Ask Packer - No Seriously, Ask Him Anything (AHA)!

[cmakam]

Thanks Packer...

-cmakam

[simplefocus]

Hi Packer,

 

The market is looking very interesting lately.  What are you buying recently?  Here are some of the stocks that I'm looking at currently.  Can you provide your opinion? 

 

I don't like O&G in general but the risk reward ratio is enticing.

1) PWE

2) BXE

3) DIS

4) AAPL

5) GM

6) CHTR

7) BABA

 

Thanks.

[Packer16]

The stuff I have been buying includes BXE and a SPAC warrant (ROIQW).  Of your list I have an opinion on 2 or 3.  I looked at PWE but I am only focused on low cost producers for O&G as I am not convinced about a large upward bounce.  BXE wins in either scenario.  PWE only in the O&G up scenario & will probably have more upside in a bounce but could be 0 also.  I like GM and hold the warrants. The others are too expensive for my style of investing.  They may be great compounders but that is outside of my circle of competence.

 

Packer

[rijk]

hi packer,

 

the roiqw warrants will only pay out if they pass a majority  shareholders vote, whereby spac investors have the right to a $10.- redemption

 

stock price is around $10.60 now, doesn't that kind of indicate that current stockholders are not all that excited about the india deal and

 

will therefore most likely ask for a refund?

 

how did you determine the risk/reward?

 

regards

rijk

[simplefocus]

Thanks, Packer!

[Packer16]

You are correct but with the higher offer for the warrants of 0.50 dollars plus .05 shares, the warrants have a value of $1.  If you look at the top shareholders they are warrant holders also.  So I look at these as a package.  So you can get the redemption of the remaining cash which will be less than $10 today or you can hold you shares & warrants which are worth $11.60 if you redeem your warrants for cash & stock.  I think the warrants are much more valuable than $1 redemption value.  You are getting a growing tower cash flow stream from a known consolidator in the Indian telcom market and paying about 12x EBITDA for 20 to 30% EBITDA growth in a growing market.  The resulting company will sell at discount to the largest Indian tower company, Bharti Infratel, at 13.4x EBITDA.  These both sell at discounts to other EM and NA tower companies who trade at 17 - 22x EBITDA.  You can ask aren't the NA and other EM tower companies selling at inflated prices?  I think they are close to fair value due to the tower companies having a long term leases (like bonds) on the growing telecom infrastructure of these countries. 

 

You are correct on the risk but the market is putting 50/50 odds and I think I am closer to 80 to 90%.  If I am wrong, this is probably a zero but I think the incentives are there to make this deal get done.  Historically, the average SPAC success rate is close to 70%.  I am a little higher due to the sweetened warrant package.

 

Packer 

[rijk]

ok, that makes sense

thanks!

rijk

[farbelow]

It seems trivial, but I cannot find the answer on the Internet. And the subject does state 'ask anything'. How do I find more information on private companies in Canada? I am trying to find the owners of Photon Control R&D Ltd. and DCD Management ltd, with whom Photon Control Inc has related party transactions.

 

Thank you.

[Hielko]

@Packer16; About the ROIQ warrants, don't you think that the problem is that it is not a package deal? You can vote for the deal and still redeem your shares while keeping your warrants. You basically need that all the funds that own shares and warrants to keep their shares. They can maybe redeem one fund (since they can do a 1M share private placement), but if two funds think "I'm going to bet that I'm the only fund that is going to redeem shares" you have a problem. Or a fund could decide to sell their warrants if they think this is going to happen and redeem themselves. Plenty of volume in the warrants to liquidate some large positions the past month.

[Packer16]

The deal also has a clause the no more than 15% of the shares can be redeemed so there is some risk that your shares will not be redeemed.  So if I am an arb my options are disapprove deal and get about $8.0 in proceeds ($125m in trust fund) or approve the deal and get $11 in proceeds ($0.5 + 1.05 shares) with the risk of selling for below $7.14 (at which point redemption is a better option).  Also if you look at the latest SEC holdings disclosure many of these arbs still hold millions of these warrants.

 

I also see the warrants as a fulcrum security that the sponsor can continue to sweeten to get the arbs buy-in.  Given the 3 month average volume is only about 53,000 per day, I think volume is a big problem to sell these things.  There are over 20 million warrants outstanding and unless the arbs are selling in off market transactions, I do not see how they get rid of them.  Most of the large arbs have like millions of these warrants and I do not see that type of volume yet.

 

Packer

[Hielko]

@Packer16: As an arb you can approve the deal and still elect to redeem shares. I think that this is a very attractive option because you get $10/share without risk and ~$1/warrant with little risk (since you get 0.05 shares/warrant). The problem is that just one or two funds max can go for this option, otherwise two many shares will be redeemed for the transaction to go through. So I don't really think the warrants can act as a fulcrum security since you can always vote for the deal, redeem shares and keep your warrants. Actually, the more value is transferred to the warrants the lower the value of the shares post-transaction which would increase the incentive to redeem.

 

Seems to me that this is a bit like a prisoners dilemma problem were shares+warrant holders as a group will get the best result if everybody cooperates. But if someone betrays the group he will get an even better result, but when too many players betray the group everybody is worse of. The problem is that the game theory optimal decision in the prisoners dilemma is to be an asshole and hope that everybody else is too trustworthy. But I'm guessing that a lot of fund managers aren't the trusty type, so from this perspective I think there is a high risk that this deal doesn't go through.

 

The only exception might be that there will be big negative repercussions on future deals if they don't cooperate, but I don't know what those would be. In multi-round prisoners dilemma game, a cooperate strategy is optimal as long as you retaliate against players who betray you.

[Hielko]

PS. I think there are 12 million warrants outstanding since all the founder warrants will be forfeited. Most funds that have disclosed their ownership in ROIQ(W) have between 400K and 1M warrants. You need just one or two funds who have sold their warrants to have a problem, and with a couple of 200K+ volume trading days that easily could have happened I think.

[Packer16]

But how can the jerk do well and others not if they all are of the same ilk?  These guys know that they are all out for number 1 so the fear of not trusting everyone else might make them not redeem.  I see the upside of one guy being maybe $11.00 and the downside being $8 for all if enough redeem.  Why would you take the chance of gaining a $1 if you can lose $2 if enough folks follow you?  The only way would be if you knew that less than 15% would follow you & I don't think anyone can know that.

 

From the latest BB screen I have seen many multi million share holdings (unless the BB is wrong).  If you look at ROIQ's price, the lowest it has been since the IPO is $9.60.  I do not see the incentive to redeem unless you think the stock will sell for less than $7.14.  Why would the arbs want to lock in a loss of at least $1.65?

 

The other aspect is I don't think this an overvalued SPAC offering.  It is slightly undervalued based upon the comps and the seller is retaining all of his equity so based upon these indications it should not at least initially lead to declining share price. 

 

Packer

[Hielko]

I think the incentive to redeem is pretty clear: if you think the stock could trade below $10 post-transaction the redemption feature is attractive. You aren't giving away your warrant upside if you redeem, so I don't follow why you think they would be locking in a loss. And if you really don't trust the other guys you should be selling your warrants and redeeming/selling your shares.

 

So you have to ask who is selling those warrants the past month. Is it an fund that is long warrants only (good) or a fund that is also long shares (bad). Someone is selling, and it must be someone who isn't very optimistic about the deal going through. The problem is that someone who is long shares in a large quantity and long warrants would be in the best position information wise to know what's going to happen if they want to redeem shares. They know that the deal will fall so they would be willing to sell warrants at a very low price. I think we could be seeing that, but other explanations are possible as well.

 

I got my shareholder/warrant holder data from the 13-HR filings, guess that's also Bloomberg's source. So it should look something like this:

stock warrants units

ARROWGRASS CAPITAL PARTNERS 601,100 602,100 -

HIGHBRIDGE CAPITAL MANAGEMENT 500,000 - -

BLUEMOUNTAIN CAPITAL MANAGEMENT 642,555 642,555 -

Polar Securities Inc. 791,418 348,800 -

GLAZER CAPITAL 115,551 - -

CNH PARTNERS LLC 945,000 1,050,000 -

GLG Partners LP 400,000 400,000 -

BASSO CAPITAL MANAGEMENT, L.P. 350,168 269,538 2,000

BERKLEY W R CORP 336,442 191,240 -

Ionic Capital Management LLC 15,107 - -

CAPSTONE INVESTMENT ADVISORS, LLC 525,000 - -

Pine River Capital Management L.P. - 1,150,000 -

FIR TREE INC. 1,235,900 1,060,900 -

Archer Capital Management, L.P. - 800,362 -

MOORE CAPITAL MANAGEMENT, LP 550,000 550,000 -

MILLENNIUM MANAGEMENT LLC - - 250,000

Davidson Kempner Capital Management LP - - 1,050,000

Hudson Bay Capital Management LP 400,000 - -

Castle Creek Arbitrage, LLC - 400,000 -

Yakira Capital Management, Inc. 152,281 - -

DEUTSCHE BANK AG 644,415 451,945 49,063

TD ASSET MANAGEMENT INC - - 1,050,000

Tower Research Capital LLC - - 242

K2 PRINCIPAL FUND, L.P. 17,875 - -

Sum 8,222,812 7,917,440 2,401,305

This accounts for 85% of the outstanding shares.

 

And yes, I think It looks like a decent deal. But with the shares trading at $10 almost exactly the market doesn't appear very excited.

[Packer16]

You are locking in the loss because the company does not have the cash to redeem at 10.00.  It only has enough cash to redeem at 8.00 if the deal fails and the SPAC is wound up.  So redemption greater than 15% results in either a wind down or look for another deal and eat up more cash.

 

Given the small amount of volume I am not sure It says much about the deal.

 

Packer

[Hielko]

ROIQ has 125 million in the trust account and 12.5 million shares outstanding (excl. founder shares). In the Ascend prospectus they also estimate that the per-share redemption amount is $10.00, so the stock is trading almost exactly at the redemption price.

[Packer16]

You are correct. So I guess the math is accept 10 or possibly 11.00 in stock and cash via the warrants.  Now it comes down to whether it will be best economically for the shareholders, more risky than I originally thought.  We will know soon enough there is an extension proposal submitted on Friday.

 

Packer

[matjone]

where do you guys see the 15% condition?

[Laxputs]

Packer, you didn't mention Asian Standard in your top 10. What keeps it from making it to that list? TIA.

[Packer16]

For Asia Standard, the price keeps falling so it drops out.  I still like it a lot.  The 15% may not be a stated condition but it is an assumption in the original deal presentation.

 

Packer

[Hielko]

There is actually an 18% number with exact share count in deal prospectus

[RedDaruma]

Packer,

 

I'm new to the board and wanted to ask you about the idea I juat posted on Investment Idea section:VVI.

 

This comapny has a recreation business and, depending on the EV/EBITDA multiple for the segment, the other segment seems to be freebie at the current market cap for the entire cmpany. I'm assuming 8x, as the segment generates somewhat recurring type of cash stream, albeit it's volatile. Any idea for appropriate multiple the segment? TIA

 

 

 

[Packer16]

I took a look at your VVI valuation and I have 2 comments.  Good approach BTW.  First, you need to capitalize corp expense of $7.5 million at lets say a 10% cap rate so the corp overhead is about $75 million.  It may be higher but I used the adjusted corp expenses here. 

 

As to multiples, I would value attractions business at 10x versus 12x for comps because comps own their attractions.  As to GES, I would probably value it at closer to 5 to 6x.  The organic growth of 2% is pretty weak is a good business climate.  If we get a recession this growth could easily turn negative (see 2010 results).  Most of the comps in this segment are private but to give you a sense of the volatility, listen to Howard Mark's interview with Joel Greenblatt at Wharton site.  At about 24:40 Joel describes his investment in this space and how it lost him some money.  I am not saying it will happen here but the industry IMO is too volatile to assign a high multiple to.  With these changes, today's value is pretty close to FV.

 

Packer 

[RedDaruma]

I took a look at your VVI valuation and I have 2 comments.  Good approach BTW.  First, you need to capitalize corp expense of $7.5 million at lets say a 10% cap rate so the corp overhead is about $75 million.  It may be higher but I used the adjusted corp expenses here. 

 

As to multiples, I would value attractions business at 10x versus 12x for comps because comps own their attractions.  As to GES, I would probably value it at closer to 5 to 6x.  The organic growth of 2% is pretty weak is a good business climate.  If we get a recession this growth could easily turn negative (see 2010 results).  Most of the comps in this segment are private but to give you a sense of the volatility, listen to Howard Mark's interview with Joel Greenblatt at Wharton site.  At about 24:40 Joel describes his investment in this space and how it lost him some money.  I am not saying it will happen here but the industry IMO is too volatile to assign a high multiple to.  With these changes, today's value is pretty close to FV.

 

Packer

 

Thank you, Packer. I thougt I have given an enough discount for the attractions business vs comps due to their size. I really appreciate your perspective. Also, could you explain why I should capitalize the corporate expense?

[Packer16]

Because as a shareholder of VVI you have to pay the corporate expenses out of the cash flows you receive.

 

Packer