Author: George Silva, Fat Pitch Financials
Covestor model: Workouts
Disclosure: Long EEA, ACL, NOVL, MENT, SHMR, NOC
The first quarter of 2011 was one of recovery for the Fat Pitch Financials Workouts model. According to Covestor, the Workouts model grew 5.62% in the first quarter of 2011 versus 5.42% for the S&P 500. Overall since the model’s inception on November 1, 2011, the Workouts model has returned 3.27% (the S&P 500 was up 11.94% over the same period).
In January, the Workouts model added The European Equity Fund (EEA) at a price of $7.62 per share. This closed-end fund offered to buy 5 percent of its outstanding shares at 98 percent of the fund’s net asset value. On February 8, 2011, the fund tendered shares at $8.62 per share. Twelve percent of the shares in the Workouts model were accepted for payment at the tender price. The remaining 88 percent of The European Equity Fund (EEA) was sold on April 1, 2011 for $8.10 per share.
At the end of January, the Workouts model also added a position in Alcon Inc (ACL) at $163.02 per share. Novartis AG upped its offer for Alcon back in December by offering 2.8 Novartis shares for each share of Alcon, which will be topped off with cash if necessary to ensure Alcon shareholders receive $168 per share. I sold half the position for $165.45 on February 23 to raise some cash.
The portfolio also successfully closed out a tender offer position in Copart, Inc. (CPRT) on January 24, 2011. This tender offer played out just as planned and netted the portfolio some profit.
In February, the Workouts model added Novell Inc (NOVL) at $5.94 per share. Novell agreed to be bought out by Attachmate Corporation for $6.10 per share. This is a simple, straightforward merger arbitrage opportunity.
Toward the end of February, I added Mentor Graphics (MENT) at $16.14 to the Workouts model. Activist investor Carl Icahn offered $17 per share in cash for Mentor Graphics. Sadly, at the end of March, Mentor Graphics rejected Icahn’s offer. On March 31, 2011, shares of Mentor Graphics closed at $14.63 per share.
Shamir Optical Industry LTD (SHMR) was added to the Workouts model at the end of February for $13.61 per share. Shamir Optical announced last December that it will merge with a subsidiary of Essilor International SA. Under the terms of the merger, shareholders of Shamir Optical Industries will receive $14.50 in cash per share.
At the end of February, the Workouts model also received cash for the successful merger arbitrage opportunity we previously discussed concerning the buyout of Crucell NV (CRXL) by Johnson & Johnson (JNJ). The Workouts model ended up receiving just over $33.98 in cash per share of Crucell on February 24, 2011.
Finally at the end of March, the Workouts model added Northrop Grumman Corp (NOC) at $68.09 per share. Northrop Grumman announced that it would be spinning off one share of Huntington Ingalls Industries (HII) for every six shares of Northrop Grumman held on March 30, 2011. I’m hoping to profit from both the parent company stock and the spinoff shipbuilder, Huntington Ingalls Industries. The prospects for both stocks look attractive.
Sources:
EEA: Tender offer statement, 1/7/2011, https://www.sec.gov/Archives/edgar/data/791718/000095012311001521/y88836exv99waw1.htm; “The European Equity Fund, Inc. Announces Expiration and Preliminary Results of Tender Offer,” February 9, 2011 https://www.sec.gov/Archives/edgar/data/791718/000008805311000214/sc_to-c020911eef.htm
ACL: : Press Release: Alcon and Novartis Agree to Merger Terms, 12/15/2010 https://www.sec.gov/Archives/edgar/data/1167379/000116737910000193/acl6k1215novartisex991.htm
CPRT: Copart Tender Offer Statement, December 15, 2010 https://www.sec.gov/Archives/edgar/data/900075/000114544310002830/d27612exh99a1a.htm
NOVL: Novell Stockholders Adopt Merger Agreement with Attachmate Corporation, February 17, 2011 https://www.sec.gov/Archives/edgar/data/758004/000119312511039225/dex991.htm
MENT: Mentor Graphics Confirms Receipt of Unsolicited Conditional Proposal from the Icahn Group, February 22, 2011 https://www.sec.gov/Archives/edgar/data/701811/000119312511042240/d8k.htm
SHMR: December 1, 2010 SEC Filing – https://www.sec.gov/Archives/edgar/data/1317362/000117891310003198/exhibit_a-2.htm
CRXL: Johnson & Johnson Completes Tender Offer for Crucell and Declares Offer Unconditional, February 22, 2011 https://www.sec.gov/Archives/edgar/data/1126136/000120864611000076/c104297.htm
NOC: Huntington Ingalls Industries, Inc. Form 10 Registration Statement Declared Effective, March 18, 2011 https://www.sec.gov/Archives/edgar/data/1133421/000095012311026758/v59031exv99w1.htm
