Thursday, February 4, 2010

ACAS: Why So Sudden A Need To Sell Shares?

Unlike the ECAS deal, in which investors had lots of notice what ACAS was up to when management announced it wanted to "sell" shares below NAV (by exchanging them for ECAS shares that were even more below NAV, thus increasing ACAS' post-transaction NAV), ACAS hasn't educated the public about its latest solicitation of authority to sell shares below NAV.


(1) ACAS is working on a deal in which it doesn't want competitive suitors, or in which it is working under a nondisclosure agreement. The evidence that ACAS has a specific deal in mind is that ACAS has given a very short time frame in which to solicit the necessary shareholder approval. ACAS' desire to make sure the approval is obtained is underscored by the fact that ACAS had someone call The Jaded Consumer soliciting a recorded proxy vote of shares held by the Jaded Consumer.

(2) ACAS' distressed assets group has a special situations group that looks for distressed-priced businesses that stand to benefit from ACAS' operations expertise. Founded in 2005, the group doubtless has been swamped with exciting opportunities, and is surely clamoring for capital at any price that is less discounted than that needed to enter distressed opportunities with profitable price-adjusted results. By this I mean that ACAS knows that investing a dollar for a $1.10 return is a loss if ACAS has to sell shares at half NAV to raise the $1; ACAS needs to adjust prices to accommodate the cost to ACAS of $1 in shares to assess the viability of investments. An asset's purchase for ACAS shares is still accretive to NAV despite shares being valued at half NAV if the asset itself can be had for $0.10 on the dollar. 5:1 isn't as good as 10:1, but it's awfully good. Why doesn't ACAS wait until share price exceeds NAV? "Speed is a critical component" in the special situations market.

Upshot? Vote your shares "yes" or decide you lack confidence in management and vote with your feet. Voting "no" seems to make no sense.

Why is ACAS plummeting? Apparently, someone thinks ACAS has a liquidity problem despite having hundreds of millions in cash. But think for a minute. By adding high-return assets that are hard to value without either taking on debt (forbidden because of BDC debt ratio limits) or losing cash (likely required to solve issues with outstanding creditors), ACAS both grows its business and de-leverages its balance sheet.

Nice, eh?

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