Motiwala Capital Quarterly Letter- Merger Arbitrage Ideas
January 2012 – March 2012 Report

Dear Friends,

This is our quarterly letter to clients for the period from January 2012 to March 2012. Global equity markets remained extremely bullish since October 2011. Most US indices were up 10%+ in the first quarter of 2012. Motiwala Capital completed its first year of operations. All accounts are of friends and family and we appreciate the trust placed in me and my firm. I have invested a six figure amount which is 90% of my liquid net worth in the same investments as my clients. As a reminder, we manage separate accounts and not a single commingled fund.

Portfolio activity – Summary

We had another busy quarter. Our portfolio is broken up into two parts. The bulk of the portfolio is invested in long equity positions we refer to as ‘Generals’. These investments are longer in duration. We took on 4 new positions and closed two. One portfolio company (GME) initiated quarterly dividends and is now fully debt free. We also added to four existing positions and reduced two positions. We ended the quarter with 15 positions.

We took on eleven new special situations in the quarter and subsequently closed seven of these for modest gains. We received cash payment for three special situation positions from the previous quarter.

Portfolio activity – Detailed

Generals: 2 closed, 2 reduced, 4 new positions, 4 increased. Ended with 15 positions.

Portfolio exits: We closed our positions in Bolt (BOLT) and Gravity (GRVY).

GRVY shares appreciated sharply during the quarter. We initiated our position at $1.2 per share in the last quarter. In our Q4 report we wrote “While investors have been disappointed, at the price we took the position we feel there is limited downside. Shares trade significantly below cash and securities held on the balance sheet”. As the company launched private and public beta testing for its next generation game, the price appreciated strongly. We exited as the share price moved from trading significantly below cash to near cash levels. We booked a 40% gain in the stock. We sold early and the stock rose 50% since our sale. While one can be upset at selling too early, we would gladly take 40% gains in such a short period of time. This business is often one of disappointments – you don’t buy enough or you buy too much too early or you sell too early or you sell too late or you sell too much too soon…you get the point!

BOLT shares appreciated strongly on the special dividend announcement. We took smaller gains in this medium size position as we were not very sure about the acquisition Bolt did a few quarters back. We exited around $13.2. Our total return (capital appreciation + dividend) was ~15%. Bolt went on to announce a regular dividend as well and shares have held up pretty well with oil prices continuing strong north of $100/barrel.

New positions:We added four new positions to the portfolio in the quarter.

We often hear commentators talking about valuations of entire markets and comment that the markets are undervalued or overvalued. At Motiwala Capital, we invest in one company at a time. We look to buy good quality businesses (strong balance sheets, consistent free cash flow generation, high ROIC) at attractive valuations.

For two of our new positions, we went across to Europe (though listed in the US via ADR). We purchased positions in primarily UK retailers Tesco and Halfords. The other two positions were companies headquartered in the US. Shares of Iconix Group came under pressure after the company announced Q4 and 2011 earnings and issued guidance for 2012. While Lear shares were not purchased at the lows seen in last fall, we feel the shares trade at a significant discount to their fair value and also to the industry despite having one of the best balance sheets in the industry.

Lear Corporation (NYSE:LEA)

is a leading global supplier of automotive seating and electrical power management systems. Lear came out of bankruptcy in late 2009 with a solid balance sheet and closed down under performing operations. With 100 million shares outstanding and a share price of $46, Lear has a market cap of $4600 million. Lear has $1 billion in excess cash on the balance sheet and will generate FCF of $400 million. Lear returned excess cash to shareholders in 2011 via buybacks and dividends and plans to do more of the same. We think Lear should continue to do well as the demand for cars/trucks should be robust as world economies improve and the average age of cars in US is about 11 years.

Tesco PLC (ADR) (PINK:TSCDY) is one of the world’s largest retailers with operations in 14 countries including UK, South Korea, Thailand, China, Japan and the US. In FY 2011, Tesco had sales of £61 billion and generated profit before tax of £3.5 billion. Tesco had a market cap of £26 billion with a P/E of 10x and a dividend yield of 4.5% (that has grown for many years). Tesco owns about 75% of the land beneath its stores and this acts as a large margin of safety for our investment. Tesco has stumbled recently in the UK market but it has a leading market share of about 30%. Tesco is also growing rapidly and profitably in Asia and is number one in Thailand and South Korea.

Iconix Brand Group, Inc. (NASDAQ:ICON) is a brand management company that has a portfolio of 27 different brands. Their brands do roughly $12 billion in sales at the retail level. Iconix receives royalty payments from its partners for these sales. It has a superb business model with no inventory, no manufacturing, no capex — an extremely asset light model producing gobs of free cash flow and high operating margins. In FY2011, ICON had revenues of $370 million and generated $180 million in FCF. ICON has more debt than we usually like in our investments. However, with the stable FCF, interest is well covered and Icon could chose to pay off the debt in 2-3 years if it wants to. We purchased ICON at P/FCF of 7x and think there is lot of room for growth as it increases partnerships globally.

Halfords Group plc (LON:HFD)  is the UK’s leading retailer of automotive and leisure products and leading independent operator in garage servicing and auto repair. Halfords has 467 retail stores in the UK and 250 car repair

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