Urbana continues to have its discount to its reported net asset value expand. It’s up to a massive 50%!
Why the discount? A dual class share structure, a conflict of interest with management, related party transactions and a less than wonderful track record (although much of that is due to the nature of the sector they were invested in, stock exchanges)
What could Urbana Corporation (TSE:URB.A) do to permanently reduce the discount to NAV?
In September 2011, Buffett announced a buyback that will continue ‘indefinitely’.
When Berkshire shares fall below 110% of book value the company will buyback an unlimited number of shares. There are caveats such as not reducing Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s cash below $20b and it being dependent on the attractiveness of other investments but for all intents and purposes it is an extremely serious indication to the market that management thinks the stock is cheap and will take strong actions to reduce the discount to its intrinsic value. Since the announcement Berkshire has very rarely traded below the buyback level.
Now let me say Urbana Corporation (TSE:URB.A) has made very serious buybacks in the past. Currently the company has 70m shares outstanding, down from 81m in 2010 and 87m in 2009. But it’s not enough because of the issues mentioned above.
So what could a Berkshire-esque buyback look like for Urbana?
Set a permanent buyback at 90% of NAV.
Urbana Corporation (TSE:URB.A) doesn’t have the cash reserves or operating income of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), but it does have a very large liquid stake in the CBOE Holdings, Inc (NASDAQ:CBOE) and NYSE Euronext
) which together represents 72% of its investment portfolio. If there was ever an indefinite buyback that expressly guaranteed to repurchase an unlimited number of shares when they drop below 90% of NAV it should reduce the discount to less than 10%. And if doesn’t, the company will begin to self liquidate through the buyback allowing for the return of capital to shareholders.
This is a very pie in the sky idea which I do not expect to occur because it could sharply reduce the size of Urbana’s investment portfolio which is where management gets its fees from, but it would definitely be a homerun for shareholders.
Full Disclosure: Long Berkshire Hathaway. No position in Urbana.
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