DENALI INVESTORS, LLC ANNUAL MEETING 2009

Transcription

1 DENALI INVESTORS, LLC ANNUAL MEETING 2009

2 DENALI INVESTORS, LLC An Uncommon Fund Modeled after the original Warren Buffett Partnerships hedge fund of the 1950 s Value-Based Special Situations Opportunistic Concentrated Net Cash Our framework is rare in today s world

3 Overview OBJECTIVE STRATEGY PORTFOLIO Produce superior long-term absolute and relative returns versus the S&P index Combine Generals and Workouts ; Focus on identifying value-based investment ideas and margin of safety Build a portfolio of 5 15 very attractive, non-market correlated investment ideas which have high conviction through fundamental research

4 Generals + Workouts Generals Undervalued stocks Neglected Long time horizon Favorable risk/reward Shorts Flawed business, management Unrealistic expectations Negative catalysts Workouts Non-recurring; Catalyst Internal/External Mergers Tender Offers Spin-offs Capital Structure Arbitrage Reorganizations Liquidations Bankruptcies Flexible search for opportunities

5 Investment Philosophy VALUE FUNDAMENTALS CONCENTRATION LONG-TERM VIEW NET CASH Buy Cheaply. Invest at steep discounts to intrinsic (business) value Be an Owner. Approach investments as an owner of a business, rather then chasing momentum or technicals Be Selective. A handful of great, highconviction ideas is better than a hundred mediocre ones Use Time. Patient long-term investing creates a distinct advantage over shortterm speculation Don t Risk Ruin. Leverage is hazardous no matter the number of PhD s

6 A Bit About Q Generals

7 Generals Long/Short % Exposure Long Short Net 30-40% 10-15% 15-30% Our Generals consist of a handful of longer-term ideas, and we are looking to add more.

8 Q Special Situations

9 Q Idea #1 An Election Merger

10 Deal Background Precision Drilling (PDS) buys Grey Wolf (GW) GW and PDS announced a merger in Aug 2008 Tail end of an energy boom. The election merger consideration for each GW share was either 1) $9.02 in cash per share, or 2) share of PDS. Election subject to proration. By December 2008, in combination with the market market, GW traded down from $9 per share to about $6 per share. PDS from $20-25 to $6-7 per share. An opportunity hiding in plain sight

11 Possible Outcomes Outcome Band includes: The deal closes (PDS buys GW) The deal breaks (PDS does not buy GW) GW shareholder makes cash election GW shareholder makes share election GW shareholder makes no election (defaults to share election) Something in between

12 Ways to Place an Investment The Approach Short GW & hedge PDS Counterintuitive (typical to long target / short acquirer) Tactics are critical Standard merger arb analysis on GW alone is limited Insurance/hedge cost Combination increases safety The Ratio 1/10 risk/reward ratio

13 Heads I Win, Tails I Don t Lose Combining the GW short and PDS hedge: Investment boils down to heads I win (likely a lot), tails I break even. The near-term catalyst creates value the merger will either close or break. The Outcome Does Not Matter: the potential for 100% upside exists on a close or break.

14 So What Happened? Deal closed Dec 19th Hiding in plain sight 2 Events Catalysts Insurance active 1 1 2

15 Review Special situation Optionality that s free Hedging (Insurance) The Ratio Heads I win, tails I don t lose

16 Q Idea #2 Free Spin-Off

17 PNX Spin-Off of VRTS Phoenix (PNX) Spin-off of Virtus (VRTS) PNX VRTS

18 Phoenix (PNX) PNX is a Tier 2/3 player in the insurance (life and annuity) space. Valuation Sector volatility creates value-based opportunity. Book value, $0.9b upon spin, implies 0.2x book. Assume large haircut to book value, metrics. PNX pricing is still far below conservative values. Pricing implies high likelihood of bankruptcy scenario. No credit to VRTS

19 Virtus (VRTS) VRTS is a Tier 2/3 player in the space. A company with $20b - 25b in AUM. Valuation VRTS pricing at 0.2% of AUM At 50bps, $20 per share (adj. for the 20 to 1 spin ratio). At 0.3x book value at spin. Net cash of ~$3 per share, NOLs of ~$40 per share ($20 federal; $20 state; taxable spin). We should remember that the value from VRTS - it is free to us.

20 Valuation PNX & VRTS SEP 08 PNX DEC 08 PNX JAN 09 PNX JAN 09 VRTS Price: $10 $1.50 Price: $3.00 $10* MC: $1.2b $180m MC: $360m $58m PB 0.8x 0.2x PB 0.4x 0.3x % of AUM 0.2% * 20 to 1 share ratio on spin Pricing implied bankruptcy

21 Deal Background PNX was a stomping ground for hedge funds that helped create the catalyst 1 2

22 Spinoff Checklist Valuation Capital structure Orphan business/stock Institutional ownership/pressures Management incentives/ownership Fundamentals

23 Ways to Place an Investment Pre-spin Play the break up value - Via equity or options Post-spin Buy PNX on the cheap Buy VRTS on the cheap - Via equity or options (time arbitrage/leaps) Options/Volatility create very attractive risk/reward

24 Review Spinoff Inefficiency built into the system Valuation The Ratio

25 Q Idea #3 Forgotten Merger

26 Idea #3 (Presented 11/20/08) A Merger Arb OVEN TurboChef ($1.60) - MIDD is a consolidator (know Selim Bassoul) - $4.90 per share consideration: $3.67 cash (funded via revolver), $1.22 stock (MIDD $25 x ) - Planning to close Q Special meeting for OVEN vote (simple majority) - Management on board (20% ownership) - Synthetic via options (size, cash inflow, cost basis)

27 Q Idea #4 Self-Tender Offer

28 Idea #4 (Presented 11/20/08) A Tender Offer HLTH HLTH Corp. ($8.10) - Up to 80m shares (of 185m outstanding), no minimum - $8.80 cash per share tender (funded via $1b net cash) - 9% return in one week - Expiration 11/25/08 (next Tuesday) - Management on board and have tendered (think motivations & busted merger ) - Unlikely to reach 80m share max - Don t forget: post tender potential

29 Looking Forward Capital structure arbitrage Merger arbitrage Corporate liquidations Tender offers (self & third party) Upcoming bankruptcy wave

30 Thank You