Purchase: Comdisco Holdings (OTC: CDCO)
Market sell-off, like today, seems to be a good time to buy illiquid stocks. My order for Comdisco Holdings (OTC: CDCO) went through. This is my first special situation investment involving a liquidation. Thanks to gurufocus.com message board poster itznuthin1 for bringing this to my attention.
Purchase price: roughly $6.9
Investment time horizon: less than 2 years
More details follow...
Comdisco, once one of the largest computer equipment sellers/leasors, filed for bankruptcy many years ago and has been undergoing liquidation for several years. You can get more information from their website and from their SEC filings (here is the latest 10Q--up to Dec 31 2008.) It is one of Warren Buffett's rare workout investments in the last decade (Buffett used to do these a lot more in his younger days, before he was heavily influenced by Munger.) Buffett has held this for a while and supposedly even added to it back in November of 2008. This is a tiny position for Buffett and you should think of it as a "fun" investment for him rather than anything spectacular.
Liquidation Process
Comdisco has, in the past, liquidated assets and then paid out a large dividend. The following chart illustrates the payment of dividends:
I believe, although I am not entirely certain, that Comdisco has indicated that it will not be paying out any dividends any more for tax reasons. My impression is that it is very close to completing its liquidation and will likely buy back all the shares at once.
Upside Potential
What is the potential return? The following image shows my (amateur) analysis of the latest (period ending Dec 31, 2008) balance sheet:
If you are interested, you should really read the latest 10Q and also look at how the balance sheet has changed over time (this gives a sense of how liquidation has progressed.)
Most of the assets have been converted to cash and I have highlighted some assets that still need to be sold. The most problematic might be those illquid investments in private companies. I hope they can somehow get rid of them soon, rather than letting this drag on for years.
The most optimistic case, where we assume that assets can be sold for the prices on the balance sheet and liabilities do not exceed what is on the balance sheet, yields a share price of $10.16. If your purchase price is $7, that yields a potential return of 45.1%.
A more realistic case--the one I use to make my judgement--is to assume that half the asset value, excluding cash, is lost or has to be paid to the liquidators/Comdisco employees/asset managers/etc. In this case, the upside is 27.4% if your purchase price is $7.
Time Frame
Unlike arbitrage in M&A deals, liquidations do not have a specified time frame. The main risk with liquidations, assuming you did your asset valuations properly, is that they can drag on for an unspecified length of time. Not only does this involve increased costs related to liquidation, it also means that you are paying an opportunity cost (for example, if the upside is 30% and it takes 3 years to liquidate rather than one, the annual return will be quite different.)
My guess is that we are very close to the end of liquidation. There were some legal issues that had to be resolved and those seem to be mostly out of the way. Comdisco also indicated last year that some of its assets are in illiquid holdings but, simply looking at the balance sheet, it seems that they have very little to liquidate. I suspect, once they somehow sell their investment holdings, they will try to wrap up the tax situation and will be done.
Estimated end of liquidation: end of 2009 (1 year)
Worst case date for winding down everything: end of 2010 (2 years)
Expected Return
If you assume that the liquidation occurs in one year, you are looking at an annual return ranging from 27% to 45%. If you think it will take two years, cut those numbers by two to get the annua lreturn (approximate annual estimate). If you think it will take longer, the numbers get worse. I would say that if you believe this will take more than 2 years, it is not worth investing in this.
If you think the probability of 2 years is 50% and 1 year is 50% then my expected return is 20.25% (50% of 27% + 50% of 13.5%) .
The special quality about this investment is that the downside, ignoring currency changes or fraud, is zero! Even if you ignore all assets except cash, and subtract all liabilities, you will get a share price around $8.4. And unlike Graham net-net investments, where there is always a possibility of management wasting money on new projects or money-losing operations, this venture is forced to doing nothing other than liquidating its assets. So if you can purchase this below that, the risk is extremely low.
Big Risk: Currency
If you are a foreigner, like me, these deals, similar to all M&A, presents currency risk. I'm bullish on the US$--even if it declines, I don't think it will be that much--so it isn't as big of a concern. But nevertheless, if the C$ appreciates against the US$, I'm in trouble. A 20% move in the currency, which is historically very large but not so large in the last year, would almost wipe out everything. :(
Overall Thought
The upside is quite low compared to other opportunities that may be available. As examples of opportunity cost here are some: I have also looked at potential liquidations of Soapstone Networks (SOAP) and Mathstar (MATH)--refer to the activist-oriented blog Greenbackd for info; risk arbitrage of Westaff (WSTF); junk bonds yielding 15%+ and 80%+ capital gains pontential; common shares with earnings yield of 10%+ (P/E=10.) So, these days, deciding where to deploy capital is a decision in itself. My Comdisco position is kind of small and I decided to allocate some capital to that because, although the upside is lower than the aforementioned possibilities, the downside (ignoring C$ fluctuation) is zero. If you are in the mild-deflation camp like I am, earning even 5%, although I hope it ends up being more than that, is acceptable compared to potential capital losses in other schemes.
This is an extremely illiquid stock so if anyone is thinking of buying it, make sure you place a limit order and specify the price.
There are also listed Rights (OTC: CDCOR) that you may want to take a look at. The Rights entitle one to a percentage of the liquidated value and you should really read the documents to get an understanding of it. I decided to go with the common shares instead due to liquidity concerns.
Purchase price: roughly $6.9
Investment time horizon: less than 2 years
More details follow...
Comdisco, once one of the largest computer equipment sellers/leasors, filed for bankruptcy many years ago and has been undergoing liquidation for several years. You can get more information from their website and from their SEC filings (here is the latest 10Q--up to Dec 31 2008.) It is one of Warren Buffett's rare workout investments in the last decade (Buffett used to do these a lot more in his younger days, before he was heavily influenced by Munger.) Buffett has held this for a while and supposedly even added to it back in November of 2008. This is a tiny position for Buffett and you should think of it as a "fun" investment for him rather than anything spectacular.
Liquidation Process
Comdisco has, in the past, liquidated assets and then paid out a large dividend. The following chart illustrates the payment of dividends:
I believe, although I am not entirely certain, that Comdisco has indicated that it will not be paying out any dividends any more for tax reasons. My impression is that it is very close to completing its liquidation and will likely buy back all the shares at once.
Upside Potential
What is the potential return? The following image shows my (amateur) analysis of the latest (period ending Dec 31, 2008) balance sheet:
If you are interested, you should really read the latest 10Q and also look at how the balance sheet has changed over time (this gives a sense of how liquidation has progressed.)
Most of the assets have been converted to cash and I have highlighted some assets that still need to be sold. The most problematic might be those illquid investments in private companies. I hope they can somehow get rid of them soon, rather than letting this drag on for years.
The most optimistic case, where we assume that assets can be sold for the prices on the balance sheet and liabilities do not exceed what is on the balance sheet, yields a share price of $10.16. If your purchase price is $7, that yields a potential return of 45.1%.
A more realistic case--the one I use to make my judgement--is to assume that half the asset value, excluding cash, is lost or has to be paid to the liquidators/Comdisco employees/asset managers/etc. In this case, the upside is 27.4% if your purchase price is $7.
Time Frame
Unlike arbitrage in M&A deals, liquidations do not have a specified time frame. The main risk with liquidations, assuming you did your asset valuations properly, is that they can drag on for an unspecified length of time. Not only does this involve increased costs related to liquidation, it also means that you are paying an opportunity cost (for example, if the upside is 30% and it takes 3 years to liquidate rather than one, the annual return will be quite different.)
My guess is that we are very close to the end of liquidation. There were some legal issues that had to be resolved and those seem to be mostly out of the way. Comdisco also indicated last year that some of its assets are in illiquid holdings but, simply looking at the balance sheet, it seems that they have very little to liquidate. I suspect, once they somehow sell their investment holdings, they will try to wrap up the tax situation and will be done.
Estimated end of liquidation: end of 2009 (1 year)
Worst case date for winding down everything: end of 2010 (2 years)
Expected Return
If you assume that the liquidation occurs in one year, you are looking at an annual return ranging from 27% to 45%. If you think it will take two years, cut those numbers by two to get the annua lreturn (approximate annual estimate). If you think it will take longer, the numbers get worse. I would say that if you believe this will take more than 2 years, it is not worth investing in this.
If you think the probability of 2 years is 50% and 1 year is 50% then my expected return is 20.25% (50% of 27% + 50% of 13.5%) .
The special quality about this investment is that the downside, ignoring currency changes or fraud, is zero! Even if you ignore all assets except cash, and subtract all liabilities, you will get a share price around $8.4. And unlike Graham net-net investments, where there is always a possibility of management wasting money on new projects or money-losing operations, this venture is forced to doing nothing other than liquidating its assets. So if you can purchase this below that, the risk is extremely low.
Big Risk: Currency
If you are a foreigner, like me, these deals, similar to all M&A, presents currency risk. I'm bullish on the US$--even if it declines, I don't think it will be that much--so it isn't as big of a concern. But nevertheless, if the C$ appreciates against the US$, I'm in trouble. A 20% move in the currency, which is historically very large but not so large in the last year, would almost wipe out everything. :(
Overall Thought
The upside is quite low compared to other opportunities that may be available. As examples of opportunity cost here are some: I have also looked at potential liquidations of Soapstone Networks (SOAP) and Mathstar (MATH)--refer to the activist-oriented blog Greenbackd for info; risk arbitrage of Westaff (WSTF); junk bonds yielding 15%+ and 80%+ capital gains pontential; common shares with earnings yield of 10%+ (P/E=10.) So, these days, deciding where to deploy capital is a decision in itself. My Comdisco position is kind of small and I decided to allocate some capital to that because, although the upside is lower than the aforementioned possibilities, the downside (ignoring C$ fluctuation) is zero. If you are in the mild-deflation camp like I am, earning even 5%, although I hope it ends up being more than that, is acceptable compared to potential capital losses in other schemes.
This is an extremely illiquid stock so if anyone is thinking of buying it, make sure you place a limit order and specify the price.
There are also listed Rights (OTC: CDCOR) that you may want to take a look at. The Rights entitle one to a percentage of the liquidated value and you should really read the documents to get an understanding of it. I decided to go with the common shares instead due to liquidity concerns.
I'll be interested to see how this works out.
ReplyDeleteI've been buying the CDRs on this (ticker: CDCOR) whenever I can get a large fill.
ReplyDeleteThere are 22 million dollars to distribute to the CDRs, on something like 145 million shares, which puts the value per share at about 15 cents.
WideMoatInvesting,
ReplyDeleteWhen do you think Comdisco will wind down completely?
I don't have any special insight into the timetable.
ReplyDeleteSome phrases in the latest Q suggest that they are getting close to the end. They are prepared to leave some of their Mexican tax assets behind. They have an interest in the OpenTable IPO which should happen in the next month. There are 2.8 million in assets left to liquidate.
I expect that it closes before the end of year, but that is just my best guess.