The 10th Annual New York Value Investing Congress takes place in New York on September 8th and September 9th 2014. ValueWalk will be providing coverage of the event- below is a summary of a presentation by Michael Kao in which he pitches his long idea on Comcast Corporation (NASDAQ:CMCSA)’s zones.
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Michael Kao is the founder and Portfolio Manager of Akanthos Capital Management, LLC, a hedge fund that runs an opportunistic, event-driven strategy that is capital structure agnostic. Akanthos utilizes fundamental, value-driven framework that is bottom-up and idiosyncratic. Prior to forming Akanthos in 2002, Mike worked at Canyon Capital Advisors where he co-founded and lead-managed Canyon’s Arbitrage Strategies Group and co-founded the Canyon Capital Arbitrage Fund. Mr. Kao is a graduate of the University of California at Berkeley (B.S., Electrical Engineering and Computer Science) and the Wharton School of the University of Pennsylvania (MBA, Finance).
Michael Kao: Multiple Zones of Optionality
Comcast Corporation (NASDAQ:CMCSA) issued 2 tranches of 30 year ZONES, exchangeable debt securities
zero premium option notes exchangeable securities
Terms
Rank as junior subordinated debt at Comcast Corporation (NASDAQ:CMCSA) , exchangeable into SPRINT PCS stock (now sprint and centurylink)
If comcast ever paid a dividend it would get paid through to the zone holder
Issued in 1999
convertible and exchangeable bonds
Michael has traded in and out of these Comcast zones several times over last 10 years
first bought in 2003 after the NASDQA bubble burst, and the zones became busted
on 4/23/04 sprint recombined its 2 tracking stocks
each share of pcs automatically converted into .5 shares of FON common stock
FON paid a dividend which was passed through to the ZONES
He isolated the event by going long the ZONES and shorting the premium corp bonds of Comcast —made 20% with no risk
Better to be lucky than smart
Michael Kao: 4 different ways to win!!!
zone 1: cheap credit/carry
6% yield, trading at 60 cents on the dollar
Comcast Corporation (NASDAQ:CMCSA) 5 year senior CDS trade at 100bps to treasuries
ZONES fair value is 30% higher than current market price
really single A bonds for the ZONES (even though ratings agencies label them BBB
zone 2: Early Takeout Candidate
90% of the November maturity ZONES have already been retired, only $62m of the original $657m remain outstanding
67% yield to to early takeout
can be triggered by technical default –activist could trigger this and make company pay the ZONES back at PAR
zone 3: Dividend options
Zones currently exchangeable into 1 share of Sprint (S) and .0685 shares of Centurylink (CTL)
ZONES pay total annual coupon
Zone 4: OTM Equity options
Equity options are valuable given M&A history of sprint and long remaining life
RISKS:
not very liquid
mark to market risk
interest rate/duration risk (this is hedgeable) — hedge out equivalent maturity treasuries
Comcast Corporation (NASDAQ:CMCSA) credit risk (seems quite low)
