AntonioSolano
The following segment was excerpted from this fund letter.
Aimia is a holding company managed by value investors which is undergoing an asset conversion. Having sold its minority stake in the Aero Mexico miles loyalty program last year, the plan was to deploy the proceeds into good operating businesses at an attractive price. This would also allow the company to utilize its substantial NOLs.
This year the company announced that it has agreed to buy two businesses. Tuffropes is an Indian family-owned company which manufactures specialty ropes and netting for the marine industry. Bozzetto is a European specialty chemicals business. In both cases, management partnered with the same private equity firm which sourced the ideas and which will receive a percentage of the profits above an 8% growth rate in profits.
Many investors seem to be unhappy with these transactions. Reasons cited include the heightened risk of acquiring foreign companies, having to give up a portion of the economics to the private equity firm, the fact that multiples of profits paid for the acquired businesses weren’t particularly low, insufficient disclosure about the historical economics of the acquired companies, general frustration that the stock hasn’t done well and that management didn’t just return its ample capital to the shareholders.
It’s easy to start letting emotions drive the narrative when the stock hasn’t been performing as investors had hoped. I would wager that if the stock were trading at 2x its current levels, which is closer to my estimate of its intrinsic value, there would be far fewer complaints. However, I do share some of the concerns and wanted to share my view on the company’s transformation and where it leaves the shares as an investment at current prices.
I agree that the historical financial performance disclosure of the acquired businesses is insufficient, and I have shared my concerns with the management. I am also not thrilled to be sharing future business economics with a PE firm. However, in both cases the company was able to avoid an auction, so perhaps the PE firm did add some value. The ultimate measurement of success will be based on the returns the company will earn on its capital employed in these two transactions, not based on how they were found or structured.
My estimate is that the two businesses being acquired together will generate normalized operating income that will slightly exceed the sum of corporate costs, preferred dividends and the interest expense on the non-recourse subsidiary-level debt that the company intends to obtain shortly after the transactions close.
Assuming everything goes according to plan, this should leave the company with the following:
- Cash of approximately CAD 2.25 per share
- Other investments valued at about CAD 3.50 per share at cost
- A portfolio of two profitable and moderately growing businesses and substantial Net Operating Losses to offset future tax payments for many years
- This compares to the recent stock market price of the equity at about CAD 3.30
What can go wrong?
- Management might not be able to execute the refinancing on acceptable terms, leaving it with less leverage and less or no excess cash. This is unlikely to be a permanent issue but if the credit markets turn sour, or perhaps if they already have turned sour, then it might take anywhere from quarters to years to get the refinancing done.
- India is not the easiest place for Western companies to operate. From my limited experience, things don’t always work as acquirers expect. To make things worse, Tuffropes was owned by a family that is completely exiting in this transaction. The good news is that Aimia management is hiring locals to run the business. The bad news is that the price paid, by my estimates ~ 13x operating income and 18x after-tax net income on a recapitalized basis, assumes that things will go well.
- Bozzetto, the European specialty chemicals business, is cyclical. There is a chance that the sellers sold Aimia on a level of profit that’s cyclically too high. The good news is that Bozzetto management is staying on and is rolling over a meaningful portion of its proceeds into the equity of the subsidiary.
In thinking about the worst-case scenario for my intrinsic value estimate, I made the following assumptions:
- Assumed that both acquisitions produce much lower profits than management expects, and that both are sold for much lower multiples of that reduced profit than what management paid
- Assumed that the holding company is run for 5 years at a loss and then liquidated
- Assumed a 20% to 50% discount from historical cost for the other investments
- No value ascribed to NOLs
The result is my worst-case value estimate in the low CAD 3s, not far from where the current stock price is trading. I am not oblivious to the risk that things might not go the way that management expects. However, given my analysis that there is limited long-term downside to my worst-case value and that the stock is trading at less than half of my base case value, I am maintaining our medium-sized position.
IMPORTANT DISCLOSURE AND DISCLAIMERSThe information contained herein is confidential and is intended solely for the person to whom it has been delivered. It is not to be reproduced, used, distributed or disclosed, in whole or in part, to third parties without the prior written consent of Silver Ring Value Partners Limited Partnership (“SRVP”). The information contained herein is provided solely for informational and discussion purposes only and is not, and may not be relied on in any manner as legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or vehicle managed or advised by SRVP or its affiliates. The information contained herein is not investment advice or a recommendation to buy or sell any specific security. The views expressed herein are the opinions and projections of SRVP as of March 31st, 2023, and are subject to change based on market and other conditions. SRVP does not represent that any opinion or projection will be realized. The information presented herein, including, but not limited to, SRVP’s investment views, returns or performance, investment strategies, market opportunity, portfolio construction, expectations and positions may involve SRVP’s views, estimates, assumptions, facts and information from other sources that are believed to be accurate and reliable as of the date this information is presented—any of which may change without notice. SRVP has no obligation (express or implied) to update any or all of the information contained herein or to advise you of any changes; nor does SRVP make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. The information presented is for illustrative purposes only and does not constitute an exhaustive explanation of the investment process, investment strategies or risk management. The analyses and conclusions of SRVP contained in this information include certain statements, assumptions, estimates and projections that reflect various assumptions by SRVP and anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. As with any investment strategy, there is potential for profit as well as the possibility of loss. SRVP does not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk and investment recommendations will not always be profitable. Past performance is no guarantee of future results. Investment returns and principal values of an investment will fluctuate so that an investor’s investment may be worth more or less than its original value. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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