EAF - GrafTech

[valueinvestor]

I agree with Writser and Jurgis here - two excellent posts. Was considering writing something similar on the TOO thread but didn't want to cause offence. Everyone went into this with their minds open; no-one was forced to buy.

 

Strikes me BAM's main error with GrafTech was not listing enough to create a liquid stock.

 

This was a real eye opener for me. I remember a time where I had a large part of my portfolio in Brookfield Office Properties, made a good solid return, especially looking at the time spent researching on each investment. I was especially pissed that Brookfield took it private for less than liquidation value, as opposed to paying a fair price and making good returns, at the very least.

 

I am motivated to create a "shit list project" that compile all the wrongs of Oaktrees, Brookfields and any other bad operators that one can easily locate and search.  The purpose is to shame the governance offenders and create a database of bad actors.

 

Most takeovers (or takeunders) by a good investor are not fair to selling shareholders by definition. If the buying (value) investor is good, they are only buying companies by underpaying. Investors selling to good value investors usually get a good deal only when the buying investor inadvertently overpays.

 

 

This is true for the most part, but I rather hoped that the board do their duties in finding a buyer who can extract a lot of strategic value, such as Facebook and Instagram or Blackstone and Equity Office Properties.

 

They paid a very large premium, and made good money in return.

 

 

[Packer16]

I agree that most of these investors to various degrees will take advantage of minority investors when they can.  That is why there are SoTP discounts associated with their entity valuations like BAM.  The more they act like predators the larger the discount.  If they take advantage of minorities when they can, when do you become a minority to be taken advantage of?  Once this approach is part of your business model, IMO it is difficult to draw the line.  I think the market rewards good actors vs. worse ones.  If you look at the valuation of SSW vs. TOO you can see this in action.  SSW is a much tougher & IMO worse business than TOO but the share price is much higher.  The Fairfax approach of fair & friendly IMO will be rewarded in the long-term versus the take what you can get now approach. 

 

I also think for public businesses in these situations that at some point there will be more rights given to minorities (maybe by legislation or lawsuits) to force the bad actors to act according to their duty to the minorities.  The intent of minority shareholder protection is to say if you control a public company then you should be partners with them & not predators taking advantage of them.  In most of these cases, the control folks feel they have no duty to minority shareholders.  This will show up in pricing of securities the bad actors are a part of. 

 

The one difference I noted with TOO is that BBU management told shareholders one thing when asked about a take down (we will keep the company public for an exit) & did another.  I would just like those who act this way to be honest & say we may do this to minorities & not give an impression they are something they are not.  IMO this is a disclosure issue as well as a governance issue.

 

Packer

[BG2008]

Jurgis/Writser,

 

I love the candid and direct feedback on this governance issues.  I am a big boy and fully understand that investing is probabilistic.  I actually stated that it is possible that Brookfield may try a take under. I just want to distinguish that there are two types of shareholders here in Teekay situation

 

1) Teekay Corporation was a distressed seller that needed liquidity recently and

2) A patient/long term shareholder base (letter writer) that is willing to wait years for TOO to play.  We don't need liquidity and we are also provider of liquidity. 

 

If Brookfield either

 

1) Refuse to acknowledge a difference between the two types or

2) Knows the difference but treats all of them like lambs

 

In the long run, no one will pay fair price for any Brookfield sponsored entities if they seek public market IPO.  There is a trade off.  You mentioned recency bias.  Yeah, you could say that.  But maybe that adage of  "brands are built in 10 years and destroyed in 10 minutes" means something and we are seeing it happen in real time.   

 

I'm glad you guys bought up Berkshire and Clayton, and Malone and etc.  They should all go into the governance watch list database a.k.a. "Shitlist project"  It may not be worthy, but I assume that is how Glass Lewis and ISS got started. 

 

 

[peterHK]

If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

 

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

 

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

 

[5xEBITDA]

If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

 

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

 

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

 

I agree with you from an outsiders perspective. Understanding each parties' incentives is crucial in investing, and in this case it looks like BAM's incentives had been misunderstood. One of the original presentations from a fund listed on the letter to TOO has BAM's involvement as a positive in big bold letters, its just simply wrong and frankly naive. BAM is doing the logical thing here and it is what is best for their investors, they could care less about the minority investors and the idea that this will harm the BAM brand is laughable.

 

I legitimately do not think there is even a governance issue going on at the moment with TOO and minority shareholders are just pissed off they got the rug pulled out from under them. This is not the first time shareholders listed in the letter have gotten burned by not understanding how distressed investing works. Is this really a BAM issue, or is this really an issue of buy and hold investors style drifting into distressed?

[valueinvestor]

If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

 

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

 

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

 

I agree with you from an outsiders perspective. Understanding each parties' incentives is crucial in investing, and in this case it looks like BAM's incentives had been misunderstood. One of the original presentations from a fund listed on the letter to TOO has BAM's involvement as a positive in big bold letters, its just simply wrong and frankly naive. BAM is doing the logical thing here and it is what is best for their investors, they could care less about the minority investors and the idea that this will harm the BAM brand is laughable.

 

I legitimately do not think there is even a governance issue going on at the moment with TOO and minority shareholders are just pissed off they got the rug pulled out from under them. This is not the first time shareholders listed in the letter have gotten burned by not understanding how distressed investing works. Is this really a BAM issue, or is this really an issue of buy and hold investors style drifting into distressed?

 

I do not think people were complaining about how they got burned, or at least in my case. I was more frustrated on finding another investment, than being mad at BAM. Whether I am right or wrong, it does not changes the fact that they are buying us out. However, I do hold the view that if they (or anyone really) keep screwing minority investors, especially if they screw them harder in the future, many people would not buy what they sell, which would significantly impair their ability to exit. Are they unethical? Maybe. Are they going to have a brand that will diminsh? No. Are people going to be more skeptical in getting into bed with Brookfield? Yes.

 

That also means getting into bed with them on a holding level, and hence there maybe a discount.

[heth247]

If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

 

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

 

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

 

Well it is easy to say TOO shareholders were stupid in the hindsight. But things changed fast, I suspect this take under was not in the cards of BBU until recently when TK sold all of its TOO stake to BBU.

[peterHK]

If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

 

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

 

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

 

Well it is easy to say TOO shareholders were stupid in the hindsight. But things changed fast, I suspect this take under was not in the cards of BBU until recently when TK sold all of its TOO stake to BBU.

 

But that was always a risk. BAM has been positioned this way for a while now: if the business didn't work out, then they can take it private themselves and they control the GP and the debt. If it works out, then they hold the equity so they're fine.

 

Their involvement wasn't good or bad, there were a range of outcomes, and the way BAM invests, they need plans to ensure that the outcome for BAM in each of those is favorable. The issue for shareholders is that in a number of those outcomes, the result was good for BAM and bad for shareholders.

[peterHK]

Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

 

I'll start:

 

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

[Spekulatius]

On top of the loss, you might also get unexpectedly worse taxes when you fill out your K-1 on Sales next year. These things work in mysterious ways. Been there before...

I am avoiding LP‘s where an buyout is possible for that very reason. In this case, there weren’t any recent distributions, so it might be OK, but I have heard about cases, where LP‘s had to pay taxes on „Phantom gains“. These also accrue to the buyer of the entity in most cases.

[BG2008]

Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

 

I'll start:

 

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

 

PeterHK,

 

Love the sharp wits and the straight talk.  I guess we're back talking about another BAM sponsored company trading cheaply.  A pattern maybe?

 

 

[heth247]

If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

 

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

 

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

 

Well it is easy to say TOO shareholders were stupid in the hindsight. But things changed fast, I suspect this take under was not in the cards of BBU until recently when TK sold all of its TOO stake to BBU.

 

But that was always a risk. BAM has been positioned this way for a while now: if the business didn't work out, then they can take it private themselves and they control the GP and the debt. If it works out, then they hold the equity so they're fine.

 

Their involvement wasn't good or bad, there were a range of outcomes, and the way BAM invests, they need plans to ensure that the outcome for BAM in each of those is favorable. The issue for shareholders is that in a number of those outcomes, the result was good for BAM and bad for shareholders.

 

I can argue the same thing for EAF. The critical part is what probability you assign to each outcome. If you tell me that you had the vision a year ago to assign the probability of "taking under at $1.05" to something >20% and used it as one of the main reasons to fail the TOO investment thesis, I have my hats off to you.

 

 

 

 

[aglittell]

Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

 

I'll start:

 

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

 

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

[valueinvestor]

Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

 

I'll start:

 

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

 

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

 

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

[rkbabang]

If you were to go into business with a friend and you were going to own 49% of the company and your friend was going to own 51%, would you not consider the fact that your partner has majority control of the company a risk that you should take into account before making your decision to invest?  You would want to assess your partner's capabilities to run the business as well as his likeliness to make a decision that benefits him over you.  Whenever you are thinking of becoming a minority shareholder in a company (which is every investment for most equity investors) this is a risk you should think about.  Assuming everyone else is going to care about you because you think they "should" doesn't seem like a good plan.

 

[aglittell]

Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

 

I'll start:

 

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

 

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

 

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

 

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

 

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

 

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

 

 

[valueinvestor]

Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

 

I'll start:

 

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

 

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

 

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

 

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

 

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

 

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

 

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

[aglittell]

Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

 

I'll start:

 

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

 

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

 

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

 

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

 

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

 

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

 

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

 

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

[valueinvestor]

Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

 

I'll start:

 

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

 

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

 

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

 

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

 

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

 

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

 

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

 

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

 

As you said, it's thinking of reasons why they may take it private. Typically I invest in companies with an upside of 100% or more, and the reason why I liked Graftech is because there's an optionality that prices will go up, but even if it goes down, I don't lose too. However, my upside is capped with Brookfield, as they may take it private if prices for Graphite goes sporatically up due to the rise in demand for EV vehicles or tightening of supply.

[BG2008]

Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

 

I'll start:

 

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

 

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

 

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

 

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

 

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

 

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

 

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

 

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

 

Dude, BAM is trying to screw TOO shareholders on an $113mm of S/O not owned by BAM.  EAF is way bigger than that.  From my experience, once someone cheats, they will cheat again.  There is a very important distinction between EAF and TOO and that is EAF is a C Corp and if it is domiciled in Delaware, you have appraisal rights.  This is not a luxury afforded LPs in TOO.  Check this yourself.  I am not going to scrub through the corp structure for you.   

[valueinvestor]

Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

 

I'll start:

 

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

 

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

 

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

 

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

 

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

 

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

 

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

 

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

 

Dude, BAM is trying to screw TOO shareholders on an $113mm of S/O not owned by BAM.  EAF is way bigger than that.  From my experience, once someone cheats, they will cheat again.  There is a very important distinction between EAF and TOO and that is EAF is a C Corp and if it is domiciled in Delaware, you have appraisal rights.  This is not a luxury afforded LPs in TOO.  Check this yourself.  I am not going to scrub through the corp structure for you. 

 

I know right? At the end of the day, if you need to look into the corporate structure is the investment really worth it? There are other investments with either "minority shareholder-friendly" majority holders or no majority holders that would provide the same upside with limited downside. If not, then I would wait until one comes into my radar.

[Deepdive]

Mark Leonard of Constellation Software has some weird take on buybacks.  He is very much against share buybacks as he feels like he is cheating his shareholders (many who are employees) if he bought back shares from them on the cheap.  I used to roll my eyes at that.  Given what BAM has done, I have grown to appreciate that guy with the weird beard. 

 

[chrispy]

Deep dive, yes I too thought it was an odd approach but view it in a much different light now

[johnny]

I think I can guess the answer here, but is there a more bullish explanation for why they are so aggressively paying down debt even though they're under their leverage target?

[peterHK]

I think I can guess the answer here, but is there a more bullish explanation for why they are so aggressively paying down debt even though they're under their leverage target?

 

If you assume electrode prices normalize, then they are over their leverage target. My read on it is that they're paying down debt because they expect pricing to fall and cash flows to weaken.