Urbana Corporation: A Net-Net Value Trap?
Urbana Corporation (TSE:URB) (TSE:URB.A) is a closed-end investment company that has been discussed many times on this site. It trades for $1 but has a net asset value of $1.67 (the majority of which are publicly traded companies (CBOE, NYSE, TMX Group). I had invested but eventually sold Urbana at a loss after a group of value investors were politely turned down in requesting a more aggressive buyback (substantial issuer bid), or at best a liquidation and distribution of the holdings. My mistake and the reason why Urbana’s management disagreed was because of something Charlie Munger has preached about for many times: Incentives, for some reason I chose to ignore his advice (probably greed & self rationalization on my part).
Urbana’s management is compensated based on a percentage of assets under management. Buybacks reduce the assets under management, thus reducing their fees. That being said, Urbana has done a good job of buying back stock, just not good enough in my opinion given the size and duration of the discount. Closed-end funds should only trade at a premium to NAV if investors have an expectation of market beating returns in the long run.
Urbana has a history of underperformance with NAV decreasing from $2.71 in December 2006, to $1.67 today. As a potential investor, I’d rather have the immediate liquidation of the company rather than an additional 5 years of Urbana’s investment stewardship.  But that’s not going to happen.
Anyways, That’s the background. I have largely ignored Urbana since I sold it. But I checked in on their NAV today and came across something that I found extremely interesting.
Urbana Corporation: A Net-Net Value Trap?
Urbana has been buying Caldwell Financial.
What is Caldwell Financial?
<<Caldwell Financial Ltd., the parent company of a financial services organization that was established in 1980 by Thomas S. Caldwell.>>
Thomas Caldwell is also the Chairman of Urbana and effectively controls the company with 41% of the common shares. He also owns 45% of Caldwell Financial.
So now we have a massive conflict of interest.
Urbana is buying shares in Caldwell Financial (what was once 100% empolyee and director owned, thus employees are cashing out).
Also, Caldwell Financial isn’t publicly traded so there is no market price to determine the transaction.
Urbana put out a statement yesterday (anticipating a massive blowback?)
The first page details their reasoning on why they are focusing on Caldwell Financial:

“…We have been asked why CFL was not included in Urbana’s stable. This idea was also put forward by shareholders of Urbana.”

I’d be extremely curious what unbiased shareholder would ever think this is a good idea?
But the second page is where things get interesting.
“The internal formula for shareholder purchases and sales is one times book value and one times annualized investment management fees, net of payouts to other dealers and internal portfolio managers. This valuation is approximately a half to a third of the estimated price which would be received for a full sale of CFL.”
I have no idea if this is fair or not. Their financials are not public, so we are left in the dark. I think most shareholders would feel the same way. An ‘outside fairness opinion’ by Macquarie Group Limited (ASX:MQG) was obtained but I don’t put much faith in an opinion that you pay for.
Caldwell makes it clear that he believes he was not directly involved in the vote and that it is legal (bold added by me):
Once the offer was made, neither myself, as Urbana’s Chairman, nor any other Director affiliated with CFL was allowed a voice or a vote in any potential transaction. An independent committee of the Board of Directors, headed by George Elliott, examined the offer and sought an outside fairness opinion by Macquarie Capital Group. This is followed by an approval process by the Toronto Stock Exchange and the Ontario Securities Commission, the Investment Industry Regulatory Organization of Canada, as well as securities commissions/regulatory bodies across Canada. 
The process took several months. 
Several months? Is that supposed to make shareholders feel better? This is a 1% portfolio position worth only $1m. Why spend several months on a company that severely damages your reputation in the eyes of shareholders?  They couldn’t find any other financial company in the world to investment in? They even have holdings in The Bombay Stock Exchange and the Budapest Stock Exchange.
I don’t care if it’s 100% legal. It raises too many questions.