DENALI INVESTORS, LLC · 2015-05-10 · DENALI INVESTORS, LLC An Uncommon Fund… Modeled after the...
Transcript of DENALI INVESTORS, LLC · 2015-05-10 · DENALI INVESTORS, LLC An Uncommon Fund… Modeled after the...
ANNUAL MEETING 2009
DENALI INVESTORS, LLC
DENALI INVESTORS, LLC
An Uncommon Fund…
� Modeled after the original Warren Buffett
Partnerships hedge fund of the 1950’s
� Value-Based
� Special Situations
� Opportunistic
� Concentrated
� Net Cash
Our framework is rare in today’s world
Overview
OBJECTIVE Produce superior long-term absolute and relative returns versus the S&P index
STRATEGY Combine “Generals” and “Workouts”; Focus on identifying value-based investment ideas and margin of safety
PORTFOLIO Build a portfolio of 5 – 15 very attractive, non-market correlated investment ideas which have high conviction through fundamental research
“Generals” + “Workouts”
Generals� Undervalued stocks
� Neglected
� Long time horizon
� Favorable risk/reward
� Shorts
� Flawed business, management
� Unrealistic expectations
� Negative catalysts
Workouts� Non-recurring; Catalyst
� Internal/External
� Mergers
� Tender Offers
� Spin-offs
� Capital Structure Arbitrage
� Reorganizations
� Liquidations
� Bankruptcies
Flexible search for opportunities…
Investment Philosophy
VALUE Buy Cheaply. Invest at steep discounts to intrinsic (business) value
FUNDAMENTALS Be an Owner. Approach investments as an owner of a business, rather then chasing momentum or technicals
CONCENTRATION Be Selective. A handful of great, high-conviction ideas is better than a hundred mediocre ones
LONG-TERM VIEW Use Time. Patient long-term investing creates a distinct advantage over short-term speculation
NET CASH Don’t Risk Ruin. Leverage is hazardous no matter the number of PhD’s
A Bit About Q4 2008…
�Generals
Generals – Long/Short
15 - 30%Net
10 - 15%Short
30 - 40%Long
% Exposure
Our Generals consist of a handful of longer-term
ideas, and we are looking to add more.
Q4 2008
� Special Situations
Q4 2008 – Idea #1
�An Election Merger
Deal Background
Precision Drilling (PDS) buys Grey Wolf (GW)
� GW and PDS announced a merger in Aug 2008
� Tail end of an energy boom.
� The election merger consideration for each GW share was either 1) $9.02 in cash per share, or 2) 0.4225 share of PDS. Election subject to proration.
� By December 2008, in combination with the market market, GW traded down from $9 per share to about $6 per share. PDS from $20 - 25 to $6 - 7 per share.
An opportunity hiding in plain sight…
Possible Outcomes
Outcome Band includes:
� The deal closes (PDS buys GW)
� The deal breaks (PDS does not buy GW)
� GW shareholder makes cash election
� GW shareholder makes share election
� GW shareholder makes no election (defaults
to share election)
� Something in between…
Ways to Place an Investment
The Approach…
“Short” GW & hedge PDS
� Counterintuitive (typical to long target / short acquirer)
� Tactics are critical
� Standard merger arb analysis on GW alone is limited
� Insurance/hedge “cost”
� Combination increases safety
� “The Ratio” – 1/10 risk/reward ratio
Heads I Win, Tails I Don’t Lose
Combining the GW short and PDS hedge:
Investment boils down to – heads I win (likely a
lot), tails I break even.
� The near-term catalyst creates value – the
merger will either close or break.
� The Outcome Does Not Matter: the potential for 100% upside exists on a close or
break.
So What Happened?
� Deal closed Dec 19th � Hiding in plain sight
EventsCatalystsInsurance active
1
1
2
2
Review
� Special situation
� Optionality… that’s free
� Hedging (Insurance)
� “The Ratio”
Heads I win, tails I don’t lose…
Q4 2008 – Idea #2
�Free Spin-Off
PNX Spin-Off of VRTS
Phoenix (PNX) Spin-off of Virtus (VRTS)
PNX VRTS
Phoenix (PNX)
PNX is a Tier 2/3 player in the insurance (life and annuity) space.
Valuation
� Sector volatility creates value-based opportunity.
� Book value, $0.9b upon spin, implies 0.2x book.
� Assume large haircut to book value, metrics.
� PNX pricing is still far below conservative values.
� Pricing implies high likelihood of bankruptcy scenario.
� No credit to VRTS…
Virtus (VRTS)
VRTS is a Tier 2/3 player in the space.
A company with $20b - 25b in AUM.
Valuation
� VRTS pricing at 0.2% of AUM… At 50bps, $20 per share (adj. for the 20 to 1 spin ratio).
� At 0.3x book value at spin.
� Net cash of ~$3 per share, NOLs of ~$40 per share ($20 federal; $20 state; taxable spin).
� We should remember that the value from VRTS - it is free to us.
Valuation – PNX & VRTS
0.2x0.8xPB
$180m$1.2bMC:
$1.50$10Price:
DEC 08
PNX
SEP 08
PNX
* 20 to 1 share ratio on spin
0.2%% of AUM
0.3x0.4xPB
$58m$360mMC:
$10*$3.00Price:
JAN 09
VRTS
JAN 09
PNX
Pricing implied bankruptcy…
Deal Background
PNX was a stomping ground for hedge funds that helped create the catalyst…
2
1
Spinoff Checklist
� Valuation
� Capital structure
� Orphan business/stock
� Institutional ownership/pressures
� Management incentives/ownership
� Fundamentals
Ways to Place an Investment
Pre-spin
Play the break up value
- Via equity or options
Post-spin
Buy PNX on the cheap
Buy VRTS on the cheap
- Via equity or options (time arbitrage/LEAPs)
Options/Volatility create very attractive risk/reward…
Review
� Spinoff
� Inefficiency built into the system
� Valuation
� “The Ratio”
Q4 2008 – Idea #3
�Forgotten Merger
Idea #3 (Presented 11/20/08)
A Merger Arb…
OVEN – TurboChef ($1.60)
- MIDD is a consolidator… (know Selim Bassoul)
- $4.90 per share consideration: $3.67 cash (funded via revolver), $1.22 stock (MIDD $25 x 0.0486)
- Planning to close Q4 2008- Special meeting for OVEN vote (simple majority)
- Management on board (20% ownership)
- Synthetic via options (size, cash inflow, cost basis)
Q4 2008 – Idea #4
� Self-Tender Offer
Idea #4 (Presented 11/20/08)
A Tender Offer…
HLTH – HLTH Corp. ($8.10)
- Up to 80m shares (of 185m outstanding), no minimum- $8.80 cash per share tender (funded via $1b net cash)
- 9% return in one week
- Expiration 11/25/08 (next Tuesday)- Management on board and have tendered (think
motivations & busted merger…)- Unlikely to reach 80m share max
- Don’t forget: post tender potential…
Looking Forward
� Capital structure arbitrage
� Merger arbitrage
� Corporate liquidations
� Tender offers (self & third party)
� Upcoming bankruptcy wave
Thank You