ECL.AU - Excelsior Capital Limited

[AJB96]

High quality business with owner operator management team and significant earnings growth potential trading at just 4.4 times FCF (net of cash).

 

See attached writeup.

[NeverLoseMoney]

I've owned the company in the past. I now have a quite negative view about management. I don't think Leanne Catelan acted fairly when she asked shareholders to vote for accepting the new asset management division. This was a very big change and also introduced management fees (the hurdle rate they use is ridiculous as well). At the same time, shareholders were given the option of tendering their shares in a buyback at a price that was, in my opinion, well below intrinsic value. That's not a management that is acting in shareholders' best interest. This move also allowed Catelan to gain control.

 

When her father was still in charge, there was another controversial transaction involving Leanne: https://www.couriermail.com.au/business/takeovers-panel-slams-ray-catelans-cash-gift-to-daughter-and-cmi-share-purchase/news-story/0efb17aff0c7e8e348058078150dce8a.

 

I think they are going to continue to buy back shares opportunistically and that they will delist the company at some point. If they do, they'll do it at a large discount to intrinsic value again. I believe the market is pricing this scenario in. If you are able to hold shares in a private Australian company this might not be a major issue.

[AJB96]

I've owned the company in the past. I now have a quite negative view about management. I don't think Leanne Catelan acted fairly when she asked shareholders to vote for accepting the new asset management division. This was a very big change and also introduced management fees (the hurdle rate they use is ridiculous as well). At the same time, shareholders were given the option of tendering their shares in a buyback at a price that was, in my opinion, well below intrinsic value. That's not a management that is acting in shareholders' best interest. This move also allowed Catelan to gain control.

 

When her father was still in charge, there was another controversial transaction involving Leanne: https://www.couriermail.com.au/business/takeovers-panel-slams-ray-catelans-cash-gift-to-daughter-and-cmi-share-purchase/news-story/0efb17aff0c7e8e348058078150dce8a.

 

I think they are going to continue to buy back shares opportunistically and that they will delist the company at some point. If they do, they'll do it at a large discount to intrinsic value again. I believe the market is pricing this scenario in. If you are able to hold shares in a private Australian company this might not be a major issue.

 

I've owned shares in this business for 2 years and I feel management has treated me very fairly. Over the past 2 years I've been able to get to know Michael Glennon quite well. In November of this year, I flew to Sydney to attend the annual shareholders meeting and I also spent an entire day at headquarters meeting with management.

 

I think very highly of Michael Glennon. He's been a good steward of the company for all shareholders and has made a number of very positive improvements at the company. He runs a value oriented investment fund and is a ardent Buffett fan (we first met in person at this year's Berkshire Hathaway annual meeting). He's made very intelligent capital allocation decisions at Excelsior Capital and I have no doubt he will continue to run the company for the benefit of all shareholders (he's a minority shareholder himself). I should also note he's been buying shares on the open market in recent months. Shareholders are in good hands with Michael Glennon as Chairman. From my discussions with management, I feel I have a clear idea of what their long term goals are for the business. Management has no intention or interest in delisting the company. It would not serve their interests.

 

I've fully supported the share buybacks at Excelsior and I hope they continue. Since I became a shareholder they have repurchased over 18% of the shares outstanding at very attractive prices. I am very happy to see them tendering for shares at a large discount to intrinsic value and I have encouraged them to continue buying back shares at the current price.

 

They've communicated with me what their intentions are on the asset management side and I have expressed my support for this venture.  I supported the resolution at this year's annual meeting to change the name of the company from CMI to Excelsior Capital. When I was in Sydney, I met with Paul Bolinowsky who is the newly appointed president of the asset management division. He is exceptional. He is the former CEO of UBS Asset Management Australia and walked away from a very lucrative position to start Excelsior Asset Management. Actions speak louder than words here. Excelsior Capital owns 40% of the asset management business and it will cost shareholders less than $500,000 to build out this venture. If it is successful, Excelsior Capital's stake could be worth multiples of the market cap. I am quite excited to watch the progress.

 

Excelsior Capital is a cash flow positive net net with a good management team. Those types of investments usually work out well!

[NeverLoseMoney]

Can you expand on why the company can't be delisted eventually? I've seen a number of examples in Australia and I think protections for minority shareholders are weak in this regard. It would clearly be in Catelan's (it's not spelled Catalan) interest to buy-out shareholders on the cheap. A delisting would help a lot to do just that.

 

I also think it was a conflict of interest for Glennon to be manage his own (hedge) funds and to then choose to also manage CMI's money. I don't know how good a manager he is. CMI's management never really explained to shareholders in their written reports why Glennon was selected (other than that they thought he could do well obviously) and didn't provide a long track record of his results. I do think he did well in the latest Australian bull market, but didn't really like the picks I saw in his Glennon Small Companies fund.

[AJB96]

Can you expand on why the company can't be delisted eventually? I've seen a number of examples in Australia and I think protections for minority shareholders are weak in this regard. It would clearly be in Catelan's (it's not spelled Catalan) interest to buy-out shareholders on the cheap. A delisting would help a lot to do just that.

 

I also think it was a conflict of interest for Glennon to be manage his own (hedge) funds and to then choose to also manage CMI's money. I don't know how good a manager he is. CMI's management never really explained to shareholders in their written reports why Glennon was selected (other than that they thought he could do well obviously) and didn't provide a long track record of his results. I do think he did well in the latest Australian bull market, but didn't really like the picks I saw in his Glennon Small Companies fund.

 

You have a management team with a track record of acting in shareholders best interests and returning lots of cash back to shareholders via dividends and intelligent share buybacks. Michael Glennon is a minority shareholder as well and our incentives are aligned. This is a very shareholder friendly management team and since present management took over 8 years ago they have consistently acted in shareholders best interest.

 

Since inception (June 2010), Glennon Capital has returned just under a 200% total return to shareholders compared to 49% total return for the most relevant index for small cap stocks in Australia (S&P Small Ordinaries Index). I've spent quite a bit of time with Glennon and he strikes me as a very rational investor. Someone who knows him well told me he follows every single small cap stock in Australia and knows all the management teams. He's one of the only value investors focusing on small caps in Australia and he's done very well over time (as his results demonstrate).

[Scunny Bunny]

You are a brave man indeed. When a great investor like Troy Harry (Trojan) makes the comments he did about the late Ray Catelan and Leanne was an accessory to what went on, think you will find there are easier ways to make money.

[Steven B]

Interesting find. Thanks for posting. I'm not loving that Michael Glennon and Paul Bolinowsky (who also happens to be CEO of Glennon Capital btw) have a way to win here even of shareholders lose. Never like to see that. Will dig further. Alex, much appreciated!

[AJB96]

Michael Glennon is one of the most impressive managers I've come across at a nano cap company and I have a lot of respect for him. We're fortunate to have him involved at Excelsior Capital Limited (ECL). Anyone who spends the time to get to know him will conclude the same.

 

I don't agree with most of the comments posted here. Many of which are ridiculous and uninformed.   

 

At the same time, shareholders were given the option of tendering their shares in a buyback at a price that was, in my opinion, well below intrinsic value. That's not a management that is acting in shareholders' best interest.

 

So you'd rather them repurchase shares at a premium to intrinsic value just so you can make a quick profit at the expense of all other shareholders?

 

Intelligent share buybacks are in the interest of all shareholders.  ECL shares are illiquid and it also gave shareholders who wanted out a mechanism to do so. Many of Berkshire's early investments did the same thing.  If shareholders think ECL is undervalued at this price, they were not forced to participate in the buyback. If people own ECL because it's undervalued, I think the company should also feel the same way.  Which would mean it's intelligent for them to repurchase shares. I'm a long term investor and I look for businesses with managers who invest capital rationally which includes repurchasing shares at attractive prices. 

 

This move also allowed Catelan to gain control.

 

Leanne already had control before the buybacks.  38% ownership is still control because losing a vote at 38% ownership would require another 39% to vote against her.  That's 77% of the company voting, so the buybacks did not change the control.

 

It would clearly be in Catelan's (it's not spelled Catalan) interest to buy-out shareholders on the cheap.

 

If Leanne is interested in buying the company she can make a bid at any time.  Anyone can make a bid for the company at any price and shareholders would get to vote on that proposal.

 

I don't think Leanne Catelan acted fairly when she asked shareholders to vote for accepting the new asset management division. This was a very big change and also introduced management fees (the hurdle rate they use is ridiculous as well).

 

The management fees paid to Excelsior Asset Management are A$200k a year and Glennon owns 45% of the joint venture. He is also paid A$150,000 as Chairman. The previous chairman was paid $1.3m in his final year, along with options and performance rights, so Glennon is significantly cheaper. I think the compensation structure is very fair and so did the majority of ECL shareholders - ECL allowed shareholders to vote on the proposal and the majority of shareholders approved it.

 

All of the cash on ECL's balance sheet was previously earning close to nothing, so any return Glennon earns us on the investment portfolio will be accretive to earnings. For example, a 10% return after fees would add $2 million a year to ECL's annual earnings which would increase overall earnings substantially.

 

I'm not loving that Michael Glennon and Paul Bolinowsky (who also happens to be CEO of Glennon Capital btw) have a way to win here even of shareholders lose.

 

I don't understand this comment. How would Glennon win even if ECL shareholders lose?  Shareholders of ECL got a great deal when Glennon decided to do a JV with us and if it's successful, ECL shareholders will win big.

 

You are a brave man indeed. When a great investor like Troy Harry (Trojan) makes the comments he did about the late Ray Catelan and Leanne was an accessory to what went on, think you will find there are easier ways to make money.

 

Ray Catelan passed away awhile ago - back in 2011.  Since the present management team took over the company, there has been nothing inappropriate at the company - other than a significant amount of capital being returned to shareholders via dividends and buybacks.  I would take Troy Harry's comments with a grain of salt and I'm not sure that he's a great investor either. He actually had to shut down Trojan because of poor performance and that is public information.

[NeverLoseMoney]

Michael Glennon is one of the most impressive managers I've come across at a nano cap company and I have a lot of respect for him. We're fortunate to have him involved at ECL. Anyone who spends the time to get to know him will conclude the same.

 

Most of the the comments posted here are ridiculous and uninformed.

 

It seems pretty pointless for me to respond to your post, given this first part. You're obviously heavily committed to your investment thesis, probably because you've spent an enormous amount of time on it and personally met Glennon.

 

Huh? Glennon reached out to most of the top shareholders and nearly all of the them were happy with the company repurchasing shares cheaply.  That is in the interest of all shareholders.  Hey sought advice from several before they finally did it.

To be very clear: I was talking in my first post, and in the rest of this post, about the buyback announced in November, 2016 and completed in January, 2017. This was when the company "changed business direction" that allowed them to create the asset management division and to bring in Glennon. I'm not sure you're talking about that buyback or about later buybacks.

 

As a former ordinary, small CMI shareholder who just reads filings and who has never met Glennon at a Berkshire meeting, or elsewhere, I was never informed about the reasons why Glennon was chosen at that time. Or about why it was a good idea to manage CMI's excess cash in this manner.

 

Given the lack of liquidity in ECL shares, it also allowed anyone who needs to get out to do so.  It's also something many of Berkshire's early investments did.  So if shareholders think its too cheap at these levels, they were not forced into selling.

Completely false, because the buyback announced in November, 2016 was limited to 10% of the outstanding shares. In fact, many people dumped the remainder of their shares after the tender at much lower prices than the tender price. This was a very unfair way to act by CMI's management.

 

The filing can be found here (Jan. 25, 2017 - "CMI successfully completes off-market buy back"): https://www.asx.com.au/asx/statistics/announcements.do?by=issuerId&issuerId=4444&timeframe=Y&year=2017

 

A quote from that filing:

 

Under the terms of the Buy Back, the Company has bought back 3,485,263 shares, being 10% of CMI’s issued capital, at a price of $1.2501 per Share for a total of $4,356,927.28.

 

As the total number of Shares tendered was greater than the maximum number of shares CMI determined to buy back, a scale back was required. Subject to the qualification to the scale back for shareholders with a small residual Holding of 450 shares or less who had all of their shares bought back in full, as a result of the scale back, shareholders who tendered their Shares at the Buy-Back Price had 36.30177% of their shares scaled back in excess of the Priority Allocation bought back.

(The "Priority Allocation" were parcels of shares valued at $2,000 AUD or less, so very small shareholders did get an advantage, similar to odd-lot provisions in US tender offers).

 

Here's the historical share price data after the tender: https://finance.yahoo.com/quote/CMI.AX/history?period1=1477087200&period2=1492812000&interval=1d&filter=history&frequency=1d

As you can see, the share price fell to $0.83-$0.85 on large volume when trading resumed (January 20) after the tender. These were pro-rated shareholders who liquidated the rest of their stake. I remember this, because as a non-Australian at Interactive Brokers, I was not able to participate in this tender. So don't tell me this is fair and that people were able "to get out". Give me a break. You have to be completely brainwashed to believe that. These are the facts, the filings don't lie.

 

Leanne already had control before the buybacks.  The buybacks do not change the control.  38%-44% is still control. To lose a vote at 38% would need another 39% to vote against her.  That's 77% of the company voting, which is a big number.

I believe that, generally, a control premium is paid once a party goes over a 50% holding in take-overs, etc. I think that should have been required here if the Board had done its job. Changing the business direction of the company, while instituting a limited buyback of 10% to allow shareholders "to get out" (we already saw that was nonsense) at an inadequate price (due to the largest mining downturn in recent history) - all this was just handing Catelan a gift.

 

I'm going to leave it there. The goal of my post is to point out this filing and Leanne Catelans involvement in the previous dubious transaction (linked in my first post). That can give other board members some background. If people believe that's all fair and great, fine. At least you're then going in with your eyes open.

[BG2008]

NeverLoseMoney,

 

I want to thank you for bringing up some very interesting counter arguments to Alex' thesis.  I think feedbacks like yours are very underrated and very important to fully value the merit of an investment thesis.  Please keep sharing them.  It is paramount that we identify our blind spots.  At the same time, we are all grown ups that manage our own capital and others.  We may disagree, but we want to understand all the bear and bull view points. 

[NeverLoseMoney]

NeverLoseMoney,

 

I want to thank you for bringing up some very interesting counter arguments to Alex' thesis.  I think feedbacks like yours are very underrated and very important to fully value the merit of an investment thesis.  Please keep sharing them.  It is paramount that we identify our blind spots.  At the same time, we are all grown ups that manage our own capital and others.  We may disagree, but we want to understand all the bear and bull view points. 

No problem. My tone in my last post is not as civilized as I normally try to be. I was annoyed with my comments being characterized as "ridiculous and uninformed", because I owned CMI in 2016 and read those tender offer filings at the time.

 

I should also emphasize that I don't know how this will all play out. Excelsior Capital could turn out to be a great investment. Catelan might prove to treat minority shareholders fairly from here on out. Glennon could prove to be a great investor for Excelsior Capital.

 

Glennon's investment style seemed very different from my approach, so that also made me uncomfortable. If someone wants to check out some of the holdings in Glennon Small Companies (GC1.AX), you can see their filings here: https://www.asx.com.au/asx/statistics/announcements.do?by=asxCode&asxCode=gc1&timeframe=D&period=M6. I assume Glennon and Bolinowsky are still involved and responsible for that portfolio, because they are listed as "key people" on the website: https://www.glennon.biz/team

 

The November 15 filing of the 2018 AGM has some of the companies they are invested in on page 11. I'm more a Graham/Schloss type of investor and didn't like almost all the companies they showed in their GC1.AX filings during the time I was still a CMI shareholder. I still feel that way today when I look at this list. I wouldn't want any of my cash invested in any of those names. That also led me to move on after the share price recovered a bit, following the completed tender in 2017.

 

I actually like CMI's products and agree with much of what Alex said about that. It's very important though to have a view about how well the excess capital will be invested and that is where I feel uncomfortable. That doesn't mean those investments won't work. There are many different investment styles that can be successful. And perhaps the cash in Excelsior Asset Management will be invested using a very different approach than what is used in Glennon Small Companies. I just don't know.

[Scunny Bunny]

Alex, not sure you know Troy very well, but you wouldn't mind being $1 behind him. TJN was returned to shareholders so Troy could travel. If you don't think he's any good, try the 2017 APT Top 20 (#13) as a starting point. As you will discover, he also has a sense of humour (Norfolk Enchants Pty Limited) and was a part owner of the famous Brisbane racehorse Pistol Knight.

[AJDelphi]

NeverLoseMoney,

 

I understand you disagreed with CMI starting a new business venture and that you wanted to sell out at a price that was equal to the $1.25 tender offer. MOST shareholders are from New Zealand or Australia and they were able to tender their shares easily.

 

In my case, I thought the company was (and still is) worth considerably more than the market price, so I had no intention of tendering my shares. You seem to agree the stock is mispriced and I would think that would make you want to hold onto your shares.

 

Since I had no interest in tendering my shares at what I consider a very cheap price, I didn’t check to see if the tender was available to me as a non-Australian investor (I also use Interactive Brokers btw).  But if I wanted to, I’m sure I could have found out if the tender was available to me with a simple email to Glennon. So, I emailed Glennon last night and he responded just a few minutes later.

 

You claim to have read the tender offer documents:

 

“I owned CMI in 2016 and read those tender offer filings at the time.” And you also added: “because as a non-Australian at Interactive Brokers, I was not able to participate in this tender. So don't tell me this is fair and that people were able "to get out". Give me a break. You have to be completely brainwashed to believe that. These are the facts, the filings don't lie.”

 

I agree, fillings don’t lie. Lets take a look what they say. It sounds like you missed this section:

 

From the 2018 buyback booklet:

 

“CMI retains the discretion (to be exercised on a case by case basis) to extend the Off-Market Buy-Back to Shareholders residing in jurisdictions outside Australia and New Zealand where CMI considers it reasonable to make invitations to participate, provided at all times that the Shareholder’s participation in the Off-Market Buy-Back is permitted under the laws of Australia and the jurisdiction in which the Shareholder is a resident without the need for any filing or approval by any government agency (except one that CMI is willing in its absolute discretion to comply with).

 

Any Shareholder with a registered address outside Australia or New Zealand who believes that they are entitled to participate in the Off-Market Buy-Back in accordance with the laws of Australia and the relevant jurisdiction in which the Shareholder resides (without the need for any filing or approval by a government agency) should contact Link Market Services Limited on 1300 658 099 and +61 1300 658 099 (for overseas holders).

 

The distribution of this Booklet in some jurisdictions outside Australia and New Zealand might be restricted by law and does not constitute an invitation to participate in any place where, or to any person to whom, it would be unlawful to do so.”

 

 

It clearly states that the 2018 tender offer was available to shareholders in other countries (as long as law in your jurisdiction allows it). The 2016 tender offer was also available to shareholders outside of New Zealand and Australia. It clearly states that in the buyback booklet from 2016: Section 1.3 Page 4. Now it was up to CMI's discretion, so assuming no massive costs in doing so, I suspect they would have extended the offer to you. But you didn't get in contact with CMI or Link Market Services.

 

If Interactive Brokers would not let you participate, you should have addressed that with IB at the time.

http://www.cmilimited.com.au/Investor-Centre/?page=News---Announcements

 

“This was when the company ‘changed business direction’”

 

The company did not change business direction. They did however change their listing classification. They have always had a mix of businesses. They created a new JV and partnered with Glennon to create Excelsior Asset Management. They used to own TJM and a finance business that were later sold. They still own CMI Electrical. I don’t think this is a change of business direction as the asset management is a small piece of the company.

 

As a former ordinary, small CMI shareholder who just reads filings and who has never met Glennon at a Berkshire meeting, or elsewhere, I was never informed about the reasons why Glennon was chosen at that time. Or about why it was a good idea to manage CMI's excess cash in this manner.

 

I am also a small shareholder. I have not found it difficult to get in touch with Michael Glennon and get my questions answered. You could have reached out to him at any time and he would be happy to speak to you (even after your unfair comments here). A brief phone call or an email to management and you could have had your questions answered. Glennon is very willing to talk with any shareholder large or small and explain to you what the intention is with Excelsior Asset Management. At that point you could have made an informed decision on how to vote your shares.

 

The buyback booklet explicitly explains who you needed to contact to get your shares tendered.  You also could have reached out and had a discussion with him about the new investment mandate, you instead concluded management was acting “unfairly” without any effort on your part to reach out to them and perform your proper due diligence. 

 

Maybe contact Glennon directly with your questions. He's very open to answering them regardless of how many shares you own (His email can be found with a quick Google search: michael@glennon.com.au).

 

Again, I’m a small shareholder and management explained the thinking behind the asset management venture to me.  After I gave them the time to explain their reasoning, I agreed and I support the new venture (Excelsior Asset Management) because it will cost shareholders very little and has very large upside.

 

Here's the historical share price data after the tender: https://finance.yahoo.com/quote/CMI.AX/history?period1=1477087200&period2=1492812000&interval=1d&filter=history&frequency=1d

As you can see, the share price fell to $0.83-$0.85 on large volume when trading resumed (January 20) after the tender. These were pro-rated shareholders who liquidated the rest of their stake.

 

Leanne already had control before the buybacks.  The buybacks do not change the control.  38%-44% is still control. To lose a vote at 38% would need another 39% to vote against her.  That's 77% of the company voting, which is a big number.

I believe that, generally, a control premium is paid once a party goes over a 50% holding in take-overs, etc. I think that should have been required here if the Board had done its job. Changing the business direction of the company, while instituting a limited buyback of 10% to allow shareholders "to get out" (we already saw that was nonsense) at an inadequate price (due to the largest mining downturn in recent history) - all this was just handing Catelan a gift.

 

1. Leanne does not own over 50% of ECL. Because of the 2016 share buybacks, her ownership went from 38% of the company to 44%. After the 2018 buyback, she now she owns 47.7%.

 

2. What control premium are you referring to? Leanne didn’t purchase the shares, ECL did. And why would the company pay a control premium to repurchase their own shares? Furthermore, you make a claim that the board didn’t do its job. Could you explain what they didn’t do? The board acted in shareholder’s best interest by using excess cash to repurchase shares at a bargain price. I’m quite happy to see the company prudently using cash to repurchase shares at these prices. This is an intelligent use of cash and I fully support it. Since 2011, they have returned all accumulated earnings back to shareholders via dividends and buybacks.

 

Again, if you thought the stock was undervalued, like I did, you were not forced to sell when the stock declined after the tender offer (that you could have participated in). Also, the stock did not close at A$.83, they were there briefly and then jumped. But never closed at that price.

 

I think shares were very mispriced at that level and it sounds like you agree. If you believed the stock was undervalued the best course of action would have been to patiently wait for the price to better reflect fair value which would have worked out quite well. This is a value investing message board after all. Shares are now at $1.37 and you would have received significant dividends along the way. If you are worried about short term declines, owning illiquid small caps that tend to have volatile stock prices is not where you should be investing your money.

 

[Steven B]

 

I'm not loving that Michael Glennon and Paul Bolinowsky (who also happens to be CEO of Glennon Capital btw) have a way to win here even of shareholders lose.

 

I don't understand this comment. How would Glennon win even if ECL shareholders lose?  Shareholders of ECL got a great deal when Glennon decided to do a JV with us and if it's successful, ECL shareholders will win big.

 

 

My point is that Glennon and Bolinowsky make out either way and have no skin in the game. Imagine if some public company came to you and was willing to let you manage their portfolio for them, paying you at least $150K, 1.5% management fee and 20% performance fee while also willing to do a JV with you to try raise more money that you probably didn't have access to before (I'm speculating on the non-access point motivation but that's not central to my point), all without requiring you to make a substantial investment into the company (Glennon owns less than 1%!).

 

Sounds pretty sweet to me. No downside.

 

If they're capable of raising more money  awesome, if not, they have long term capital to invest and collect fees on.

 

So lets assume he breaks even over 5 years investing, pockets the $150K a year plus 1.5% on $21.3M of investments (just took the whole number but you get my point) nets Glennon Capital $2.35M. Not bad for a side hustle and that's winning for them regardless what happens.

[AJB96]

 

I'm not loving that Michael Glennon and Paul Bolinowsky (who also happens to be CEO of Glennon Capital btw) have a way to win here even of shareholders lose.

 

I don't understand this comment. How would Glennon win even if ECL shareholders lose?  Shareholders of ECL got a great deal when Glennon decided to do a JV with us and if it's successful, ECL shareholders will win big.

 

 

My point is that Glennon and Bolinowsky make out either way and have no skin in the game. Imagine if some public company came to you and was willing to let you manage their portfolio for them, paying you at least $150K, 1.5% management fee and 20% performance fee while also willing to do a JV with you to try raise more money that you probably didn't have access to before (I'm speculating on the non-access point motivation but that's not central to my point), all without requiring you to make a substantial investment into the company (Glennon owns less than 1%!).

 

Sounds pretty sweet to me. No downside.

 

If they're capable of raising more money  awesome, if not, they have long term capital to invest and collect fees on.

 

So lets assume he breaks even over 5 years investing, pockets the $150K a year plus 1.5% on $21.3M of investments (just took the whole number but you get my point) nets Glennon Capital $2.35M. Not bad for a side hustle and that's winning for them regardless what happens.

 

 

Michael Glennon and Paul Bolinowsky own 55% of the JV (Excelsior Asset Management) and thus they are required to fund half the start up costs of the venture. My guess is that will amount to over $500,000 from their side. From what I can tell, Paul Bolinowsky (President of Excelsior Asset Management) does not draw any salary from ECL or Excelsior Asset Management. He will only profit if the venture is successful. So they do have skin in the game and they also have downside if it doesn't prove successful. Glennon has also been buying shares in ECL and his stake is meaningful. Maybe he will continue buying more. Glennon has been quite successful in his previous business endeavors and is independently wealthy. He must see large upside for Excelsior Asset Management or he wouldn't devote the time and capital to fund it. 

 

Glennon's investment fund, Glennon Capital, has well over A$100 million in assets so he doesn't need ECL's cash to raise money.

 

I've also met Paul Bolinowsky and I'm quite impressed with him. Here is a brief overview of his resume: " Mr Bolinowsky’s previous roles have included Country Head (Australia) of Pioneer Global Investments, CEO and subsequent Head of Distribution at UBS Global Asset Management Australia, Head of Distribution at AllianceBernstein Investments Australia and CEO of Zurich Scudder Investments Australia."

 

I don't think Bolinowsky is drawing any salary from ECL (we can confirm that in future fillings). His upside will only come from his 10% stake in Excelsior Asset Management. I'm not sure what he made in salary at his previous roles but I think it's safe to say he has quite a high opportunity cost. Like Glennon, he must think the chance of success is high or he wouldn't have become involved. Both of them have monetary downside if this doesn't work and also a high opportunity cost. I hope they both profit significantly from the venture, because that means ECL shareholders will also do well. Glennon and Bolinowsky aren't going to walk away with a big payday unless the venture is successful.

 

Glennon does not get 1.5% on A$21.3 million. Excelsior Asset Management does. Glennon owns 45% of the venture with Bolinowsky owning 10% and ECL shareholders owning 45%.

 

And on the question about his salary as Chairman: I think it's very fair. The previous Chairman made over A$1.3 million in his last year. Michael Glennon draws only A$150,000/ year as Chairman. Glennon has saved the company well over A$1 million per year in expense rationalization (I'm not counting his reduced salary as Chairman in this number) and has also brought in a very good President of CMI Electrical, James Johnson. ECL shareholders are lucky to have Michael Glennon involved and his intelligent actions have earned his salary back for ECL shareholders multiple times over. He's created a lot of value for ECL shareholders and I hope he continues to stay involved as Chairman for the long term.

[Steven B]

 

I'm not loving that Michael Glennon and Paul Bolinowsky (who also happens to be CEO of Glennon Capital btw) have a way to win here even of shareholders lose.

 

I don't understand this comment. How would Glennon win even if ECL shareholders lose?  Shareholders of ECL got a great deal when Glennon decided to do a JV with us and if it's successful, ECL shareholders will win big.

 

 

My point is that Glennon and Bolinowsky make out either way and have no skin in the game. Imagine if some public company came to you and was willing to let you manage their portfolio for them, paying you at least $150K, 1.5% management fee and 20% performance fee while also willing to do a JV with you to try raise more money that you probably didn't have access to before (I'm speculating on the non-access point motivation but that's not central to my point), all without requiring you to make a substantial investment into the company (Glennon owns less than 1%!).

 

Sounds pretty sweet to me. No downside.

 

If they're capable of raising more money  awesome, if not, they have long term capital to invest and collect fees on.

 

So lets assume he breaks even over 5 years investing, pockets the $150K a year plus 1.5% on $21.3M of investments (just took the whole number but you get my point) nets Glennon Capital $2.35M. Not bad for a side hustle and that's winning for them regardless what happens.

 

 

I see your point here Steven B. Thanks for expanding on it.

 

Michael Glennon and Paul Bolinowsky own 55% of the JV (Excelsior Asset Management) and thus they are required to fund half the start up costs of the venture. My guess is that will amount to over $500,000 from their side. From what I can tell, Paul Bolinowsky (President of Excelsior Asset Management) does not draw any salary from ECL or Excelsior Asset Management. He will only profit if the venture is successful. So they do have skin in the game and they also have downside if it doesn't prove successful. Glennon has also been buying shares in ECL and his stake is meaningful. Maybe he will continue buying more. Glennon is quite successful in his own right and must see large upside for Excelsior Asset Management or he wouldn't devote the time and capital to fund it. 

 

Glennon's investment fund, Glennon Capital, has well over A$100 million in assets so he doesn't need ECL's cash to raise money.

 

I've also met Paul Bolinowsky and I'm quite impressed with him. Here is a brief overview of his resume: " Mr Bolinowsky’s previous roles have included Country Head (Australia) of Pioneer Global Investments, CEO and subsequent Head of Distribution at UBS Global Asset Management Australia, Head of Distribution at AllianceBernstein Investments Australia and CEO of Zurich Scudder Investments Australia."

 

I don't think Bolinowsky is drawing any salary from ECL (we can confirm that in future fillings). His upside will only come from his 10% stake in Excelsior Asset Management. I'm not sure what he made in salary at his previous roles but I think it's safe to say he has quite a high opportunity cost. Like Glennon, he must think the chance of success is high or he wouldn't have become involved. Both of them have monetary downside if this doesn't work and also a high opportunity cost. I hope they both profit significantly from the venture, because that means ECL shareholders will also do well.

 

Glennon does not get 1.5% on A$21.3 million. Excelsior Asset Management does. Glennon owns 45% of the venture with Bolinowsky owning 10% and ECL shareholders owning 45%. The previous Chairman made over A$1.3 million in his last year. Michael Glennon draws only A$150,000/ year as Chairman. Glennon has saved the company well over A$1 million per year in expense rationalization (I'm not counting his reduced salary as Chairman in this number) and has also brought in a very good President of CMI Electrical, James Johnson. ECL shareholders are lucky to have Michael Glennon involved and his intelligent actions have earned his salary back for ECL shareholders multiple times over.

 

Thanks for the timely response Alex.

 

Yes, the $500K is meaningful however is mitigated by the fact that just from salary alone will cover that downside. Paul Bolinowsky is currently the CEO of Glennon Capital which I'm sure pays him handsomely. I'm not sure there is much of an opportunity cost if he's staying in that position. Just sounds like Glennon tabbed one of his lieutenants to also work on this.

 

As far as who gets the management fees, the prospectus that outlines the change in business strategy clearly states that at the outset Glennon Cap will be managing the portfolio and will receive management and performance fees. It sounds like the longer term goal was to raise money for a standalone asset management business at which time that business will manage the companies capital. The 2018 annual report sounded that the fund operations haven't ramped up, meaning Glennon Cap. is still earning fees.

 

You say Glennon's stake is meaningful but all I could find is that he owns a couple hundred thousand shares in the '18 Annual Report. How big is his stake?

 

[NeverLoseMoney]

I understand you disagreed with CMI starting a new business venture and that you wanted to sell out at a price that was equal to the $1.25 tender offer. MOST shareholders are from New Zealand or Australia and they were able to tender their shares easily.

I wanted a fair price first and foremost. I don't think $1.25 was a fair price. Shareholders who tendered received an inadequate price in my opinion, given CMI's cash on hand, their cash generative business, and the fact that all this happened when the business was depressed due to market conditions. Those shareholders were also prorated ("scaled back"), so not all their shares were accepted. I already discussed this. People could not get out completely, nor at a fair price.

 

You seem to agree the stock is mispriced and I would think that would make you want to hold onto your shares.

I liked CMI's business. The institution of the asset management business changed things dramatically in my opinion. How the cash is managed there is an important factor. Now, I'm not so sure anymore if the market price undervalues the company significantly. The risks of a delisting have also increased, but I've already discussed that as well.

 

"The company did not change business direction."

 

It did. I did misremember the term though, because it was called "Change of Business" in the filing. That filing can be found here (18/11/2016). It is titled "Change of Business, Prospectus, EGM Notice, Share Buy-Back": https://www.asx.com.au/asx/statistics/announcements.do?by=issuerId&issuerId=4444&timeframe=Y&year=2016

 

A quote:

 

In taking a portfolio approach to investments, the Company does not propose to confine itself to making investments in the electrical or ancillary mining services fields, but rather will evaluate a wider range of investments in which it can take either controlling or non-controlling positions. This range will comprise small and microcap companies, both listed and unlisted, which are considered to offer the potential for higher returns and capital growth. This represents a change in the nature of the Company's activities (the Change of Business) which ASX has determined requires re-compliance with the admission requirements under Chapters 1 and 2 of the Australian Securities Exchange (ASX) Listing Rules (the Listing Rules). [...]

 

The Company is also required to obtain shareholder approval in respect of the Change of Business. It will seek such approval at an Extraordinary General Meeting to be held on 21 December 2016 at which meeting a special resolution to change the name of the Company to Excelsior Capital Limited will also be considered.

 

They got the shareholder approval, so good for them. Just offer a fair price to those shareholders who don't agree with the change of business and want out. They chose not to do so.

 

- Re: Contacting Link Market Services Limited

 

You're right, I did not reach out to this Australian company to see if it was possible to tender. I'm a small, retail shareholder and deal with my broker for tender offers and other corporate actions. I think the overwhelming majority of people rely on their broker for this.

 

I mainly wanted to point out that it simply wasn't possible to get out completely, let alone at a fair price. People were prorated, unless they owned less than $2k worth of stock. After trading resumed, the price declined significantly. Shareholders who didn't agree with the change of business were between a rock and a hard place.

 

- Re: Contacting Glennon

 

I mainly rely on filings for my research. I believe all shareholders, large or small, should be informed fully and at the same time in a company's filings. In my opinion, at the time of the change of business, CMI should have explained better in its filings why Glennon was chosen and why the asset management subsidiary was a good place to invest a substantial part of the cash.

 

I no longer have a position in Excelsior Capital. I don't think I've been "unfair" to Glennon. He has a different investment approach than I'm comfortable with. That's all. I'm actually mainly critical about Leanne Catelan's role, because she was a major owner at the time of the change of business.

 

So I don't really understand where the somewhat heated reactions are coming from when I share some criticism here. It feels like a case of shooting the messenger, but perhaps that's just my perception. It also feels like I'm debating Glennon now, because you (AJDelphi) are apparently even e-mailing him about a point I made in my post, and then an answer appears in this thread based on his feedback. I find that a bit unusual and strange.

 

- Re: change of control premium:

 

You are right. Catelan did not go over 50% at the time of the tender completed in Jan. 2017. So a control premium was not an appropriate term for me to use here. I do think that the Board should have done more to ensure that shareholders got a better price in that tender and that a more demanding benchmark was put in place for the asset management division. A change in business is fine, but pay a fair price to those people who don't agree and want out. Catelan was able to enlarge her stake as a result of this tender and I think minority shareholders are in a more vulnerable position today. See my points about the risk of delisting in my earlier post.

[AJDelphi]

I think it would be great if we as investors were fully informed in the filings for any company. Would make our work a lot easier. But I just don’t think that’s reality anywhere in the world. There’s always the dynamics of not telling your competitors too much, leaving things out for legal reasons, not having as high of a standard of reporting for smaller public co’s.

 

If you don’t listen to conference calls, investor days, industry conferences, or have conversations directly with management you are going to have blind spots. Especially on the business strategy part. I feel like that really isn't addressed in public filings well. Sure, there’s the argument that a CEO will sell you on some BS but hopefully that is rare.

 

So yea I got in contact with Glennon and was totally upfront about that. The guy knows more about the business than anyone so I think it’s a good idea to ask him questions. With any small cap company I get in contact with management because it helps a lot. And I don't always like what I find out.

 

 

[Mr Pink]

I’m not interested in going back and forth on this and really don’t care who thinks what about the stock – so this is a one-time comment (no need for anyone to respond). 

 

I think some of the comments here are extremely unfair to Leanne – who I believe has thus far been very fair to all shareholders and has taken a number of intelligent steps to create value on a per-share basis.  I think she has acted quite honorably.  Obviously everyone is entitled to their opinion - that is mine.

 

Clearly this situation isn’t the right fit for some people – and that’s great – but I do think that anonymously criticizing Leanne on the internet is very inappropriate given the circumstances.  I for one sincerely appreciate her actions and integrity over the past few years.  I will admit that I preferred the old company name  :)

 

Disclosure– I own shares here. 

[BG2008]

I want to throw my 2 cents into the peanut gallery here.  It was helpful for me to hear the bear thesis of ECL.  Frankly, we all die for situations where you've got

 

1) A Net Net

2) Pays out a 4.6% dividend

3) Company tried to buy back shares in large amount

4) Company owns a good product with high barrier to entry.  This is not a melting ice cube net net.  FCF generation is estimated at 10% of market cap currently. 

 

From 30,000 feet, ECL is the unicorn of a net-net investment.  My take on the tendering and share buyback at insufficient prices.  I get it that for people with higher cost basis, it is a pain to not be able to get out near cost basis.  My personal philosophy is that if the company is still operating, buybacks should be done to create value not necessarily to provide liquidity to shareholders.  This is different if the company went to 100% cash which ECL did not.  ECL retains its core GoodCo which is probably the reason why people own ECL to begin with.  I doubt that anyone owned ECL for its Badco that was sold.  I needed to hear the bear thesis to vet it.  Now that I have heard, I think the key bear thesis is that ECL sells into the coal business which some in the investment community will view as being terminal.   

[Spekulatius]

I don’t think the coal industry in Australia is terminal, metallurgical coal is pretty much alive. I think one thing I don’t like about dividend payers in Australia is the high withholding tax of 30%. At least when held in an IRA, there is no way of getting it back.

[AJB96]

Excelsior Capital reported earnings yesterday: https://www.asx.com.au/asx/share-price-research/company/ECL

 

For the year ended June 30th, 2019 the Electrical Components segment earned pre-tax profits of $7.72 million vs $6.98 million in the prior year.

 

Overall, the company reported net income of $4.25 million for the year (adjusted for non-controlling interests). I make a few adjustments to net income to arrive at free cash flow for the underlying business. I add back the gain or loss on the investment portfolio net of tax ($.799 million), add back depreciation & amortization ($.386 million) subtract capital expenditures ($.322 million), and make an adjustment to normalize taxes ($.263 million).

 

I get FCF of $5.38 million ($.185 per share) for the year.

 

Here are the current figures:

 

Share price: $1.265

Market capitalization: $36.68 million

Net cash and investments: $18.41 million

Annualized free cash flow of the underlying business: $5.38 million

Net current asset value + securities: $38.98 million

Enterprise Value (market cap net of cash & investments): $18.27 million

 

At today’s market price of $1.265, Excelsior Capital is trading for an enterprise value of $18.27 million and the underlying business is producing $5.38 million in annual FCF. At the present price, Excelsior Capital is trading for just 3.4 times FCF net of cash & investments.

 

I'm quite happy with how the business is performing and the stock remains deeply undervalued.

[kab60]

Why don't they take it private? Only reason I can think is that being public with a rock solid BS helps them win orders, but the upside seems pretty huge for Leanne. Could be financed with the BS. Anyone into aussie takeover-rulles and know whether we risk getting Brookfielded? I bought a position, Leanne also bought more the other day. Pretty crazy setup (though that big Rio Tinto mine is delayed).

[Deepdive]

Why don't they take it private? Only reason I can think is that being public with a rock solid BS helps them win orders, but the upside seems pretty huge for Leanne. Could be financed with the BS. Anyone into aussie takeover-rulles and know whether we risk getting Brookfielded? I bought a position, Leanne also bought more the other day. Pretty crazy setup (though that big Rio Tinto mine is delayed).

 

In the short term, they are trying to create an asset management subsidiary that they can potentially spin off at a later date if they are successful with capital raising and performance.  So there is no short term 2-3 year risk of a take under.  In the long run, I generally find these large insider/family control companies to not think about these topics like a distressed investor like a Brookfield or Oaktree.  If they have a public vehicle, they tend to leave it alone.  Culturally, I believe having a publicly traded company in Australia is more of a social status.  Back to the fundamentals, it trades below liquidation value, pays a healthy dividend, and actually has a pretty good operating business. 

[Stuart D]

For anyone looking for more discussions on ECL, I just discovered another blog "hotcopper" that focuses on Australian companies. After signing up I wasn't able to post for ~24hrs, but it seems to be okay now that admin have approved my account. Curious if anyone else uses the that forum?

 

Also, I love the verb "Brookfielded"