Winter Quarter Wrap-Up
March 9, 2009
Going Private Arbitrage
Going Private Transactions
Essentially a “cash-out” for small shareholders.
A company can avoid the filing costs of being a public
company by reducing its shareholder count below a certain
number (usually 200).
To accomplish this, the company submits a proposal to a
shareholder vote to buy back shares from any shareholder
owning less than, say 500, shares at a given price.
These transactions are often completed by a reverse stock
split immediately followed by a forward stock split.
Shareholder of Record
Read proxies carefully because some companies may require
shareholders to be shareholders of record in order to be
eligible for the cash-out.
Shares held at brokerage firms are held in “street name.”
In order to become a registered shareholder, you must get
physical stock certificates (and of course pay a fee to your
The exchanges are moving away from offering physical
These transactions are also subject to shareholder approval.
Entrx Corp. (ENTX)
Meeting date of April 15.
Going private by means of a cash-out of shareholders
holding less than 500 shares.
Cash-out price of $0.35 per share.
Trading (or at least recently priced) around $0.15 per share.
Potential for a quick 110% gain, but only allows for an
investment of ~$75.
That’s still a potential profit of around $90.
More ENTX Details
This going private deal was originally proposed last year, but
it did not pass the shareholder vote at that time.
2,288,781 in favor and 800,106 against.
Need 3,828,074 this time.
Obviously, everyone didn’t vote.
Management seems to be more proactive about getting
people to vote this time around.
They probably wouldn’t try it again if they didn’t think it was
going to pass and that they would approve the deal.
Economics of the Deal for ENTX
They don’t really state how much they expect to save
annually, but they said “above $20,000,” which is probably an
Estimated cost of $170,000.
Paid for with cash on hand (they have ~$1 million).
Katy Industries (KATY)
Going private by cashing out shareholders holding less than
Cash-out price of $2 per share.
Currently trading around $1 per share.
Big potential payout, but this one may be a little risky.
Financing may be difficult.
But, consider potential losses if the deal falls through.
The date of the shareholder vote is March 19.
Directors own 39.1% of the company (and intend to vote in
favor of the cash-out).
Estimated annual savings of $800,000 versus a cost of
KATY has access to a $40 million revolving credit facility.
Another note, after dilution the company’s book value is
around $0.88 per share.
Compass Diversified Holdings
Recently in the $7 range.
Paid down $70m in debt last
Quarterly conference call this
Impact of labor market on
Dow Chemical and Core-Mark
Still making news with the Increase in cigarette prices to
Rohm & Haas deal. impact inventory (Christian).
Maine & Maritimes
A company we looked at last winter/spring.
Recovering from poor management and diversification.
Stranded asset masking true earnings.
Look at cash flow.
Based on cash flow, trading at a discount to peers.
Also opportunities for growth and value to be recognized
(i.e. takeover target).
See VIC write-ups.
Recently on the Forum:
Voting on New Positions
Reverse Split Going Private Deals
Oil Discussion Follow-Up
USO (United States Oil Fund)
Wall Street Journal article last Friday.
Controls $3.8 billion.
Uses futures contracts to try to capture price moves of oil.
Performance -20% this year vs. -2% for crude oil.
Tracking error due to the way in which the fund rolls over
futures contracts. Basically everyone knows when the fund
rolls its contracts over so traders could charge high prices to
the fund, thus lowering its returns (costing it $120m).
This is why you want to read the prospectus and consider
how the fund tracks its target (in this case oil).
DXO (PowerShares DB Double
Long Oil ETN)
Not an ETF, but rather an ETN.
Basically a long-term contract with Deutsch Bank stating that
they will pay a certain amount at a certain date about 30
years from now based on the price movements of oil.
Deutsch Bank then does its own hedging (but there is credit
risk if Deutsch Bank because these are unsecured notes).
Aims to double the daily performance of oil.
Does that mean if oil goes down 50% in one day, DXO goes down
100% to zero?
Follow-Up on Last Week’s Oil Conversation
What do you make of the current markets?
Are you buying? If so, what?