This post by Curtis Jensen, portfolio manager at Robotti & Company, has been excerpted from a letter of the private fund he manages.
“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” –Warren Buffett
Liberty Interactive Ventures Group ($4.7 billion market cap, 6.6% position)
Liberty Ventures Group represents one of two tracking stocks of Liberty Interactive Corporation. Ventures Group’s assets include shares of Charter Communications (Nasdaq: CHTR) and Liberty Broadband (Nasdaq: LBRDK), as well as smaller stakes in other listed and unlisted companies. In April, Liberty Interactive announced its intention to acquire General Communication, Inc., (Nasdaq: GNCMA) and combine it with the assets of Liberty Ventures Group to form GCI Liberty, via a tax-free split-off.
Charter has gained critical mass in the broadband industry through its acquisition of Time Warner and Bright House Networks, and seems likely to have attractive opportunities to build value in the combined enterprise. The formation of GCI Liberty appears value accretive from a Liberty Ventures standpoint and creates another avenue for Liberty Interactive Chairman John Malone and his team to consolidate the broadband industry. Subject to certain conditions, the GCI transaction is expected to be completed by the first quarter of 2018.
Global Logistics Properties, Ltd. ($11.4 billion market cap, 5.7% position)
Singapore-listed GLP owns, operates and invests in logistics assets in China, Japan, the U.S. and Brazil. The company’s operations include modern and strategically-located warehouses and distribution centers that serve a wide range of customers, from auto suppliers to e-commerce retailers. GLP also operates a growing, $39 billion fund management platform that provides a recurring source of revenue. In July, GLP agreed to be acquired by a consortium led by the company’s CEO. The acquisition value appears fair and represents a 67% premium to the Fund’s cost basis. The transaction has the approval of GIC (a 37% GLP shareholder), has limited contingencies and is slated to close in late 2017/early 2018. On many levels, the investment in GLP exemplifies the type of investment that the Fund seeks: i) a business with multi-legged growth prospects; ii) a share price – reflecting temporary or fixable issues – that was deeply discounted to a conservative estimate of the company’s intrinsic value; iii) a strong balance sheet that protects the business and affords management a high degree of flexibility; and iv) the presence of a control shareholder whose interests are aligned with those of the outside, passive shareholders.
White Mountains Insurance Group, Ltd. ($4.0 billion market cap, 5.1% position)
White Mountains is a financial services holding company that has rationally disposed of its interests in various insurance businesses at attractive valuations during the past few years. Most recently the company announced its intent to sell its 76% interest in OneBeacon (NYSE: OB), the last of its property casualty businesses. The sale of OneBeacon will significantly boost White Mountains’ book value per share and will leave the company with relatively small interests in a nascent municipal bond insurer, a portfolio of private, insurance services-related companies and a large, short-duration bond portfolio. Simplistically, pro forma for the OneBeacon sale, White Mountains can be viewed as a closed-end bond fund trading at a modest discount to Net Asset Value. With surplus capital at its disposal, the relatively new management team will have to decide during the next one to two years whether to opportunistically re-build the company or to continue liquidating, potentially delivering extraordinary returns of capital to shareholders. While the upside in an investment with such optionality may be unclear, the downside appears limited and the presence of a high quality, fixed-income portfolio embedded in the Fund’s top holdings may serve as a natural hedge for the Fund against adverse equity market developments.
Belden Inc. ($3.2 billion market cap, 4.8% position)
With roots dating back to 1902, Belden manufactures and markets a large portfolio of signal transmission and data security products used in industrial, corporate and broadcast markets. The company’s products, including cables, connectors and other equipment and software would appear to have attractive demand trends, characterized by growth in factory automation, broadband / network deployments and related need for security. Given the “mission critical” nature of the products, relative to their low cost, Belden (and its peers) generally enjoy attractive and stable margins. Management, led by a former Danaher executive, appears to be laser-focused on cash flow and returns on capital and ought to be able to continue to build the business through both internal development and bolt-on acquisitions. As well, there appear to be opportunities on the capital allocation front: the company recently re-financed a portion of its debt, a move that is expected to add $0.34 per share to 2018 earnings, after-tax (versus an estimated 2017 cash EPS of $4.50 – $5.00). Shares were purchased at a high single-digit, free cash flow yield.
Seitel, Inc. 9.50% Notes due 4/15/19 (Private, 4.5% position)
Founded in 1982, Seitel is a leading provider of onshore seismic data to the North American oil and gas industry. The company boasts an extensive library of three-dimensional databases for licensing, including data on oil, liquids and gas in various unconventional plays. In 2007 ValueAct Capital took Seitel private and the company remains privately held today. Seismic data is a reasonably long-lived asset that generates very high margins but whose sales tend to be unpredictable. Public companies in the seismic industry repeatedly get into trouble by forgetting that the volatility in oil and gas exploration (and related data sales) does not match well with a leveraged balance sheet1. Seitel twice found itself over-levered; it entered bankruptcy back in 2004 and was recapitalized in 2011 by an investment from Centerbridge. The Fund’s investment in the Notes ought to provide an equity-like return over the two years left until maturity, and should be protected by covenants within the bond indenture and cash on the balance sheet (accounting for 25% of the outstanding debt and expected to grow), as well as the value of the company’s library which continues to expand through selective new data acquisitions.
Alternatively, given the attractive spreads presently available in the high yield market, it is plausible that the company could re-finance the Notes, pay down a significant portion of the current issue, extend the maturity profile and dramatically lower its interest expense.
On the one hand, the Fund’s early investment results are satisfactory, but progress on “filling out” the portfolio has been slower than expected. The torrents of “blind capital,” e.g., index funds, ETFs and Central Banks rushing into risk assets, along with the market’s euphoric reaction to President Trump’s pro-business rhetoric in recent months, have temporarily re-priced broad swaths of the U.S. stock market. That upward repricing has swept up many of the securities in the Fund’s “inventory,” reducing the margin of safety to unacceptably low levels, in my view. There is ample evidence of pro-cyclical behavior by corporations and complacency on the part of investors that, experience tells me, I should resist and is the inspiration for the Buffett quote at the outset of this letter. Fortunately, I do not equate “portfolio activity” with progress and I prefer the “risk” of lost opportunity to that of lost capital.
Fund Management specifically eschews any forecasts about markets or the economy, but it seems difficult to handicap whether any of Trump’s rhetoric will actually translate into coherent legislation and ultimately, favorable business conditions on Main Street. From what I can tell, one would need an advanced degree in abnormal psychology and a virtual reality headset to really understand what is going on in Washington these days!
The Fund’s Approach
The Fund is a concentrated, value-oriented investment fund that employs a fundamentals-based process, grounded in primary research, to identify and invest in securities–primarily in small and mid- cap equities–whose public market prices appear to reflect a significant discount to their intrinsic or economic value. The approach is rooted in a “business owner’s mindset” used to establish a range of intrinsic values, assess prospects for fundamental changes in business economics, analyze balance sheets and identify management incentives as they relate to the interests of the companies’ securities holders. Given significant personal capital invested in the Fund, downside protection is a cornerstone of its philosophy.
I am interested in connecting with like-minded partners, defined as those whose investment time horizon and views of investment risk match my own. I remain firmly of the belief that a cautious, risk- conscious approach to investing like that of the Fund, where idiosyncratic risks are managed selectively, will compare favorably with passive, value-agnostic strategies in the years ahead.
The above letter, dated July 2017 is the update letter of Robotti & Company Advisors, LLC (“Robotti Advisors”) with [XXXX Fund, LLC (“XXX”)] and was sent to partners of [XXX]. This letter should be read in conjunction with the following disclosure information:
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