Since my last update, my Absolute Returns portfolio initiated small positions in a post bankruptcy oil and gas company, Par Petroleum and in the luxury retailer, the subject of a buyout by Canada’s Hudson Bay
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Our position in Saks was initiated during a temporary dip in prices following a report that the company’s debt could be downgraded to junk status by rating agency Standard and Poor’s.
If you assume that a buyout would be debt financed and add significantly to the company’s existing debt pile, then a downgrade appears logical. However, in our opinion, a sell off in its equity is certainly not logical, given that the triggering event of the debt downgrade would be a takeout of the equity at a premium to the market price.
In our view, the buyout offer is at a price that arguably undervalues the enterprise, or at least the real estate on the company books. This prompted the almost inevitable on behalf of disgruntled shareholders.
Regardless, the company will now have a period of 40 days to solicit alternative third party bids. Starwood Capital was recently reported to be among those interested in acquiring Saks, fueling investor hopes of a bidding war.
However Starwood, with their expertise, and led by Barry Sternlight, are unlikely to overpay for a company, and given that the stock is up considerably this year, the potential upside may be less than investors are hoping for.
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Other notable events among the portfolio holdings were two major developments at French media conglomerate Vivendi. First, the company appears to be finally making progress in its attempt to divest its majority stake in Maroc Telecom and has entered exclusive talks with Etisilat regarding the sale.
Secondly Vivendi struck a deal with Activision and a consortium of investors to sell the majority of its stake in the video game maker. This deal will be remembered as one of the few transactions in which the majority holder not only failed to get paid a control premium but actually sold its interest at below market prices.
We continue to hold a reasonable percentage of cash and as always are seeking attractive opportunities in which to deploy it. We remain, as before, constrained by the limited availability of opportunities in a buoyant market.
The investments discussed are held in client accounts as of July 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
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