|
March 18th 2015
HCHC- SOLD
Following HC2's earnings report this week, the stock moved
closer to $10, or 6x EV/EBITDA, our estimated intrinsic value,
which is where we sold.
Background
We first identified HC2 prior to their name change, from PTGi,
in January of 2014. They were trading below NAV at a $60m mkt
cap with no debt and $200m in NOLs. Phil Falcone purchased a
40% stake and received board seats. He then withdrew PTGi's
DEC13 request to be voluntarily delisted. The initial thesis
was that he was going to explore ways to take advantage of the
NOLs by building out PTGi.
In March 2014, PTGi renamed itself to HC2 Holdings (Harbinger
Capital 2??) and also re-designated a non-operating segment
from for-sale to ongoing. This furthered our view. In June,
HC2 purchased a 65% stake in Schuff International at a price
of less than 3x EV/EBITDA, ultimately consummating a tender
for 91% of the company in the Fall. HC2 continued to
purchase additional companies throughout last year. (There are
some great breakdowns of these companies and valuations
discussed by Bradd Kern on Seeking Alpha.) As HC2 continued
their acquisitions, they issued preferreds and began to lever
up HC2. Through one of these debt issuances, HC2 themselves
valued their majority owned Schuff position north of $55/share
valuation compared to their $31.50 purchase price (*relevant
to those who also have an investment in SHFK). A catalyst we
were anticipating, uplifting to a major exchange from OTC,
occurred at the start of 2015.
Why we sold
Valuation. We sold our position based on the $10 price for
~$70m EBITDA, or roughly 6x EV. Schuff represented about
~$45m of EBITDA. 6x is typically viewed as a cheap valuation,
but coupled with execution and key-man risk, and a
conglomerate structure, we feel this is fairly valued. For
execution and key main risk, the Falcone exposure is greater
the more fair valued the company is, requiring more and more
deals with strong cash flows to support the debt that is being
put on and the preferreds that are being issued.
Outcome/Post
The stock has tripled since JAN2014.
From a long-term view, HC2 may indeed be in its early stages,
as this is now Falcone's primary focus after leaving Harbinger
last year. However, we feel the margin of safety has closed
and we are replacing the investment with other opportunities
due primarily to the execution and key-man risk. We
acknowledge that we may be getting out early, and we'll
continue to track this to evaluate post-investment lessons.
Lessons learned
- Don’t unnecessarily trade out of the stock. I sold out of
this position as it eclipsed $8 the first time. Thankfully, we
got back in under $8, but considering the tax implications,
the return's full potential was hurt.
- Size based on margin-of-safety. We initiated a small
position in the company, <2% of the portfolio. As we evaluated
the transactions, especially the Schuff acquisition, we added
making it a 7% position. Stepping back, it would have been
prudent to build it quicker, especially as PTGi was initially
trading for less than NAV when we noticed Falcone's initial
moves.
- PUSH/PULL (Thanks, Craig.)- Schuff played a role in this
investment and it’s being fairly valued now through HC2. We
are pushing HC2 out of the portfolio with another construction
position, while also keeping our Schuff* position. |
