On ACAS' Issuance

Prelude:
Today, my paper loss in ACAS has declined to less than half my basis. This means that if ACAS – which as I mentioned is now a 10-bagger off its 2009 nadir – doubles again, I'll be in the black.

Sound crazy?

Consider that over most of the history of ACAS, it's traded at a premium to its net asset value. Currently, ACAS is trading at a steep discount to NAV. The fact that the street can get excited enough to bid ACAS to $6 on the strength of news ACAS issued shares at $5 is something that should make one stop and think a bit about just how undervalued ACAS is just now.

The Main Event:
I suspect (on the basis of the crazy analysis I've heard of the ACAS issuance, and on the strength of the identity of the major buyer) that ACAS' buyers weren't creditors being paid to accept strange credit terms, but genuine investors interested in what ACAS can do with $300m in cash that's not locked up in a forebearance agreement with longstanding creditors. In my fantasies, this is a distressed asset purchase that turns out to be a gold mine. Of course, it's possible that the distressed-asset buyer that invested in ACAS did so on the basis of the manipulation of an accounting principle – that is, that ACAS can, by doing something trivial like paying debt owed by ECAS, cause ECAS to be revalued in such a way as to impact now only ACAS' NAV, but ACAS' ability to function normally.

The other time ACAS issued "dilutive" shares was to buy ECAS, which was also trading well below NAV – so much so that the net effect of the transaction was accretive. I suspect that ACAS has another transaction in mind that similarly involves known quantities and does not involve speculating on the future performance of some new acquisition target. The question is whether it's some sexy distressed-asset find with a future potential that makes it a steal, or whether (like the ECAS purchase) it's an accounting-driven transaction designed primarily to revalue existing assets. A one-time accounting bump might not be a big benefit for long-term holders, while a super-discounted quality asset could pay off for years. You can see where my heart is. Still, a short-term accounting-driven transaction could set ACAS up for a much better negotiating position with its creditors, which has long-term benefits of its own.

We may learn more May 5, when management discusses its May 4 report of its 1Q2010 results.