Friday, January 29, 2010

ACAS: Hungry to Buy, Wanna Let 'Em?

Remember the last time ACAS asked for authority to sell shares below net asset value? The idea was to buy ECAS, which made book-keeping sense because ECAS was itself trading below NAV, making ACAS' below-NAV share price doubly-discounted. Trading ACAS shares below NAV to get ECAS shares that were trading below book seemed to leave ACAS ahead in NAV. In the time since, ECAS has grown the China business of its Metall Technologie portfolio company and made several investment exits representing double-digit rates of return. Although ACAS has apparently looked at deals to sell ECAS, the price hasn't been good enough to tempt management to discard this tool in its global capital management arsenal.

ACAS certainly could liquidate existing assets – some, like its holdings in AGNC, are extremely liquid – but ACAS has plans for those assets, too. AGNC is providing something like $1.40 a share per quarter, which isn't a bad return on ACAS' $20 per share. 7% per quarter? Plus capital appreciation? And AGNC has such a sharp management team; how could ACAS bear to part with the rest of its investment? Now that ACAS' NAV is on the way up, why would ACAS want to part with peach investments?

So, ACAS has come back to the well, asking for permission to issue shares below NAV. Sigh.

The proxy statement echoes the argument posed here last year, that deals are so good even below-NAV fundraising is expected to yield outstanding ultimate returns:
We believe that current market conditions have created opportunities to invest in assets at prices that are at significant discounts to their economic or intrinsic fair value. For instance, the decrease in purchase multiples for some private and public companies has generated historically unusual attractive strategic investment opportunities to acquire certain middle market public companies that could prove to be accretive to our future net asset value.
Proxy Statement
Last year, this was argued here in support of the last below-NAV approval, predicted here to be approved:
ACAS will be approved to conduct the below-NAV issuance needed to close the ECAS deal and others like it; the result will be ACAS surviving its liquidity and net-worth crunch; and the due diligence that has produced ACAS its historic returns will continue to produce future returns, possibly amplified by the availability of insanely good deals during a time of broad economic crisis
Jaded Consumer, "ACAS: Profit Isn't Cash Flow"
Once again, the question is whether owners believe management warrants their confidence. If not, owners should sell. Do not pass GO, just sell.

Those who believe that management can value a deal, and work out the value of potential fire-sale purchases, will naturally vote to approve sale below ACAS upon Board approval.

The fact that NOI has stabilized and that NAV is heading north again gives ACAS some added credibility as the company navigates the waters in which it finds itself. Exactly how ACAS should be navigated through these waters is a question many may ask, but management's done an excellent job in rough times and expecting the performance to continue isn't as crazy as it sounds.

The language in the proxy makes it clear that management is contemplating deals that, like the ECAS deal, are stock deals for assets trading below their net asset value. Instead of issuing shares for cash, ACAS would issue shares for discounted assets that management believes are even more discounted than ACAS shares on the date of the transaction. Like the ECAS deal, this could be accretive rather than dilutive and would benefit shareholders. Since, according to the proxy, Malon Wilkus still has an interest in millions of shares of ACAS, I think he has a strong incentive to ensure that the shares do well over time.

I'm inclined to vote to support the fundraising so that outstanding deals can be consummated if and when they appear.

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