Denali Investors‘ slides from the 2009 annual meeting.
An Uncommon Fund…
- Modeled after the original Warren Buffett
- Partnerships hedge fund of the 1950’s
- Value-Based
- Special Situations
- Opportunistic
- Concentrated
- Net Cash
Our framework is rare in today’s world
Overview
Objective: Produce superior long-term absolute and relative returns versus the S&P index
Strategy: Combine “Generals” and “Workouts”; Focus on identifying value-based investment ideas and margin of safety
Portfolio: Build a portfolio of 5 – 15 very attractive, non-market correlated investment ideas which have high conviction through fundamental research
“Generals” + “Workouts”
Generals
- Undervalued stocks
- Neglected
- Long time horizon
- Favorable risk/reward
- Shorts
- Flawed business, management
- Unrealistic expectations
- Negative catalysts
Workouts
- Non-recurring; Catalyst
- Internal/External
- Mergers
- Tender Offers
- Spin-offs
- Capital Structure Arbitrage
- Reorganizations
- Liquidations
- Bankruptcies
Flexible search for opportunities…
Investment Philosophy
Value: Buy Cheaply. Invest at steep discounts to intrinsic (business) value
Fundamentals: Be an Owner. Approach investments as an owner of a business, rather then chasing momentum or technicals
Concentration: Be Selective. A handful of great, highconviction ideas is better than a hundred mediocre ones
Long-term View: Use Time. Patient long-term investing creates a distinct advantage over short-term speculation
Net Cash: Don’t Risk Ruin. Leverage is hazardous no matter the number of PhD’s
Deal Background
Precision Drilling (PDS) buys Grey Wolf (GW)
- GW and PDS announced a merger in Aug 2008
- Tail end of an energy boom.
- The election merger consideration for each GW share was either 1) $9.02 in cash per share, or 2) 0.4225 share of PDS. Election subject to proration.
- By December 2008, in combination with the market market, GW traded down from $9 per share to about $6 per share. PDS from $20 – 25 to $6 – 7 per share.
An opportunity hiding in plain sight…
Possible Outcomes
Outcome Band includes:
- The deal closes (PDS buys GW)
- The deal breaks (PDS does not buy GW)
- GW shareholder makes cash election
- GW shareholder makes share election
- GW shareholder makes no election (defaults to share election)
Something in between…
Ways to Place an Investment The Approach…
“Short” GW & hedge PDS
- Counterintuitive (typical to long target / short acquirer)
- Tactics are critical
- Standard merger arb analysis on GW alone is limited
- Insurance/hedge “cost”
- Combination increases safety
- “The Ratio” – 1/10 risk/reward ratio
See full PDF below.
