Monday, September 7, 2015

Special Situation Ideas for week of 7-September-15

AFTER a long hiatus, I have decided to start writing again. The writing took a break, since I was busy with trying to establish a small investment partnership. The partnership will now complete its first 2 years, going on to its 3rd, having survived disastrous markets over the last 12 months. Happy reading!!!


TGNA is a media and marketing solutions company that operates through two business segments: Broadcasting and Digital. TGNA is a recent spinoff from Gannett (GCI), after GCI decided to separate its paper publishing business, mainly newspapers. The reason Ilike TGNA is because of certain key assets it holds. Firstly, it owns “” which is one of the largest websites for car dealers and consumers regarding information they need on cars. This asset should benefit from the recent uptrend in car buying activity, which is usually followed by incremental purchase of used car. In both instances, which define the up-cycle and down-cycle in the auto industry, “” should generate higher advertising revenues. Secondly, TGNA owns “”, which should benefit from the change in employment cycle and increase in people looking for jobs within the US and outside. Lastly, and most importantly, TGNA owns 46 broadcast stations that are watched by over 33% of the US population. It’s also the largest owner of NBC and CBS affiliate stations, amongst others. With the change in viewing patterns, we believe there is a huge opportunity for TGNA to generate incremental revenue from contract negotiations related to the licensing fees that TGNA gets paid to transmit content (transmission fee).  With approximately 90% of the contracts up for renegotiation within the next 12-18 months, TGNA should be able to demand higher fees when these contracts get renegotiated. What makes a good case in support of higher fees is the upcoming FY16 US Presidential election, in addition to the upcoming US Senate races in key states. With TGNA owning TV stations with viewership in certain key swing states where politicians are willing to spend on pricy TV ads, the firm will be able to negotiate from a position of strength. In addition to the elections, further strengthening TGNA’s hand are the FY16 Olympics in Brazil that should considerably increase TV viewership. What’s more is that both the Presidential elections and the Olympics are happening in the same year. TGNA believes that at current rates, it is still grossly underpaid compared to others, such as ESPN. We believe the shares could rise 30% to 40% from their current trading price by 4Q16.


Patterson Company is a distributor serving three business segments: dental, veterinary and rehabilitation supply markets. My original thesis while establishing a position in PDCO few weeks ago, was that the company will restructure and eventually go private. Since then, PDCO has made announcements to reorganize their business and their management has undertaken certain tangible actions. Of the three business segments, it announced the sale of its rehabilitation supply business to Madison Dearborn Partners for USD 715m. While selling the smallest of the three divisions, PDCO also made an announcement to acquire Animal Health International for USD 1.1bn. PDCO said that it would use the proceeds from the sale of rehabilitation business to pay down debt. The restructuring has enabled PDCO to double its veterinary business and become a leading player in dental and veterinary space. The company is approximately 16% owned by its employees with good cash flows and a stable business model along with a 1.8% dividend yield. I believe the company can be taken private at a higher price than where it currently trades. There were reports last week that the firm is exploring alternatives to be taken private, however, if it happens soon or not remains to be seen.   

HOT operates as a hotel and leisure company worldwide. HOT initially got my attention after announcing a spin-off of its vacation ownership business to its shareholders. Further analysis revealed that, in addition to creating two separate companies, HOT was undervalued on sum of the parts basis to where it was trading. My thesis was also supported by the recent macro events, including lower fuel prices, which we believe would lead people to travel and spend more on vacations. With prime properties in the US and worldwide, HOT was a good name to own in that space. Furthermore, the spin-off of its vacation rental business will make HOT a pure play hotel operator. The two separate firms can help HOT unlock shareholder value, either as standalone entities or as eventual takeover targets thus generating profits for our partners over the next 12 to 18 months. The current spin-off remains on schedule, due to be completed in 4Q15. Since we established our position, HOT has announced that it will move further towards a service heavy model, selling properties around the globe while retaining property management contracts. The company also changed its top management, and retained Lazard in April 2015 to explore financial and strategic alternatives in order to increase shareholder value. In addition to retaining Lazard, what might further accelerate the monetization process is the involvement of certain large hedge funds in this name, which disclosed their positions after we bought the shares. It’s rumored that the funds are pushing HOT’s management to pursue a sale. There have been reports in the media that the company might have initiated a sale process, however such reports are not confirmed. We believe the company is fairly valued closer to USD 90 a share, more than 20% from where it currently trades.

HTZ rents and leases cars and trucks in the United States and internationally. HTZ got my attention because of two major events – an admission of accounting irregularities by HTZ whereby HTZ was obligated to restate 3 years of its financials, and secondly, the announcement of a spin-off of HTZ equipment rental business. A slow but steady selloff in the stock price began after the announcement by HTZ that it will have to restate 3 years of its financial statements. NYSE threatened HTZ with delisting if it did not comply within a given time limit. This coupled with the knowledge that HTZ was struggling to integrate the FY12 acquisition of Dollar Thrifty lead to a massive stock selloff. The price fell from USD 28-USD 30 per share to the current share price of USD 17. The sell-off was made worst by reports that car rental firms will have issues increasing car and equipment rental rates in the short term, while simultaneously facing competition from services such as Uber. Contrary to the popular belief, we bought the shares thinking that over the next 12 to 18 months HTZ should be able to resolve issues and regain its footing, leading to a recovery in its share price. Since our initiating the position, HTZ announced the appointment of a new CEO, John Tague, who is a former United Airlines executive. This appointment comes in addition to 2 Carl Icahn nominees as directors on the board. Carl Icahn is a known activist investor who owns more than 11% of HTZ stock. The CEO’s appointment was followed by certain other key appointments. In addition to appointment of John Tague, HTZ appointed Tyler Best and Tom Kennedy as its CIO and CFO. Both worked for a firm that was owned by Cerberus Capital and housed brands such as Alamo and National. These guys cut costs, restructured the company, and sold it to Enterprise for a price reportedly more than five times what Cerberus had paid.  With this new management, HTZ’s goal is to right the wrongs and grow its core business. To that extent, HTZ took the first step and successfully restated 3 years of its financial statements, putting aside the threat of NYSE delisting and thus engaging many demotivated investors. Management then went on to reaffirm its $1bn share buyback program and announced that it is looking into exiting certain non-core businesses. HTZ also announced that it has furthered its cost cutting initiatives by, increasing its goal of cutting costs by an additional $100M to a total of $300M. Furthering the cost reduction goal is HTZ’s long awaited announcement to fully assimilate Dollar Thrifty acquisition and finally integrate and streamline its IT systems by year-end. Aside from the current ongoing turnaround that should unlock shareholder value, investors often seem to ignore HTZ’s 16% stake in
 China Auto Rental, China’s leading car-rental company. This stake could be worth $900 to $1bn. What remains a key risk to our thesis is the execution by management. This execution risk is mitigated by the involvement of two well-known activists, Carl Icahn and Jana Partners, both of whom own substantial stakes in the company. We believe that on the sum of the parts basis, HTZ could be worth north of $25 a share, which is approximately 30% to 35% higher than where it currently trades.

Axiall is a manufacturer and international marketer of chemicals and building products. The company operates in three basic segments: Chlorovinyls, Building Products and Aromatics. AXLL was formed in FY13, after the company, formerly known as Georgia Gulf merged with PPG’s commodity chemicals business. AXLL got our attention due to number of factors, chief among them is the business reorganization AXLL is undergoing, and the involvement of activist shareholders pushing the company to divest assets or put itself up for sale. This push for sale becomes especially relevant in light of AXLL being the subject of a takeover offer few years ago by Westlake Chemicals. Since we established our position, AXLL announced the appointed of an interim CEO who has taken certain tangible actions. First among them is his reiterating the timeline on the sale of the smallest of the three AXLL segments. The management believes that the divestiture of the Aromatics segment will happen by 3Q or 4Q of FY15.  In addition to this announcement, management announced in the most recent earnings call that it is exploring strategic alternatives for its Building Products segment, including a sale. In response to the question on the sale of the entire company, the CEO commented that “every option is on the table”. We believe that if the two divestitures of Aromatics and Building Products segment are executed properly, then it opens the door for the sale of the remaining company. There have been recent trends indicating consolidation in the Chlorovinyls sector – a segment that will remain after AXLL disposes the other two business divisions. This sector was marred in the past due to overcapacity, which impacted revenues and negated any positive impact from lower raw materials costs. However we believe that the recent sector M&A (eg: Olin merging with DOW’s Dow chlor-alkali division), will lead to capacity reduction in this sector. Sold or not, the remaining AXLL segment should report much better relative performance in late FY16. The execution risk by the management remains, however, once again involvement of several vocal activists mitigates that risk for us. We believe the real value of the company is somewhere in the high 30s, closer to $38 to $40 a share.

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