The U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and the Commissioner of Competition appointed under the Competition Act (Canada) issued a “no-action” letter advising the parties in writing that she does not have grounds on which to initiate proceedings before the Competition Tribunal under the merger provisions of the Competition Act (Canada).

I may take a position in NCX this week.

Paul mentions the other conditions that have been satisfied, but I am pretty sure that the deal required some kind of Canadian Government agency ok.

I am playing ENPT, but small because of some shady dealings that I have read about the Din family. Again, not sure what to believe, as much of this was posted on message boards by less than reputable sources, but I think there is some cause for caution. I am beginning to question the lack of a set date for the shareholder meeting. I hope this is resolved soon. I might be more willing to take a bigger position then.

Any other opinions would be much appreciated…

Thanks for the idea and update Paul.

With NCX – the spread may not be large but the risk seems low.
1) shareholder approval
2) EU antitrust approval
3) No financing conditions

I don’t hold a position in ENPT.
I do hold a position in NCX.

I haven’t been looking at mergers lately. There just doesn’t seem to be any really good ones. I’m not interested in gaining 10% over 5-6 months. It just doesn’t make sense.

The only one that may be worth the effort would probably be ENPT but that one still has over 1 1/2 months remaining.

With the market moving up, although it’s unclear whether the upward movement can be sustained, arbitrage plays aren’t so profitable. In a flat or down economy, yes. But if the market crashes again, I’m hoping to pick up some great companies I have on my list.

I just started looking at Arb deals again. Anything on your radar?

Thanks,
Tristan

And then I’m hoping for the ENPT deal to close like it’s supposed to.

http://buyandholdplus.com/blogweb/index.php?/archives/50-New-Purchase-ENPT.html

As for stock deals, I don’t like them period and I haven’t shorted anything before, so I hope someone else here can answer your question.

http://finance.yahoo.com/news/Image-Entertainment-bw-14964740.html?.v=1

But based on history – it sounds like QBlack and Image wants to close the deal. Just can’t raise financing. Any opinions on whether there will be another suitor for Image? DISK doesn’t really fit my investing criteria for an arb but I find the merger history so fasinating that I can’t help but continue to follow it. (feels like a night-time soap-opera)

Disclosure: I have no current position in DISK. But have held positions in past 30 days.

Other topic – LIMC – The lack of merger activity makes me more curious about all stock mergers. I have only ever invested in all-cash deals. The LIMC merger looks promising. (1) TAT already owns a large percentage of LIMC (2) Stock-deal so no financing issues.

In an all stock-deal – how much hassle is it to deliver the converted stock to cover the short of the acquirer. I have a regular online brokerage account (Fidelity) and I was planning to call and ask but was wondering about others experience. Or do people prefer to buy puts (if available) on the acquirer instead? Also – are there any issues with shorting-the-box rules if a broker cannot delivery the converted stock to the shorted stock.

Thanks for any opinions.

1. Probability of Closing: This deal is almost a perfect example of Knight’s uncertainty so I won’t dare to throw a guesstimate. It could be anything. However, uncertainty is our friend because it scares momentum players and arbitrageurs. I would say that at this moment most of the big shots are long gone.

And what weapon do we have small players have against this uncertainty? Klarman’s golden glove to catch falling knives: margin of safety

2. Margin of Safety: Most people buying DISK do not even know what they are buying. They just see recent sell-offs and use that as a proxy for downside risk.

Since when we value investors trust Mr. Market? Especially since film libraries are assets that time and again are being underestimated by our bipolar partner. P/E ratios lack accounting of the heavy non-cash depreciation and amortization expenses, And M/B ratios usually undervalue the library because it is not marked to market.

At the same time the library has some particularly favorable economics:

- Growth potential across formats and internationally with marginal investments
- Low maintenance CAPEX
- Steady royalty cash flows

In other words, they are the perfect LBO or acquisition target. The only problem is the risky film production. But once you have the rights, no sweat! Buffet likes, or used to like, newspapers. I like film libraries.

I prefer to use equity free cash flow and in this case, EBITDA is a good proxy for FCF because of the low maintenance CAPEX. And because of the steady cash flow, compared to real estate for example, a multiple of EBITDA is a good estimate of asset value.

VALUATION Q3 2008

I used Q3 numbers because the company has changed for good in a hostile financial environment.

- Expand theatrical distribution rights to higher-profile feature films.
- Conservative prints and advertising expenditures to cap risk in the event of theatrical failure and greater focus on the rental marketplace
- Acquire “direct-to-video” content and distribution opportunities from the closing of the independent and specialty divisions of major studios
- Reduced distribution expenses through agreement with Arvato for replicating, warehousing and fulfilling retail orders

I did not include working capital in the valuation because it was very volatile quarter to quarter. If someone has insights into that, they are very welcomed

Earnings from Operation: 2.0 million
Amortization and Depreciation: 1.8 million
Interest Expense 0.9 million
Taxes 0.0 million
- Other Expenses – 0.8 million (just in case, mainly $561,000 M&A)
EBITDA 3.9 million per quarter
15.6 million annually

4x EBITDA 62.4 million (a low multiple even for industrials)
- Debt 20.3 million

Value Standalone 42.1 million
Market Cap 31 million
Margin of Safety 27%

Another way of thinking about this is trying to estimate the rate of return for the un-levered firm. For that I am going to assume a conservative 30% tax rate given they NOL carryforwards.:

EBITDA 15.6
After tax free cash flow 10.9
Enterprise value (Market Cap + Debt) 51.3
FCF / EV yield 21.2%

That is right, a wide moat business with an un-levered 21.2% annual rate of return after taxes. And consider that international and digital is less than 4% of current sales, 2.5 M USD in cash from the escrow release, no value added from potentially being acquired player with global distribution, and short term catalyst at twice its current price.

In my opinion it looks very compelling even if the deal does not close … if it would survive maturities, covenants, capital requirements to finance working capital and a blundering management.

I am falling asleep. To be continued….

Disclosure: Long DISK.

The blog posting is a good read of the events.

Jae – thanks for your thoughful posting – it more clearly articulates my view on DISK. I did sell out my entire DISK position today as it was spiking. I may go back in again.

Right now – ENPT seems more appealing to me. And although the spread on NCX is small – it meets my criteria and I’ll probably open a position in NCX.

Business wise, I certainly dont like how this company loses so much money in its operations and having to rely on debt to stay alive. The deal extensions doesn’t make it attractive either. The reason for the hold up is financing. However, Nyx has never backed off the deal or mentioned that it’s financier is backing off like they did in EMAG. DISK and Nyx has been very open and transparent to update shareholders which is a good indication that Nyx wants to go through with it. Problem is Nyx is seriously stupid or something. Constantly having troubles depositing even $500,000 and constantly amending the agreement every few days.

I see the potential downside of around 40-50% on DISK.It will probably end up at $0.80 if it fails but the extra $2.5million (IF they can receive it) will certainly boost the cash value per share. Not saying the quality of the shares will be great, but it will be significantly better than what it is now.

If Nyx wants to extend the merger again, the new deadline would be May 4 and they will deposit another $3 million. DISK could also potentially collect another $3m, increase its cash by $5m total from fees which will be around $0.25 in cash per share.

Another reason as to why I am buying DISK now is that it had multiple bidders at the $3 mark. If Nyx fails to complete, there are good chances of other buyers coming in.

I see this as a 60-40 bet of going through at best. Therefore I have made my bet accordingly. If the deal is successful, my portfolio moves up 3%. If it fails, it goes down 2%.

At any rate, it is supposed to close in 5 days at double the current price. So I would really like to know why this is considered “risky”.

Perhaps the family just wishes to take the company private. I believe they own some 25% or so already. But there I cannot determine how the acquisition will be funded.

I do own some DISK which although risky – the various bounces have been profitable.