Aug 15, 2007
- Commerce Planet: CPNE.OB took a beating after announcing mediocre earnings. CEO Michael Hill said he was pleased with the quarter (I’m not), adding: “we executed on initiatives to more effectively spend our advertising dollars increasing our efficiencies and performance results. We expect this strategy to lower our future operating costs and protect the quality of our ongoing revenue stream.” Frankly, I think companies that blow their quarter could do with a little less corporate doublespeak. I was wrong on this position, but I don’t plan to stay wrong.
- Investors also punished China 3C Group: CHCG.OB after its quarterly earnings announcement. I didn’t think it was that bad but if the stock continues to trade down I will exit this position as well.
- Air Industries: AIRI.OB reported a slight loss, but promised a strong second half on a record backlog. “The improvements in revenue and gross margin, as well as progress with our consolidation strategy, as exhibited in the second quarter of 2007 are a harbinger of the growth to come in the second half of the year,” said Peter Rettaliata, Air Industries Group President and Chief Executive Officer. “Importantly, resulting from our growth initiatives, we look forward to a return to profitability in the second half of the year.”
- What’s going on with gold shares? All kinds of miners including Western Goldfields: WGDFF.OB, US Gold: UXG, Crystallex: KRY, and Agnico-Eagle: AEM are off almost 10% today, yet gold futures were only off slightly. We’ll find out soon whether it was a fund liquidation or, as James Sinclair has posited, OTC derivatives blowing up. I have cut my gold exposure considerably but still own some Goldenstar Resources: GSS, a little Crystallex, and a few other small positions.
- As expected, Accredited Home Lenders: LEND sued to enforce their buyout contract. However, Lone Star pushed back the deadline for the tender until August 28, which indicates they are likely to try to renegotiate on price. I am told that LEND has a strong argument in the pending litigation.
- I’m doing some very exciting things at my primary job that will slow down my pace of posting until mid-October. Please stay patient and understand if I don’t get to your questions right away. Thanks.
DISCLOSURE: Long GSS, KRY, CHCG.OB, AIRI.OB, CPNE.OB.
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Aug 11, 2007
On August 3, I warned that investors who thought they stumbled on an easy triple with Accredited Home Lenders: LEND were in for a rude awakening: “With a buyout price of $15.10 and a close yesterday of $5.31, the spread is huge. That is not an opportunity; its a danger sign. It shows that the best and brightest arbitrageurs on the street, who have access to far more information than you and I, don’t believe the deal will close as negotiated.”
After the bell last night, Lone Star filed an amendment to its tender offer stating: “in light of the drastic deterioration in the financial and operational condition of the Company, among other things, as of today, the Company would fail to satisfy the conditions to the closing of the tender offer. Accordingly, Purchaser does not expect to be accepting Shares tendered as of the end of the current offer period ending at 12:00 midnight, New York City time, on August 14, 2007.” In other words, the deal is off, and according to Lone Star, its Accredited’s fault.
Accredited Home Lenders will undoubtedly sue to attempt to force Lone Star to go through with the deal. In a press release issued last night, Accredited stated that: “the Agreement and Plan of Merger with Lone Star expressly provides that changes generally affecting the non-prime industry in which the Company operates which have not disproportionately affected the Company do not provide a basis for Lone Star to not honor its obligations” and promised to “hold Lone Star to its obligations, and to hold it fully responsible for any damages caused by its failure to satisfy those obligations.”
But the company’s own SEC filings indicate this will be an uphill battle. On Friday, Accredited filed an NT-10Q admitting that the company was negatively impacted both by industry conditions and by specific problems attributable to loans it acquired in connection with its purchase of Aames Mortgage last fall. I’m sure that a bevy of lawyers are already planning arguments on both sides, but I wouldn’t count on a victory for LEND.
Merger arbitrage is a tough game even for professionals. For individual investors it can be deadly.
DISCLOSURE: No position.
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Aug 3, 2007
The talking heads all seem to agree that Lone Star’s deal to buy out troubled Accredited Home Lenders: LEND will go through. I just heard it on CNBC, read it last night on RealMoney.com, and in Forbes.
With a buyout price of $15.10 and a close yesterday of $5.31, the spread is huge. That is not an opportunity; its a danger sign. It shows that the best and brightest arbitrageurs on the street, who have access to far more information than you and I, don’t believe the deal will close as negotiated. Neither do I.
I confess that my skepticism is a snap judgment. I have not read the purchase agreement and there is a chance that, as Cramer argues, it is airtight. But usually there are ways out, either by exercising express options to terminate or by challenging the veracity of the sellers representations and warranties. Lone Star may also get a hand from regulators. As the company admits, the deal cannot close unless it gets 95% approval from state regulators. The company says that this requirement shouldn’t prevent closing, but who knows.
Bottom line: If you think you have found an easy triple, think again. While it is possible that Lone Star will proceed with the deal as negotiated, I imagine that a fleet of lawyers now are preparing an exit strategy.
DISCLOSURE: No position.
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