September, 2023
It was relatively benign period for the portfolio in the face of broader market volatility, although our mark to market on this occasion was more extreme than normal as we saw multiple spreads widen in the final days of the month well beyond where we would typically expect. As a snapshot in time, share price gyrations don't always accurately reflect the health of the underlying transactions. For us, it's an opportunity and historically where we have been able to generate excess risk adjusted returns. We view September's softness as no different and expect it to self-correct as transactions approach maturity. To a large extent it already has in the early days of October.
And on that note, it's more of the same; deals are completing, new ones take their place, and a few contested situations are occasionally thrown in the mix for good measure. We are expecting a rush of completions in the lead up to the end of the year (November in particular), which will put the portfolio in a great position to reinvest proceeds into several new and promising transactions.
Global Data Centre Group (GDC.ASX) surged with market buzz over the mooted IPO of Airtrunk. If an IPO or liquidity event occurs even close to the potential valuations being put forward by some corners of the market, it could prove a serious windfall for GDC and its one percent interest. Existing substantial shareholders continue to add to their holdings (as do we!), giving confidence in both the ability to realise assets over the medium term and that carrying values are well supported.
Cirrus Networks (CNW.ASX) returned to the portfolio following an agreed scheme of arrangement with Atturra Limited (ATA.ASX) at an implied $0.053 per share. We have seen a huge amount of consolidation in the broader IT services space over the last few years as players like Capgemini, Brennan, HCL, and even Atturra act as aggregators. Cirrus previously fended off a hostile takeover from Webcentral (WCG.ASX) back in 2021 (at $0.032 per share!) and we have followed the company since - it's large cash balance, nil debt, and drastically improved earnings in the period since Webcentral's offer made it an attractive target.
It also, however, made Cirrus an attractive investment in its own right, and Atturra's offer would need to be at a price shareholders would be willing to part with their shares for. It was evidently not high enough, and it was only after Atturra agreed to increase their offer price to $0.063 four days later that Microequities and H&G High Conviction publicly threw their support behind the deal (no doubt after a few rounds of private negotiations).
To close out the month, Symbio Holdings Limited (SYM.ASX) announced the receipt of a counterproposal from Aussie Broadband (ABB.ASX) in a cash and scrip deal at $3.15 per share. The offer comes in $0.30 above Superloop's (SLC.ASX) $2.85 offer back in August. Superloop has since clarified that is has no present intention of making a revised offer, but reserved its right to amend that position should circumstances change.
The Aussie Broadband proposal is still non-binding and indicative while it works through three weeks of due diligence. There is no guarantee a binding deal eventuates, but the inclusion of a work fee payable to Aussie if Symbio doesn't return a countersigned, executed deed (should Aussie table one) suggests it isn't too keen to come away from the process empty handed.
Given Symbio have flagged intent to support a firm deal on the existing terms, there are very few reasons why the work fee would become payable; namely, a better offer is on the table.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-September-Newsletter-2.pdfAugust, 2023
A somewhat muted month for the portfolio while reporting season was in full swing. New opportunities continue to pop up at a decent clip as M&A conditions evidently remain favourable, with market commentary suggesting deal pipelines are quickly being restocked as confidence in the local economy firms. A mostly "in line" earnings season points to settled equity markets, and the continued pause by the RBA in hiking interest rates has allowed for a clearer picture of the cost of capital for dealmaking.
These broader themes manifested themselves this month in both InvoCare Limited (IVC.ASX) and Estia Health (EHE.ASX) converting their respective non-binding offers to binding, albeit InvoCare saw the deal struck at a modest discount to TPG's $13 offer that secured it look at the books. It is nonetheless encouraging that bidder and target are willing to come together on price in the interests of getting a deal done. Estia, meanwhile, got Bain across the line to uphold it's revised $3.20 per share offer and has already paid out the $0.12 permitted dividend to unlock a further $0.05 in franking credits.
At the smaller end of the market, Ensurance Ltd (ENA.ASX) announced a scheme of arrangement with PSC Insurance Group Limited (PSI.ASX). The consideration offered contains considerable optionality for target shareholders - the exchange ratio of the shares offered was fixed, but there was also a minimum total consideration to be paid under the transaction. Should the bidder's share price fall far enough and the implied aggregate value is below the minimum threshold, any difference will be topped up in cash. If, however, the bidder's share price is higher and delivers value above the minimum threshold, Ensurance shareholders reap the full benefit. Certainly, a favourable mechanism from a risk/reward perspective.
Global Data Centre Group (GDC.AX) delivered a promising FY23 result, with statutory NAV increasing $0.20 to $2.13 per share, while the unaudited director valuations put it closer to $2.47. On the back of shareholder support, GDC has transitioned to a medium term strategy of value realisation for its assets and the current carrying values appear well supported. Should the board execute on the medium term strategy, there's meaningful upside still to realise from the current share price.
With fresh financial statements out in the market, September and October typically see elevated levels of deal activity in the lead up to the end of year holidays. We undoubtedly look forward to seeing if history once again repeats itself.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-August-Newsletter-2.pdfJuly, 2023
July started with a bang! Three deals hit the wires before trade had even started on the first day of the month - two new and one existing. The portfolio already had exposure to all three target companies, albeit in small size. Nonetheless, it provided the platform to close out July in the black and make a good start to the new year.
United Malt Group (UMG.ASX) brushed off some balance sheet concerns to announce that Malteries Soufflet had firmed their earlier indicative offer announced back in March with the $5 per share price tag maintained. Shares jumped from a 12 percent discount to terms to less than 5 percent on the news and closed the month at $4.82. At that price, the market is ascribing a very high chance of success the deal completes (which we would agree with), but also assumes minimal threat of regulators extending out the timetable. We continue to monitor the transaction for a more favourable opportunity to increase our exposure.
Musgrave Minerals Limited (MGV.ASX) found itself on the end of an unsolicited takeover offer from Westgold Resources (WGX.ASX) back in June and had since traded well through terms on the expectation of a bump or even a counterbid. Fingers quickly pointed to Ramelius Resources (RMS.ASX), fresh off the back of their takeover of Breaker Resources (BRB.ASX), as the most likely counterbidder - a lot of the logic underpinning Westgold's offer was equally applicable to Ramelius.
And so July came and Musgrave announced a recommended offer from Ramelius over the top of Westgold. Interestingly, Westgold's offer was privately tabled to Musgrave on June 1 before it took its offer public on June 6, while Ramelius signed a confidentiality agreement on June 4. The Musgrave board were evidently working on a better deal for shareholders throughout the Westgold offer period, and that month between early June and early July makes for a good case study on market communication and target company defence while the board worked to secure a superior offer from Ramelius.
Last of the three, Essential Metals (ESS.ASX) announced an all scrip scheme of arrangement with Develop Global at an implied $0.56 per share. The Develop deal follows on from Essential's scheme with TLEA at $0.50 earlier in the year, which was ultimately terminated back in April after Mineral Resources (MIN.ASX) picked up a blocking stake. We retained a small position (having substantially derisked above terms) while we waited for Mineral Resource's intentions for Essential to be made clear, which culminated in this month's deal with Develop.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-July-Newsletter-2.pdfJune, 2023
A pleasing end to a pleasing year.
It was a reversal of May's fortunes as a large swathe of the portfolio finished up on the month. Deal flow remained surprisingly strong with several existing positions receiving price bumps along the way. The early days of July has carried the momentum through into the new financial year as the Fund notches a milestone anniversary of its first 10 years of existence. Long may it continue.
Silk Laser Australia Limited (SLA.ASX) was the biggest contributor to performance after Wesfarmers tabled a binding offer at $3.35 per share. As detailed in our last newsletter, we felt the probability of a deal being done was far higher than what the market was ascribing and we had positioned accordingly. The most notable point of the binding deal announcement (to us at least) was what wasn't there; no indication at all that EC Healthcare's interest has been officially withdrawn.
Limeade Inc (LME.ASX) announced it would be acquired by WebMD Health at $0.40 per share, an outrageous premium of 325% to the undisturbed share price and one of the largest we've seen. In a sign of how far certain technology stocks have fallen though, Limeade is well down from its listing price of $1.85. Tesserent Limited (TNT.ASX) also called time on its tumultuous life on the ASX, announcing an agreed scheme with Thales at $0.13 per share for a comparatively measly 165% premium.
Alloggio Group Limited (ALO.ASX) recut its deal with Next Capital to $0.24 per share on the back of a guidance downgrade in May, and DDH1 Limited agreed a cash and scrip merger with Perenti Limited. There's evidently plenty happening to keep us busy, the above is just a handful of the opportunities we're seeing at present.
Finally, discounted Listed Investment Companies (LICs) received notable mentions throughout financial media during the month. A large number of ASX listed LICs trade at meaningful discounts to NTA and a handful of managers in recent years have undertaken initiatives to close the prevailing discount, either via a wind up or conversion to a more liquid, open ended structure.
Our view is that LICs are a fundamentally flawed investment product, and pressure to address significant discounts will accelerate across the board in the years ahead. Indeed, the Australian Financial Review was quick to point out the recent arrival of Saba Capital Management, an investor with a track record of agitating for change at discounted LICs, on the registers of VG1.ASX and PIA.ASX, just two of many that trade at persistent discounts.
The main argument for LICs is that the closed end structure removes redemption risk to allow for a truly long term investment horizon. In reality, many managers run identical portfolios concurrently via open ended vehicles, reducing the closed end counterparts to little more than pots of trapped capital where the manager continues to draw fees regardless of how poor performance may be.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-June-Newsletter-2.pdfMay, 2023
After a strong start to the calendar year, May saw the portfolio give back some gains in what was best described as a frustrating month. The result was driven by numerous, small paper cuts across the portfolio rather than any one individual position. With the exception of some small de-risking in certain positions where we felt the risk-reward equation had shifted, most losses are of a mark-to-market nature only and we would expect a meaningful clawback should these transactions complete as we expect they will.
Having withdrawn its indicative $12.65 offer last month, InvoCare Limited (IVC.ASX) announced the return of TPG offering $13.00 per share in cash plus a further $0.25 in potential franking credits attached. This time around, however, InvoCare were inclined to play ball should a binding offer eventuate at that price. TPG have been granted five weeks of due diligence access and we would think TPG's existing 19.3% stake and minimal required bump to get board approval will inspire them to press on and complete the deal.
SILK Laser Australia Limited (SLA.ASX) announced a higher, non-binding offer from EC Healthcare at $3.35 per share, coming in over the top of Wesfarmers (WES.ASX) at $3.15. Wesfarmers declined to take up their matching rights under their Process Deed, and EC was subsequently granted due diligence access. Current market pricing indicates a lack of belief a deal will get done from here, particularly with both bids remaining indicative, along with skittishness over EC Healthcare's willingness and/or capacity to go binding.
Two weeks prior to submitting its competing offer, EC signed an upsized HK$1b syndicated facility to lock in sufficient financial firepower to complete a SILK acquisition. As a healthcare rollup, the company has a long track record of successful M&A and a founder led shareholder base supportive of the strategy. The company has been keen to stress its growth ambitions outside of Hong Kong and the current offer price for SILK is earnings accretive. Wesfarmers have also notified SILK that they continue to do due diligence, and a mid-month Strategy Day highlighted their hunger to add higher margin, complementary businesses over their API distribution network.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-May-Newsletter-2.pdfApril, 2023
The portfolio continued its recent momentum to deliver a positive return in April in what was a pleasing result. It was a quieter month than March in terms of news flow however we continue to see interesting opportunities pop up, particularly in areas of the market that aren't well covered. Binding deals continue to track to expectation but the focus on the month has been caution with respect to anything preliminary.
Firstly, the contest in intelliHR Limited (IHR.ASX) came to its conclusion with Humanforce emerging victor with its on market takeover bid at $0.24. The Access Group gave it a last roll of the dice in early April to offer $0.235, however Humanforce almost immediately went one better to $0.24 and it was enough. An excellent outcome from the first bid at $0.11 at the end of January, which itself was a 75% premium to the undisturbed.
Essential Metals (ESS.ASX) had several twists and turns in the lead up to the shareholder vote for the $0.50 cash Scheme of Arrangement with TLEA. Mid month saw significant buying volume well through terms (as high as $0.585) and 27% of the register changed hands in just four days. Usually, such activity would be a precursor to a counteroffer, however we took the opposite view and sold 90% of the position into the strength. The company has been in play for effectively twelve months and there was an extensive process run to maximise value prior to the TLEA deal being agreed. The urgency of only buying in the direct lead up to the vote suggested to us that this was likely a strategic blocking stake rather than a launchpad for a counter.
Mineral Resources (MIN.ASX), who have been quite active of late, soon emerged as the buyer with a 19.5% stake. It came as little surprise to us when they voted against the scheme, and TLEA walked. Mineral Resources have been accumulating land for exploration potential around their Mt Marion mine, and Essential is within trucking distance.
However, the strategic stake confers optionality and with the TLEA deal broken, there is little urgency while Mineral Resources figures out how best to extract value from the resource. Comments to the media suggest as much. Shares closed out April at a lowly $0.435 and we similarly retain a (very) small position for optionality.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-April-Newsletter-2.pdfMarch, 2023
Another pleasing performance this month with the portfolio finishing in the black and continuing the strong start to the calendar year. After a lull in activity during the holiday and reporting seasons, March roared to life with an influx of new opportunities. One detail to note in particular came while perusing through various scheme implementation deeds and bid implementation agreements - bidders have evidently been keeping tabs on target companies with numerous confidentiality deeds dated as far back as early 2022. Evidently now is the perceived time to strike, and it would be a brave call to suggest there aren't any more waiting in the wings.
The main contributor to the March performance was undoubtedly IntelliHR (IHR.ASX) that began the month sitting on a conditional, friendly scheme with Humanforce at $0.11 cash per share. The Access Group (TAG) introduced themselves by way of a counter proposal at $0.14 to kick off a month long contest between the two bidders. We enter April with Humanforce sitting unconditional on market at $0.22.
Larger ticket deals such as BHP's agreed scheme of arrangement with OZ Minerals (OZL.ASX) and Newmont's non-binding offer for Newcrest (NCM.ASX) have evidently stoked confidence in the materials sector. Ramelius (RMS.ASX) made a strategic move for Breaker Resources (BRB.ASX) as they look to consolidate Breaker's Lake Roe project into the Rebecca project (acquired in 2021 via AOP.ASX) to form the basis of an eventual broader regional mining hub. Wyloo announced an on market bid for Mincor (MCR.ASX) at $1.40 to mop up the remaining shares not already owned, and Liontown Resources (LTR.ASX) announced it had rejected a $2.50 per share proposal from Albemarle. Plenty happening and undoubtedly more to come.
We saw bumps in Nitro Software (NTO.ASX), where Potentia reached the crucial 75% acceptances level to trigger the increase, and Pushpay (PPH.ASX), with a strong No vote from shareholders pushing BGH to pay more (no pun intended) to get the deal across the line. Having needed to sweeten most, if not all, public to private transactions attempted in recent years, we look forward to seeing where BGH pop up next.
We look to carry the momentum into April with a refreshed opportunity set. Corporate activity remains buoyant, completion rates are high, and indications are it looks set to continue that way for the foreseeable future. As always, we look forward to providing further updates in due course.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-March-Newsletter-1.pdfFebruary, 2023
More of the same throughout February with the portfolio closing out the month in positive territory. Almost all positions saw minor fluctuations in their respective share prices, but few had an individually material impact to performance. Things are ticking over nicely - deals are routinely closing and the opportunity set is there to recycle the capital efficiently. Reporting season is now out of the way, and a market awash with fresh financials drives our expectation that M&A will increase in the months ahead.
The Perth Basin contests in Warrego Energy (WGO.ASX) and Norwest Energy (NWE.ASX) drew to their conclusions. Mineral Resources ended the three way stalemate for Warrego by folding into Hancock's cash offer to hand them control. Strike then relinquished its stake with the writing very much on the wall and Hancock moved to compulsory acquisition by month end. Mineral Resources similarly secured a controlling interest in Norwest before announcing their offer as "Best and Final" in early March. Both positions were realised with the transactions at their logical conclusions, capping off some outstanding returns achieved over the last few months.
US Masters Residential Property Fund (URF.ASX) moved higher on the back of the ongoing buyback and a better than expected set of financials. The externalisation of management to Brooksville and Pinnacle in January should help deliver substantial value. The managers are incentivised to return capital "expeditiously" and a hurdle rate of $0.40 + 8% p.a. before performance fees are drawn aligns them with URF unitholders. Accruing performance fee provisions in the half year accounts rather than flagging a contingent payment speaks to the Board's confidence that the hurdle rate will be exceeded.
The lowest hanging fruit for Brooksville and Pinnacle to hit the earnouts is the URF unit price itself. Against a post tax NTA of $0.61, the units closed the month at a 50% discount. It is then little surprise the board asked for approval for another buy back for 25% of the register and that unitholders would be so obliging. We can only hazard a guess what the US$30m cash balance at year end (with further asset sales pending) will be put towards! In an aggressive move, Alludo declared it's $2.15 unconditional offer for Nitro Software (NTO.ASX) as "Best and Final" even if a superior offer emerged. The move played to a catch 22 on underbidder Potentia's $2 per share offer - Potentia were unwilling to increase their offer price without access to due diligence, but Nitro's ties to Alludo meant Potentia couldn't get due diligence unless it increased its offer. Put up or shut up.
The move backfired and Potentia took the advantage. With Alludo unable to increase its bid, Potentia flagged it might lift their offer to between $2.20 and $2.30, but it would need a look at the books first. With the minimal conditions attached to the offer and a clear path to a superior outcome for shareholders, fiduciary duty kicked in and Potentia got its access. The result was an increase to an unconditional $2.17 per share. If Potentia received 75% acceptances, this would increase to $2.20 and further to $2.25 if a certain amount of the 75% acceptance took the scrip consideration instead of cash. It's now a question of what the final consideration will be, rather than which bidder will win. Well played Potentia.
It's pleasing to begin the year in a strong position and conditions remain favourable for the strategy moving forward. March has already seen a counteroffer in intelliHR (IHR.ASX) at a 27% premium to the existing bid. If anything, it shows M&A activity remains robust and we intend to take full advantage. We look forward to providing further updates in due course.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-February-Newsletter-1.pdfJanuary, 2023
January delivered a positive return to start the New Year off on the right foot. Returns were mostly concentrated in a couple of positions in the Perth Basin, while the rest of the portfolio continues to track to expectations. Deal flow was a touch softer; the natural outcome of being in between the holiday period and earnings season in February, but there is still plenty of opportunity for the portfolio moving forward.
In what feels like an age ago, we ended December with Warrego Energy (WGO.ASX) in receipt of competing proposals from Hancock Energy and Strike Energy (STX.ASX), with the implied value of Strike's scrip offer ($0.315) ahead of Hancock's cash bid ($0.28). A few days into January, 15% of shares on issue changed hands at $0.35, and when neither Strike nor Hancock put their name to the crossing, fingers pointed to Mineral Resources (MIN.ASX) as a potential fourth bidder (after Beach Energy withdrew from the contest in December). Game on.
Hancock quickly offered a conditional increase to $0.36 subject to receiving 40% acceptances. Strike's share price commensurately rose with the increased corporate interest and the implied value of its offer rise as high as $0.405. Mineral Resources was indeed outed as buyer of the 15% stake, and they increased to just over 19% in the days following at a price average a touch above $0.39.
Hopes of a fourth genuine offer were dashed when Mineral Resources publicly stated they had no intention of making a takeover offer, and in fact believed gas asset prices in the Perth Basin were over-inflated. Hollow words, having just bought a 19% stake at those prices! The comments were evidently an effort to manage expectations elsewhere in its struggling offer for Norwest Energy (discussed further below). January finished in an effective stalemate between Strike and Hancock with neither looking set to gain control, the unconditionality of both offers notwithstanding.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-January-Newsletter-1.pdfDecember, 2022
Contested situations and failed non-binding offers were the opposing themes of the month - the portfolio benefitted from revised offers from a handful of positions offset by several early stage transactions that failed to convert. We saw numerous opportunities present themselves to make for a busy month and put the portfolio on ideal footing heading into the new year.
It was the Onshore Perth Basin that grabbed all the headlines in December. In 2018 we saw AWE Limited (AWE.ASX) subject to takeover offers from three separate parties. The prize was a 50% interest in Waitsia, one of the largest onshore gas discoveries made in Western Australia at the time, with the company ultimately acquired by Mitsui. Beach Energy (BPT.ASX) acquired the other non-operated 50% interest in Waitsia through the acquisition of Lattice Energy around the same time.
Fast forward five years and we are seeing history repeat itself. Warrego Energy Limited (WGO.ASX), owner of a non-operated 50% interest in the West Erregulla discovery, originally disclosed a non-binding offer back in November from its joint venture partner, Strike Energy Limited (STX.ASX), in a contemplated scrip deal. Just one day later, Beach Energy submitted a non-binding $0.20 cash offer that took only a weekend to firm up, and saw Warrego enter binding documentation.
From there, November ended somewhat humorously - while Warrego directors were hosting a conference call justifying their decision to endorse the Beach offer over Strike's, Hancock Energy lobbed a bid at $0.23 per share. December then saw Beach revise to $0.25, Hancock counter to $0.28, Beach subsequently withdrawing from the contest, and Strike return with a 1:1 scrip offer at an implied $0.335 value. Busy month indeed.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-December-Newsletter-1-1.pdfNovember, 2022
There was a fair bit of activity in what is usually one of the quieter months of the calendar year. October's trend of bids for beaten down tech stocks continued, with MSL Solutions (MSL.ASX) agreeing a binding deal with private equity firm Pemba Capital at a 64% premium to the prior close. Pemba popped up elsewhere as a substantial holder in Readytech Holdings (RDY.ASX), which found itself in receipt of a non-binding approach from Pacific Equity Partners looking to, at least initially, work with Pemba on the deal. Adveritas (AV1.ASX) caught the attention of a US suitor at $0.11 cash per share but the offer was swiftly rejected - no doubt due to a comparatively smaller control premium than other peers have enjoyed in recent months.
NEW Energy Solar (NEW.ASX) completed the sale of its entire portfolio, benefitting from a favourable AUDUSD swing since the transaction was first announced. Initially pegged at a $0.98 total payout, proceeds are expected to be closer to $1.025 all up. The portfolio received the first $0.80 per share distribution on December 1st.
US Masters Residential Property Fund (URF.ASX) formally issued a notice of conversion for the preference units (URFPA.ASX), removing some market scepticism preference unitholders would instead be made whole at ordinary unitholders' expense. Units in URF subsequently strengthened to claw back some of the price weakness observed in recent months.
A stalemate was broken in Aic Mines' (A1M.ASX) off market takeover for Demetallica Limited (DRM.ASX). Acceptances were sparse and Dematallica's board uncompliant, despite freeing the bid from conditions in late October, but November saw logic prevail - A1M improved the scrip ratio to a level sufficient to secure DRM endorsement and closed the month out on the cusp of the compulsory acquisition threshold. It delivered the portfolio a generous result for a safe, unconditional offer.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-November-Newsletter-1.pdfOctober, 2022
An otherwise quiet October finished with a flourish as a handful of deals hit the wires late in the month. The ASX tech sector trading well below the highs of last year has found itself squarely in the firing line with a competitive situation in Nitro Software (NTO.ASX), and bids elsewhere in Elmo Software (ELO.ASX), Proptech Group (PTG.ASX), Pushpay Holdings (PPH.ASX), and Readytech Holdings (RDY.ASX). There certainly seems be continued appetite for deals as we near the end of the year. The portfolio benefitted from broad based contributions and the current deal opportunity set continued to track to expectations.
Pleasingly, most of the transactions announced during the month were either binding from the outset or firmed up offers that began as non-binding - it's certainly something we love to see. Of note was that many potential acquirers were financial buyers as opposed to strategic. Ever the opportunists, it suggest to us that valuation multiples aren't stretched and there is opportunity for strategic buyers naturally able to extract more value to take interest and turn situations competitive.
It's exactly what we saw in Nitro Software off the back of Potentia's unsolicited $1.58 per share cash offer back in August, making it one of the larger contributors to this month's performance. Despite the offer being rejected at the time, Potentia were aggressive in securing a pre-bid stake to indicate that while the offer was non-binding, the intent was serious. Nitro, however, were free to run a process and solicit a higher offer should one be forthcoming. Following confirmation of media reports that Nitro had received interest from several third parties, Potentia sought to get themselves back in front and increased their offer to $1.80. The offer was far less conditional, only requiring a board recommendation and no prescribed occurrences. Nitro, however, would quickly reject the revised offer and flag it had instead received a $2 per share proposal from Alludo. In a throwback to the BGH/Capvest battle for Virtus Health (VRT.ASX) earlier in the year, the offer contemplated an alternative structure to circumvent Potentia's pre-bid blocking stake. All eyes are now back on Potentia to see if they once again move to put themselves in pole position.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-October-Newsletter-1.pdfSeptember, 2022
September saw large losses for the ASX300 (down 6.29%) as risk-off sentiment took hold globally following aggressive central bank action aimed at getting inflation back under control. Against this backdrop, the portfolio was not completely immune, also posting a negative result (down -1.38% for the month) largely as a result of wider deal spreads that drove mark-to-market losses within the portfolio. High profile deal breaks in Ramsay Healthcare (RHC.ASX, no position) and Link Group (LNK.ASX, held in small size) have captured the media's attention but are not necessarily emblematic of our broader opportunity set. Deals are routinely completing with the portfolio successfully closing out transaction in Big River (BVR.ASX) and ResApp Health (RAP.ASX), with Thiess' unconditional offer for MACA Ltd (MLD.ASX) currently due to complete in early October. Binding deals, of which constitutes the majority exposure of the portfolio, continue to track to expectations. Should they complete (and we have a reasonable basis to expect that they will), the aforementioned mark-to-market losses should be recouped in short order.
Apollo Tourism & Leisure (ATL.ASX) was the outstanding performer. Both the NZCC and ACCC chose not to oppose the merger with Tourism Holdings (THL.NZX) subject to certain assets being divested prior to transaction completion. It's been a lengthy process with the competition regulators and at times the spread has been as wide as 60% gross. To cap it off, Tourism Holdings increased the scrip ratio to reflect the business outperformance Apollo has observed since the deal was agreed back in December last year. The probability of completion from here is now significantly higher, with a now appropriate share price reflecting that.
We had a less favourable time with regulatory approvals in Link Group (LNK.ASX). We took a small position early in the month on the basis ACCC risk was mispriced, which was confirmed when the ACCC waved the transaction through. However, we underestimated the FCA approval risk (which admittedly looked opportunistic given the FCA left it to the very last moment to state their objection, with indications suggesting the delay was simply due to understaffing rather than anything more sinister). History will show that a draft notice by the FCA proposing a A$516m redress payment for a legacy issue which Link had considered largely immaterial to that point effectively killed any chance the deal with Dye and Durham would complete. Despite attempts to recut the deal at the eleventh hour, it was abandoned late in the month when it became clear that time was now against the parties in seeking to complete the transaction prior to the agreed long stop date. Position sizing mitigated much of the damage but, it was nonetheless disappointing given our general caution towards regulatory risk more broadly (the aforementioned result in Apollo Tourism & Leisure notwithstanding).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-September-Newsletter-1.pdfAugust, 2022
August delivered a strong positive return with contributions made across the board. Very few positions went backwards with the strength of returns reflecting the unwavering progress of transactions on foot (and subsequent narrowing of the discount to terms) along with some favourable results in an at times volatile reporting season. As always, there were several positions with a larger contribution to the overall performance.
MACA Limited (MLD.ASX) began the month sitting on a cash bid from Thiess at $1 per share limited in its conditionality. Fear over cost inflation within the industry appeared to overshoot the mark as peer earnings results filtered through to market, and the sector (with the exception of MACA) enjoyed a subsequent re-rate. NRW Holdings Limited (NWH.ASX) would take advantage of a storming share price to offer MACA a cash and scrip alternative valuing the company at $1.085 per share. MACA rejected the proposal on the basis the offer was more conditional than Theiss' and the variability of the scrip component was less favourable despite the higher headline price. It did, however, trigger a response from Thiess who agreed to lift the bid to $1.075 in cash. It was enough to deter NRW from coming back with a higher offer and Thiess was put back in the box seat.
The NRW share price has since continued to move upwards, increasing the mooted implied value of its cash and scrip offer. This is unfortunately of little consolation given the board's choice not to further engage with the company. Thiess' offer closes towards the end of September but, despite the increase in consideration offered, acceptances have been slow. It's never over until it's over. US Masters Residential Property Fund (URF.ASX) also had a strong month on the back of their first half results being announced to market. Included was commentary about a potential joint venture with Brooksville to externalise the REIT management function.
Importantly, the remuneration structure of the joint venture would be tied to performance fees based on returns delivered to URF unitholders rather than ongoing base fees. At a minimum, the performance fees are to be tied to retuning superior value above that contemplated under the scrapped portfolio sale entertained earlier in the year. In addition, a larger amount than expected had been set aside for capital management initiatives, namely an aggressive buyback of units trading at less than half their NTA value.
The positive developments in actively seeking to maximise unitholder value saw the share price respond accordingly. There's a bit of water to go under the bridge but the units continue to trade at a considerable discount to net assets. August was a particularly busy month with a strong pipeline of deal flow announced to market. There's a good mix of binding transactions, non-binding transactions, and assets sales that will keep the opportunity set well stocked for the foreseeable future. With reporting season out of the way, fresh sets of financial statements, and a closing window to get a deal wrapped up before the December holiday season kicks in, it will come as no surprise to us should the elevated activity continue right through September.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-August-Newsletter-1.pdfJuly, 2022
July's strong return was shaped by the handful of positions referenced last month and the attributes they all had in common; the companies had each disposed of their main undertakings and were pending distribution of the sale proceeds back to investors. There was strong support from the remainder of the portfolio with many holdings contributing positively as well, and if not individually meaningful, the aggregate returns ensured a strong start to the financial year. To use a cricket analogy, it's the ones and twos that keep the scoreboard ticking over.
Cardno Limited (CDD.ASX) was first cab off the rank for the month. It's a position we have held in the portfolio on numerous occasions over the last twelve months and appears to be the gift that keeps on giving. On this occasion, the sale of its Cardno International Development business to DT global originally promised a cash payout of $1.45 per share with a further $0.38 in cash backing post distribution. Despite the limited conditionality of the transaction, shares traded at a meaningful discount to the aggregate expected cash backing of $1.83. On July 1st, Cardno advised of an increase in the consideration received from DT Global due to net debt and working capital adjustments and determined to pay out $1.94 per share. Additionally, another $0.13 would be retained in cash alongside a small albeit profitable operating business.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-July-Newsletter-1.pdfJune, 2022
HRL Holdings Limited (HRL.ASX) is a great example of continued deal flow resilience at the smaller end of the market. Late in the month, HRL was forced to confirm media reports that it had been sitting on an all cash offer from ALS Limited at $0.16 per share while ALS worked its way through due diligence. Initially confirmed as non binding, the market saw fit to apply a healthy discount to terms until something binding was tabled. We saw a credible buyer persevering through the first three weeks in the data room without getting cold feet and established an initial position.
The next day, ALS acquired 20% of the shares on issue (a move that had us increase our exposure) and followed it up a day later with an unconditional off market offer for the rest of the company. The speed with which ALS moved to secure control of, along with the unconditional transaction structure and acquisition of a pre-bid stake, had all the hallmarks of a situation that may quickly turn competitive. Sadly, a top heavy register was sympathetic to the offer and any potential contest was over before it even began - ALS had secured a controlling stake on market less than 48 hours after the offer was first announced. Even more impressive to do so before the offer was even formally opened for acceptance. Onto the next one.
Finally, we have positions in several companies that have sold their main undertakings and proposing to distribute a significant portion, if not all, of cash proceeds back to shareholders. Prospect Resources (PSC.ASX), Ardent Leisure Group (ALG.ASX), and Cardno Limited (CDD.ASX) are but a few examples. Each company retains assets and provides significant optionality post distribution of proceeds. We have been able to establish positions close to if not below cash backing with minimal to negative enterprise value attributed, where true price discovery for the residual assets/operations has historically occurred only once the cash has been paid out.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-June-Newsletter-1.pdfMay, 2022
The portfolio posted a modest negative return in May against a backdrop of broader market weakness. This was mostly the result of wider spreads in many of our positions rather than anything more permanent (with one relatively minor exception - discussed below). Despite negative equity market sentiment which is being driven by concerns of a global slowdown in economic growth, we're still seeing plenty of opportunities. If a slowdown in M&A is coming, we've seen no signs of it yet. We do however think that now is a time for increased caution and received a few reminders this month of the importance of being selective when it comes to deciding which opportunities should be pursued.
May was characterised by several non-binding deals that were withdrawn almost immediately upon being announced. Appen Limited (APX.ASX) had a knock on its door at $9.50 and Brambles Limited (BXB.ASX) confirmed media reports that it was in discussions with CVC Capital Partners. Appen saw its bidder revoke the offer within eight hours (pushing for an improved offer whilst also simultaneously announcing an earnings downgrade probably didn't help) and Brambles saw CVC walk away without even tabling an offer only a day after first confirming the discussions. Anyone buying either stock based on the initial announcement sustained a very quick loss. Fortunately, we steered clear of both. Not all bids are equal and non-binding ones require a particularly heightened level of caution. Without anything signed there is little to compel a bidder to complete on any of the terms specified and APX and BXB served as useful reminders of that.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-May-Newsletter-1.pdfApril, 2022
There was a surprising amount of activity in the lead up to the Federal Election in May in positive signs that the current political environment is not hampering any appetites to do deals. In fact, April had a bit of everything - new binding deals, some non-binding proposals, revised offers, successful completions, and a positive return. The number of companies we are monitoring continues to grow each month.
Virtus Health (VRT.ASX) continues to be fought over between private equity firms CapVest and BGH Capital. Despite the acquisition of an initial 20% stake in the company to kick proceedings off, BGH has found itself thus far outplayed by CapVest. Each revised offer has been promptly countered, and CapVest's exclusivity tie up has seen BGH unable to meaningfully engage with the Virtus Board. BGH took the bold move of lodging a takeover bid in early April conditional only on "No prescribed occurrences" (effectively unconditional) - without having looked at the books - to outbid CapVest by $0.02 per share. CapVest promptly returned $0.15 higher to put itself back in front. The BGH offer changes the downside risks to the position and thus we commensurately increased our exposure.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-April-Newsletter-1.pdfMarch, 2022
A steady flow of newS one popping up on our radar steered the portfolio to a positive return for March. Deal flow does not seem to have slowed just yet, and with reporting season out of the way we expect clean sets of the financials to maintain the momentum as we look ahead. Irongate Group saws the Charter Hall/PGGM indicative offer at $1.90 plus distributions move to a binding deal late in the month. It served as a notable example of asymmetric opportunities thrown up when broad macro trends override the deal specifics. Initially, there was quite a tight spread
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-March-Newsletter.pdfFebruary, 2022
February saw a steady return for the portfolio with contributions to performance broad based and in line with expectations. February is usually quite busy with reporting season and there is typically a brief pause in deal activity while recent financial results are delivered to the market, at least at the larger end. We were still encouraged by deal flow throughout the month with plenty of opportunity in the smaller resources space, the very public approach for AGL Energy (AGL.ASX, allegedly since withdrawn), and a good old fashioned private equity shootout for Virtus Health Limited (VRT.ASX).
The current Russian invasion of Ukraine needs no introduction, but we thought it worth discussing in the context of the existing portfolio positions and the broader strategy. As we noted with the emergence of the Omicron COVID strain towards the end of 2021, binding agreements have specific carve outs in the Material Adverse Change (MAC) clauses. These broader macroeconomic factors are typically excluded with respect to the specifics on each individual deal. Acts of War are no different and are specific exclusions listed under the MACs. We have lower exposure to non-binding deals or positions that may be considered “pre-event” or “soft catalyst” and these are routinely monitored to ensure their position in the portfolio can be justified.
Sunland Group continues to progress their wind down strategy effectively and efficiently, producing another set of results confirming everything remains on track in returning net asset value to shareholders. When we originally established the position back in October 2020 we were, in hindsight, too conservative in our estimates of terminal value – not a bad problem to have. There are only a handful of projects still under development due for completion and settlement in the near term. All senior debt is expected to have been retired by June 30, and project specific debt by October, paving the way for some large fully franked special dividends thereafter.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-February-Newsletter.pdfJanuary, 2022
January saw the first negative return in some time as the Fund was unable to completely escape sudden risk-off sentiment observed globally. Markets suffered a brutally quick drawdown in the last week of the month attributable in large part to macroeconomic factors. Spreads widened to accommodate the perceived macro risk amongst most transactions with selling evidently indiscriminate. We see it as an opportunity. Our arbitrage strategy has typically operated independently of macroeconomic risk (with the onset of COVID in March 2020 the sole exception to date). Whether the U.S. Federal Reserve hikes four or five times in 2022 matters very little to an Ausnet Services (AST.ASX) type transaction, which is due to become legally effective in the first week of February. The 1% to 2% gross yield offered in normal circumstances blew out to as much as 6.6% only three weeks before payment. At the time of writing, the deal has become legally binding. It is but one example of the current pricing environment for merger arbitrage as at month end.
Blow outs in spreads were more pronounced in scrip based transactions (more below). As such, we largely view the majority of these widening deal spreads as temporary, subject to the transactions completing as anticipated. The disappointing outcome in Australian Pharmaceutical Industries Limited (API.ASX) was not the way we would have liked to have started the new calendar year. A binding deal is on the table with Wesfarmers at $1.55 per share, however Woolworths stormed the castle in early December with a conditional at $1.75 with "potential to improve the offer price with the benefit of due diligence". Sadly, the offer was withdrawn this month on the basis Woolworths was unable to validate the financial returns required.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-January-Newsletter.pdfDecember, 2021
If there was an expected slow down of deal activity heading into the holiday period, there were very few signs of it throughout December. The portfolio delivered a positive return to finish the calendar year in a position of strength, and once again new opportunities are popping up as soon as older ones complete. It has been a remarkable year to say the least. It will no doubt prove challenging to replicate this year's numbers in 2022, but we relish the challenge. There's still plenty on the burner heading into the New Year and meaningful returns to be had. It's full steam ahead.
There were a number of strong performers contributing to December's return, notably in Cardno Limited (CDD.ASX) and Australian Pharmaceutical Industries Limited (API.ASX). Unfortunately, in respect of the latter, API since has given up its December gain after Woolworths withdrew its surprise $1.75 counterbid in early January. Wesfarmers now looks set to take the keys at a lower consideration of $1.55.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-December-Newsletter-1.pdfNovember, 2021
November began by continuing the deal momentum observed in October before calming down somewhat in the latter half of the month. The slight easing in newly announced deals in not unexpected as we head into the holiday period, although it had no impact on the portfolio delivering another positive return to be well placed into the year end. We are expecting several deals to close in the first few weeks of December in a race to complete ahead of the Christmas break. There are several opportunities within the portfolio already for which we have earmarked some of the returning funds, but with enough dry powder to capitalise on any deal flow in the new year. There are still quite a handful of non-binding transactions in play which to date have limited exposure in the portfolio (we much prefer binding transactions for obvious reasons!), but we do expect some of these to firm in time.
One major talking point in the last few days of the month was the likely impact the Omicron strain of Coronavirus will have on markets. Specific to our strategy, it's too early to know what impact it may have, if any, on future deal flow, but we have taken the time to understand the potential implications on the existing portfolio using the benefit of the prior experience of 1H2020. Evidently, it hasn't been just us that has learned from those experiences, as we are now seeing binding transactions including specific carve outs for the impacts of COVID in the Material Adverse Change (MAC) clauses becoming far more common. The clauses have been somewhat of a silver lining from the fallout of last year. Bidders have less freedom now to walk from legally binding obligations and the insertion of more carve outs in these agreements wrests some of the balance of power back to target companies and their boards.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-November-Newsletter.pdfOctober, 2021
"Effectively every single ASX listed company is a target." - Alex Cartel, Takeovers Panel president. Six deals in a day and ten for the week. Fourteen for the month.
We have more opportunities than cash currently, and with another four deals announced in the first two days of November, there's no indication it will slow down any time soon. Every sector is seeing activity, some situations are becoming contested, and completion rates are high (private equity notwithstanding). Both the breadth and quality of opportunities in front of us are underpinning our returns, and we intend to keep making hay while the sun shines. The only place to start this month's commentary is Monday, October 18. Class Limited (CL1.ASX) agreed a scheme of arrangement with HUB24 Limited (HUB.ASX) in a predominantly scrip deal, while Ramelius Resources (RMS.ASX) revealed its recommended off market offer for Apollo Consolidated Limited (AOP.ASX). Senex Energy Limited (SXY.ASX) disclosed discussions with POSCO on a potential transaction. Having first offered $4 per share, then $4.20, then $4.40, POSCO was granted due diligence but were told to increase their offer for any deal to be struck. iCar Asia Limited (ICQ.ASX) finally caught a binding offer after a torturously long wait (the company has been in play for twelve months), and Irongate Group (IAP.ASX) was on the receiving end of an offer from the ambitious 360 Capital Group (TGP.ASX) with help from friends at property juggernaut ESR.
Not to be outdone, Home Consortium (HMC.ASX) drove its quest for scaled FUM in its acquisition of Aventus Group (AVN.ASX) via its Daily Needs REIT (HDN.ASX).Ramelius' desire to rush quickly became apparent. Gold Road Resources (GOR.ASX), fresh from its failed tilt at Tropicana, took three days to lodge its own counteroffer.
$0.56 per share. All Cash. Unconditional. 19.9% of the register already secured. The unconditional offer limits our downside to a minimum $0.56 per share and the upside is limited to what either bidder is prepared to pay. Indeed, on the first of November, Ramelius would increase its offer to $0.62 per share in cash and scrip and drop all conditions. They would also announce the acquisition of their own 19.9% stake.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-October-Newsletter.pdfSeptember, 2021
The portfolio closed out September little changed from where it began, finishing the month with a modest gain of 0.33%. It's not always the case that the delivered returns match the underlying events of the month, however we feel this time around it is a reasonable assessment. A couple of contested scenarios were offset by withdrawn proposals elsewhere. The net effect was a reasonably steady month. An interesting feature of the majority of the aforementioned deals is that all were non-binding in nature and therefore, our exposure to each was limited given our caution toward such deals generally. More on that below. Also of note is that the return in September came against a backdrop of increased volatility in global markets and broad-based 'risk off' sentiment. Having not witnessed these conditions for quite some time, it was pleasing to once again observe the defensive nature of the portfolio in these circumstances.
First, to the contested deals. Australian Pharmaceutical Industries Limited (API.ASX) fielded an unsolicited approach from Wesfarmers (WES.ASX) back in July that was promptly rejected on the basis the $1.38 cash offer undervalued the company. Despite the rejection, there were several attributes of the proposal that retained our interest (and by extension, the position). We have seen target companies rebuff takeover approaches recently, as was the case here, but it has largely been a function of setting a clearing price rather than an outright rejection - Japara Healthcare (JHC.ASX) and Spark Infrastructure (SKI.ASX) are just two examples of this recent strategy working. Wesfarmers had flagged that API was intended to form the basis of a new healthcare division within the conglomerate, and while API was minor in the scale of the Wesfarmers business, the strategic direction was not. We were of the view the situation was once again about finding an acceptable clearing price.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-September-Newsletter.pdfAugust, 2021
Deal activity slowed throughout August which is not unusual around this time of year. Reporting season ordinarily sees a pause as the most recent financials are announced to market, although it didn't come to a complete halt. The headline grabbing deal of the month was undoubtedly Afterpay Limited (APT.ASX) being acquired by Square, Inc for an equivalent A$39b scrip deal. Sydney Airport's (SYD.ASX) reign as potentially the largest transaction seen on the ASX following its $22b buyout offer lasted only a month and is emblematic of the current confidence in the domestic M&A market. Huon Aquaculture Group (HUO.ASX) signed a generous deal with JBS Australia (albeit not without substantial FIRB risk and an agitating underbidder in Andrew Forrest), while Ampol (ALD.ASX) turned its sights on Z Energy (ZEL.ASX) in its quest for scale and synergies. The pipeline of opportunities continues to replenish for us. Against that backdrop, it's pleasing to report another positive return for the month. It was broad based strength in the portfolio that delivered the return rather than a handful of stellar individual performers. We had some notable reporting season winners in Sunland Group (SDG.ASX) and Capral (CAA.ASX).
Sunland's realisation of net asset strategy is currently on track and a further dividend of $0.20 was handed down alongside the FY21 results. The non-core inventory is consistently being cleared at a profit to book value with most of the proceeds and profits to be recognised in the coming financial year or two. Net assets inclusive of the dividend total $2.34 per share, although this is still undercooked on what we expect to receive under the realisation strategy. Development margins on the remaining pipeline are not yet reflected (almost all lots except the recently commenced The Lanes West being already under contract) and when added to the expected profits on the non-core inventory sales, there's still scope to receive a meaningful amount more than current book value. The closing share price of $2.77 does capture a portion of this, however there's also $0.63 worth of franking credits that are also partially reflected in the current premium to NTA, with more expected. It has been a relatively easy hold since we established the position late last year, and we continue to do so as capital is returned.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-August-Newsletter.pdfJuly, 2021
The new financial year began where the last left off. Deal activity kept its blistering pace, targets either saw bidders improve their offers or new bidders emerge, and the portfolio delivered a positive return. Mergers and Acquisitions is a great place to be in at the moment and judging by the $60b worth of agreed deals announced at the start of August in Afterpay (APT.ASX) and Oil Search (OSH.ASX), we may see current conditions maintained for some time yet. There has been a notable shift in the balance of power between bidder and target in recent months. In the second half of last year we were typically seeing target boards being more receptive to bidders; binding deals with board endorsement from the outset were routinely announced, or a non-binding bid at the very least was enough to open the proverbial kimono of the target (nowhere better exemplified than Think Childcare's (TNK.ASX) first offer at $1.35 back in November securing access to the books, against the current binding deal at $3.28 per share). It is certainly not the case now.
Sydney Airport (SYD.ASX) received a non-binding proposal from a consortium of infrastructure investors and superannuation funds at a hefty 42% premium to the prior close, and at the time was to be the largest take private deal in ASX history. The board pushed back on the basis the bid was below pre-COVID levels and not in the best interest of shareholders to engage, and so they didn't.
Australian Pharmaceutical Industries (API.ASX) received a non-binding offer from Wesfarmers (WES.ASX) at $1.38 cash per share, an implied 21% premium to the prior close. Despite downgrading market guidance on the same day it received the offer, it took two weeks to decide that the offer undervalued the company, and so they simply rejected it. Spark Infrastructure (SKI.ASX) announced it had received not one but two offers from private equity firm KKR and partner Ontario Teachers Pension Plan (OTTP). The first at $2.6375 wasn't good enough, and nor was the second at $2.7375. But the board did provide a concession; KKR and OTTP wouldn't get full due diligence access, but some limited public info would be offered to see if the bidders could get comfortable lifting their offer to a value the board could agree on.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-July-Newsletter.pdfJune, 2021
As we close a remarkable financial year we are pleased to once again report on a month of positive returns. Closing out June in the black continues the momentum of the portfolio and marks a full financial year of positive monthly returns, welcome news on the back of a comparatively poor FY20. Conditions are currently fantastic for M&A activity. There is still a sizable amount of embedded value within the current portfolio, and that's before considering any future transactions announced or further competitive scenarios. We had almost a dozen new opportunities pop up in June alone, and the first several days of July have already contributed to the pipeline. It is certainly understandable why we're excited for the new financial year.
At long last we received a final distribution from a delisted holding in Salmat Limited (SLM.ASX). Salmat sold both it's operating businesses in late 2019/early 2020 and made the decision to wind up the company and distribute surplus capital back to shareholders. We received the vast majority of the surplus capital in August last year, and while there was a liability reserve of $5m ($0.025) retained by the company as it liquidated, there was no guarantee that there would be anything left to distribute once the company's creditors had been paid out. We were able to pick up a vast amount of shares that attributed nil value to the liability reserve, and the small amount of time between the purchase of shares at $0.665 and receiving a capital return of $0.665 only weeks later meant we did not have to tie up our capital for very long to get exposure to any potential upside.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-June-Newsletter.pdfMay, 2021
Much like last month’s commentary, May’s performance of 1.23% has largely focused around a handful of previously discussed positions, with most of the remaining positions in the portfolio closing out the month marginally higher than where they began. And once again, counterbids drove this month’s return.
The market is only now starting to catch on to the increase in M&A activity we have seen since mid to late last year. Increased confidence in the domestic economy has seen larger ticket offers tabled and it’s these larger bids that have started to gain traction in the media and the broader public. Of course, for every large transaction there are several that typically fly under the radar for various reasons; deal size or liquidity can often be constraints, or even complexity can see deals quickly thrown into the too hard basket. Fortunately for us, we are nimble enough to assess it all and choose our opportunities even if they go largely unappreciated by the rest of the market.
Our conversations with bankers and lawyers would indicate there is still more to come with a deep pipeline of deals on the horizon flagged. It has been a particularly strong period for us with May’s result marking eleven successive months of positive returns. The indicated pipeline gives us confidence that we will have a substantial opportunity set to keep building on that performance as we move forward.
On to the portfolio, and the battle for Vitalharvest Freehold Trust (VTH.ASX) continues into another month, although the bidding war has slowed ahead of the expected completion in June. We have seen Roc return with a $1.29 offer along with a qualification of what we have internally dubbed an “ ” - Roc declared that should MIRA return with a higher offer, it intended to overbid it by a further $0.01 and the same for any subsequent offer thereafter. To infinity and beyond, please. It hasn’t deterred MIRA who came back with a revised offer and is now in front at month end with the highest bid of $1.295 per share, with the trust having already paid out a $0.025 distribution.
Similarly, the contest for Mainstream Group (MAI.ASX) remains ongoing. The auction appears to be slowing down as we head into June, although it would be remiss of us to call a premature end to it all. We started the month with the best bid of $2.55 and ended it with terms at $2.76. From a valuation perspective the takeout multiples seem a little too high to reconcile, however both SS&C and Apex are strategic buyers. There could yet be some more to play out before curtains are drawn.
We saw a handful of new deals announced this month, notably in APN Property Group (APD.ASX) where Dexus Limited has offered $0.915 per share in cash. We’ve seen a trend in the way larger REITs are now shifting to increase exposure to a more capital light funds management business. Primewest (PWG.ASX) and Centuria Capital Group (CNI.ASX) first announced a merger in April, and now Dexus’ move on APN Property is continuing that trend. Netting out APN’s co-invested funds, Dexus is picking up the funds management component of the stapled entity somewhere around the 17x EBITDA region, which is roughly half the takeout multiple for Primewest. It’s all relative of course, but APN has decent exposure to industrial and convenience retail assets that have been hot property (excuse the pun) of late. It’s certainly a transaction and sector we’re keeping a close eye on.
Recent transactions in WPP AUNZ Limited (WPP.ASX) and Asaleo Care Limited (AHY.ASX) have seen parent entities mop up minority interests in listed companies, and the trend continued with Cimic Group Limited (CIM.ASX) announcing its offer for Devine Limited (DVN.ASX) at $0.24 cash per share. It’s a long way from Cimic’s offer of $0.75 back in 2015 where it secured its current 59% stake, but key shareholder Brazil Farming has publicly committed to accept this time around in the absence of a better offer and so we expect the transaction to complete with minimal issues.
Before we sign off, we thought it best to provide investors with an update to a few administration matters. Most investors would by now be aware that we are currently in process of changing over the Fund's service providers at the conclusion of the existing contracts. Equity Trustees have already taken over the Responsible Entity function, with a change of administrators to Mainstream Fund Services and J.P. Morgan as custodian scheduled to complete in the second week of June. There will be a slight delay in the processing of application and redemptions as the changes are rolled out, so we thank you for your patience during this period. If you would like to discuss any of the changes in more detail, you are more than welcome to contact us via email or phone.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-May-Newsletter.pdfApril, 2021
This month's performance can be summarised by just one word: counterbids. These are some of the best conditions for mergers and acquisitions we have seen for some time, and market expectations are that there's plenty more to come. Deal completion rates are high and revised offers and counterbids are the norm rather than the exception. It is a stark contrast to what we saw eighteen to twenty four months ago. It's unsurprising, then, that the bulk of this month's return can be attributed to counterbids and revised offers amongst multiple portfolio holdings.
As foreshadowed in last month's newsletter, Think Childcare (TNK.ASX) was a big beneficiary of an increased offer from trade buyer Busy Bees. Market prices had moved beyond Busy Bees' $2.10 offer on the back of an earnings beat and communication of a clear pipeline to almost double earnings over the next three years. Busy Bees returned to the negotiating table in early April, bidding against itself when it lifted its offer to $3.20 per share inclusive of a potential special dividend of $0.34. The offer remains non-binding, however we are comfortable that the deal will progress to binding following a short period of due diligence through to the middle of May. Inclusive of franking credits, total value to be received is expected at $3.345.
There are still compelling returns on offer against a closing share price of $3.09. Similarly foreshadowed last month, the contest for Vitalharvest Freehold Trust (VTH.ASX) marched ever onwards and continues into May - not bad for a deal that was originally scheduled to close in March. As we have learnt time and time again, it is never over until it's over. We entered April with a best offer of $1.145 inclusive of a distribution payable, and we closed out the month with the highest bid at $1.285.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-April-Newsletter.pdfMarch, 2021
It was a quieter month relative to the busy reporting season we saw in February, but M&A conditions remain buoyant, deal completion rates are high, and we are finding enough opportunities to continue replenishing the pipeline as soon as mature transactions in the portfolio complete. The end result is reporting another positive return for the period with the portfolio up 1.73% in March. The foundation of the result was very few positions ending the month lower than where they started; the cream on top came from a couple of positions in Vitalharvest Freehold Trust (VTH.ASX) and Think Childcare Group (TNK.ASX) as we will discuss in further detail below.
Roc Private Equity stormed onto the scene at the end of February with a non-binding offer for Vitalharvest at $1.08 cash per share, plus a permitted $0.025 distribution for a grossed up $1.105 per share, above MIRA's binding $1.025 equivalent offer. March saw the contest progress very much to shareholders' benefit.
To fend of the interloper, MIRA increased the consideration payable under its offer to match that of Roc's before the counterproposal could go binding. Unfortunately for MIRA, it didn't have the desired effect. It took Roc only a few days to lift the grossed-up consideration to $1.145 while it worked in the background to firm up its offer.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/20210406-KAEF-Fund-Update-March-2021-1.pdfDecember, 2020
December benefitted from broad based strength in the portfolio as many positions narrowed their discount to terms as the respective deals progressed. More sizeable contributions were made by Abano Healthcare (ABA.NZX) and Sunland Group (SDG.ASX) which helped propel the portfolio to a 1.18% return, marking a sixth consecutive month of positive gains. The breadth of positive performance amongst the holdings is encouraging but we reiterate that there is still a lot more to come from the opportunity set should these transactions complete as we expect. Activity throughout the month was largely centred around existing holdings, with Cardinal Resources (CDV.ASX), WPP AUNZ Limited (WPP.ASX), and Think Childcare (TNK.ASX) all receiving revised proposals.
Following on from last month's commentary, we are seeing more instances of opportunistic bids before the price actions starts to get away from bidders. Australian Super went public with its indicative offer to acquire Infratil Limited (IFT.NZX) at an implied value of $7.43 per share, and although marketed at a healthy premium to recent trading, it was promptly rebuffed by the Infratil board as undercooked on valuation. Major shareholders and sell side commentary were also quick to throw their weight behind the board's stance. It was revealed that it was Australian Super's second bid for the company in recent months and having spent a significant amount of time sizing up Infratil, we're not convinced this is the final offer. WPP AUNZ (WPP.ASX) announced receipt of a conditional offer from its majority shareholder (WPP plc) in late November at a cash consideration of $0.55 per share. As majority owner, the chances of a counterbid were minimal but the discussion turned to valuation of the offer, which had largely been pre-empted by the bidder; a substantial release of franking credits worth up to an additional $0.15 per share were dangled as an incentive to minority shareholders to ease valuation concerns. However, recent strong trading by WPP saw the bidder reconsider and lift their offer to $0.70 share in a binding deal announced late in December.
A special dividend is permitted for even more value. Retained losses on the balance sheet has limited the amount of franking to be passed on, however there is up to a further $0.06 in franking for eligible shareholders in what appears to be a very low risk transaction. WPP was evidently a strong contributor to this month's performance. Abano Healthcare (ABA.NZ) finally closed out its scheme of arrangement with BGH Capital, having started the process at the back end of 2019. Heading into December, there remained a risk of potential consideration adjustment events; while the deal was at no risk of falling over, the final amount we were to be paid was dependent on any future unforeseen COVID-19 impacts to the business. Thankfully, a small COVID-19 outbreak in NSW in the lead up Christmas was not enough to trigger an adjustment, and we subsequently received $5.20 per share for our holding. Sunland Group (SDG.ASX) announced some welcome news, selling off some non-core property throughout the month at a significant premium to carrying value.
The company announced a wind down of operations back in October to address the persistent discount to book value; existing projects would be finished, no new projects would be taken on, and all surplus inventory would be put on the market. Over the next three years, we are to receive dividends and capital returns equivalent to the company's book value as the property developer distributes cash proceeds rather than reinvests them. Book value based on the most recent accounts sits at $2.56 per share. Franking credits worth an additional $0.595 sat in the accounts with sufficient retained earnings to fully distribute them. Since the announcement, the shares have moved from $1.75 to close December at $2.43. Our average cost is towards the low end of that range. As we assessed the company, we continued to see little pockets of value that neither book value nor the market was acknowledging - applying conservative development margins across the remaining pipeline it wasn't hard to come up with a valuation in excess of $2.56. There are some unutilised tax losses to potentially offset some future tax liabilities on profits, but even if no offsets are available, tax payable should be recouped through franking credits.
Inventory is carried at cost, as are investment properties. Even assuming the surplus inventory is sold at carrying value (which ignores the sales announced this month and last), we expect fair value to be closer to $3.50 inclusive of franking credits. Following last month's AGM update showing strong sales for the remaining projects (now 50% pre-sold from ~33% sold at June 30 2020), it's all starting to look like we may even be a little under on our numbers. We look forward to the half year reporting in February to see how progress is tracking.
Finally, Cardinal Resources (CDV.ASX) had several more twists to offer before closing out the year and is without a doubt the most thrilling takeover battle we have seen in recent memory. Nordgold's offer at $1.05 closed December 23, paving the way for Shandong to claim victory pending a conditional increase to $1.075 should Shandong reach a specified level of acceptances by the same day. The day after Nordgold's offer closed, shareholders would awake to an early Christmas present as a fourth bidder (Dongshan) entered the fray with a conditional offer at $1.20 per share. A perfect example of M&A never being over until it really is done and settled! Unfortunately, the elation would be short lived. What Dongshan didn't know at the time of the bid was that Nordgold had already tendered its 30% stake into Shandong's offer, and when a second substantial holder accepted the same day, Shandong was handed control. Unfortunately it was too little, too late from Dongshan. The transaction closes in mid-January and we are set to receive $1.075.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Absolute-Return-Fund-December-Newsletter.pdfticker: FHT0042AU
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factsheet_url:
http://harvestlaneam.com.au/the-absolute-return-fund/
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asset_class: Domestic Equity
asset_category: Australia Large Blend - Absolute Return
peer_benchmark: Domestic Equity - Absolute Return Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund
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fund_features:
Harvest Lane Asset Management Abs Return aims to deliver consistent positive rates of return, with low or no correlation to equity markets. It aims to achieve this regardless of underlying market and economic conditions.
- The Fund invests selectively when the potential exists to generate outsized rewards relative to the risk being incurred.
- The Fund does not track an index and nor is the Fund compelled to be fully or partially invested in the event that Harvest Lane is unable to identify sufficiently attractive opportunities.
- Returns are not guaranteed.