associated we the CVR, that's 21% over two years, putting CVR’s fair present value at 0.826. According to that, NEWS fair price is 11.44+0.826= $12.23. Today's price is 11.61, so that a >5% upside and the EGM is tomorrow.

[writser]

No news at all afaik. Maybe people have some doubts about the deal getting done in 2017 and/or there are some developments in the tax bill area that I am unaware of. Still, paying 18 cents for the CVR's can't be that bad of a deal but I've been wrong before. I am already happy with my position size, not buying more.

[JayGatsby]

Got a message in my IB account that the deal will be effective 12/21, but it didn't say what that was based on. Same day as the EGM, so that may be what they were basing it on. Hopefully it's correct, but not really firm enough to trade on.

[JayGatsby]

Looks good... thanks for pointing this situation out.

 

BOSTON, Dec. 21, 2017 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (NASDAQ:NEWS) (“NewStar”) announced today that its stockholders have approved the acquisition of NewStar by First Eagle Investment Management and NewStar’s related sale of a portfolio of investment assets to a newly formed investment fund sponsored by GSO Capital Partners LP.  NewStar expects the transactions to close on December 22, 2017, subject to satisfaction or waiver of remaining closing conditions.

[writser]

I'm probably too stupid to understand (and had a few beers) this but in my opinion a) the vote was extremely likely to succeed and b) the transaction was extremely likely to close immediately after the vote (i.e. in 2017 for tax reasons). That's why I liked this deal. Obviously there always is some uncertainty but I'm surprised the stock is up 3% on this 'news'. Seems like a huge risk premium.

 

The CVR is probably still a decent buy at current prices.

[namo]

Indeed, thanks for the idea; I bought some today (sized at 4%).

 

I'm curious how other people sized this idea, and why? As Jurgis pointed out, the net gain is small compared to the capital invested. But on the other hand, it's "free" money.

[JayGatsby]

I'm curious how other people sized this idea, and why? As Jurgis pointed out, the net gain is small compared to the capital invested. But on the other hand, it's "free" money.

2.5% for me. I'm still pretty new at these sorts of situations, so that's the only reason it isn't bigger. I typically assume deals will take longer than anticipated, particularly around year end. Otherwise I agree with Writser's analysis, especially when it was trading at ~11.65, allowing the CVR to effectively be purchased for 21c for a ~5/1 bet.

[LightWhale]

But on the other hand, it's "free" money.

 

3% here.

From what I recall of the terms, the CVR is valid only up to $5m, which spells the risk that arbitraging will be limited only to small players, hence less efficient.

[Foreign Tuffett]

Indeed, thanks for the idea; I bought some today (sized at 4%).

 

I'm curious how other people sized this idea, and why? As Jurgis pointed out, the net gain is small compared to the capital invested. But on the other hand, it's "free" money.

 

It was a just over a 10% position for me. I actually think that someone could do a lot worse than buying this at ~$12.

 

Thanks for the idea writser

[writser]

I'm curious how other people sized this idea, and why? As Jurgis pointed out, the net gain is small compared to the capital invested. But on the other hand, it's "free" money.

 

4% - 5% but that was before the vote and confirmation it would close in 2017. Could buy more now but some other opportunities in the corporate action space are more attractive for me - and good for some diversification.

[LightWhale]

 

Thanks for the idea writser

[hillfronter83]

 

BIG Thanks for the idea writser!

 

[Jurgis]

Thanks for idea writser!  8)

 

Sold today for lunch money. It's amazing that this was at 11.6X just couple days ago...

[writser]

Deal closed: link.

 

Don't make me overconfident guys :) .. But thanks for the kind words. For those interested in an exotic corporate action, Kazmunaigas looks like a nice idea and I'm long a decent amount. You do have to complete some paperwork and make sure your broker doesn't fuck it up though. Basically boring administrative stuff arbitrage (also known as: work).