This will probably never happen to me again in my investing career (and I don't mean to be pessimistic or negative) - we had not one, but two, of our portfolio companies see takeovers put in for them yesterday! First day of the final Quarter of the year! Two in one day...how nice is that?
First, our largest position, Canexus (a Canadian chemical co) saw Chemtrade (competitor) put in a formal $1.50/sh bid for all of Canexus. Now we had paired down our stock position two weeks ago when Chemtrade first put in a bid at $1.45/sh (rebuffed by the Canexus Board, for some strange reason). Given the lack of engagement by the Canexus Board, Chemtrade was forced to go "hostile" yesterday morning. So we lightened up in our stock position a couple of weeks ago but added to the new high yield bond that Canexus issued last week. So we own securities across the entire capital structure of Canexus - senior unsecured high yield bonds, convertible bonds and stock (no bank debt). The real play was in the new high yield bonds where we bought a pretty big weight at 100.00 and a week later, on the back of this hostile bid, the bonds are +6.5% to 106.50 as they would become Chemtrade bonds, which is a better credit. In bond terms, that is an excellent return, especially within one week! We also have a pretty large weight in the convertible bonds of Canexus. On a change of control in the ownership of the company, the convertible bonds would be taken out at 100...we bought them around 90 and have been collecting the coupon for six months so we will be up more than 10% on the converts. Again, a low risk trade. The stock has largely played out which is why we sold some on the way up. Complicated? Maybe, but a great trade, so far.
Second, DirectCash Payments Inc. saw a bid come in from a US competitor, Cardtronics. We owned a much smaller position in DirectCash but we were lucky/smart enough to have added a bit more two weeks ago. Why did we add? Obviously not because we thought Cardtronics was going to buy them (we have been thinking that for a few years but had no idea it was coming now) but because of the cash flow analysis I perform on our portfolio investments. In fact, I just said to a prospective client in a meeting last week that DirectCash is a great example of a company that produces enough cash flow (Ebitda 65mm) to support the current Dividend (25mm) after Interest Expense, Capital Expenditures and Cash Taxes and with a dividend yield of 11%, it was time to start adding. Their payout ratio was conservative enough that they could drop about 15mm in Ebitda and still support the current dividend. In the end, a nice trade but not a great trade as we just didn't own enough. Still helps when you just bought stock at $12.87 and it gets taken out at $19 two weeks later. Every bit helps.
Both of these trades are in our Tactical Model. If you have questions (other than, "why didn't you own more DirectCash stock?"..I got that one last night from my wife) do not hesitate to contact me.
Past performance is no guarantee of future performance.