This morning, I woke up to the news that the NYSE is getting acquired for a nice premium by ICE. Being a micro-cap focused blogger, the first thing I thought of when I saw the news was to drop in on my old friend Urbana (UBAA).
For those of you who don’t remember, Urbana is a closed end fund trading at a huge discount to NCAV. Unfortunately, some sketchy insider deals (see this letter for their description of a recent one) have kept them from doing what you want closed end funds to do- buying back shares until the gap completely disappears and/or liquidating.
They publish NAV weekly, and their last NAV came in at $1.65 per share vs a share price of $0.85 per share…. but notice that the NYSE makes up ~35% of their portfolio. NYSE is up ~30% on news of the deal, and my rough math points to this gain adding a whopping 19 cents per share to NAV. (Bonus- they own exclusively financials and almost exclusively exchanges. I bet you get some price movement up in all of their financials as the market anticipates further acquisitions. And many of their holdings are small emerging privately owned exchanges- perfect for further acquisitions!)
Even if the market continues discounting Urbana at 50% of NAV, that would mean the share price should gain ~$0.10 today, or more than a 10% gain on yesterday’s price.
And I think it represents an even more interesting opp. Looking at the deal terms, if Urbana chooses to recieve either cash or the mix of cash and stock, they would be flush with cash and have the opportunity to buy back a ridiculous amount of shares at a huge discount to NAV. (Don’t worry about taxes here- even at the premium, the price is way under UBAA’s cost basis).
How do I think this plays out? I personally think the stock price will likely languish a bit today before gaining 5% or so later today as people realize that NAV is about to go up. But given all of the horrible insider deals, I really doubt that you get more than that, and I doubt management takes advantage of this opportunity to create a bunch of value through share buybacks. And the insider deals also prevent someone like Special Opps from coming in and liquidating the fund. So no activism here.
So I’m staying away… but an interesting “trading opp” nonetheless.
PS- fun fact: you may have noticed that their CEO (Caldwell) was actually quoted in the Bloomberg article I linked to up top.
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There isn’t enough volume for big buybacks and I believe TSX rules prohibit buying back more than 10% of a company annually anyway. I suppose they could attempt something like a tender, but Caldwell is opposed to shrinking the equity base materially because he thinks a closed-end fund is a “great vehicle for asset management”.
Agreed, Caldwell has stated publicly they don’t want to shrink the Fund too much because long term they see great value in the structure. They will take mostly stock in the deal or cash which they will use to buy more exchanges (maybe some private ones). They will not however, do massive buy backs, or a substantial tender. Thesis is solid based on the numbers, but management is greedy here and has different incentives than shareholders. I say stay away.
Sure its great value for them, not shareholders at 3% management fee.
So inventives are clearly misaligned here, but 1) at a 50% discount, I’m willing to take some of the risk of slightly suspect management, and 2) Caldwell owns 43% of Urbana, he stands to benefit greatly from any sort of buy back. His shares have an approximate value of $28M. If Urbana were to trade for NAV, his holdings would roughly double. That’s 25 years or so of management fees.
no u are off there
the way the dual structure works is that he has less than ~10% economics but over 40% in voting