Allan MacDonald’s notes from the 2018 Ivey Ben Graham Value Investing Conference in Canada from April 2018.
Also check out our Sohn Conference notes right here. We will also be adding much more extensive coverage of the event in coming days for Premium readers in particular.
Also Baupost letter
Klarman On
the danger of Chinese leverage
Discipline while value investing in bubby times
Q1 hedge fund letters, conference, scoops etc
Allan MacDonald - Finding great investment opportunities in new business models
- Looking at companies with no direct comps
- Looking at companies where the business model is hard to compare or understand or something to relate to
- Looking at business models that are new to the market
- The way investment bankers, private equity and ways of analyzing companies using and needing comps creates a confirmation bias
- What happens when there is not a comp? When you are on the go when you evaluate a company?
- One of the crossroads of the investment world is private equity
- Leverage buyouts were sort of entrepreneurial capital
- All first year rookie analysts, will give a spectacular first recommendation which no one will pay attention to
- First investment – looks bad, margins are non-existent, lots of interests expense
- What possibly can make this attractive
- Book value was bad, no tangible net worth to this company
- ONEX was probably the first public, LBO private equity company
- Basic premise was that the markets did not understand this business very well
- It looked liked an unwieldy conglomerate with no direction
- People misunderstood the structure of the company, especially the guy running it, Henry Kravitz, he was definitely not working for free
- At the time it was 127 million market cap and 85 million liquid assets
- Close to 80% of the company liquid, and then you have additional investments from which the company can grow from
- You were essentially renting the companies out when you bought shares of ONEX because basically when the companies were purchased by them, they were essentially up for sale
- It was all about the numbers
- You were like a limited partner in a publicly traded LBO shop
- And you could buy into it at a discount
- So what happened to this company?
- Bought it at 5.50, and the company value started to rise when they sold some businesses as interest grew
- They gave out like $3.5 dividend after sale which made no sense because you are giving away permanent capital, and then they did a rights issue to reinvest which made no sense again
- The rights issue was above intrinsic value which made no sense to buy at that price
- Lo and behold Schwartz and Bob bought 30% company in that transaction
- If you look at Schwartz net worth roughly 2 billion and I would argue 1 billion came from that transaction at that point in time
- The best thing you could of done at that time is reinvest that dividend
- If you did that, $1.5 turned into roughly $200 over 27 year period
- They compounded capital at a discount return but the kicker was that it was trading at 75% discount
- Now today it trades at a modest premium, net asset value and if you ask me before, I would have never believed this company trading at a slight premium today
- Next is the travel space with Expedia
- com was the rival
- It was an amazing business, had monster growth, people paid 3 months in advance for hotel rooms, paid 30 days after they stayed, à 4 month float
- 9/11 tested the thesis of the business model and whether it would work
- Travel stocks got hit hard
- Analysts priced Expedia as if it was a hotel company
- Hotel owners were hit hard and would throw enormous amounts of cash flow to expedia and hotels.com, the owners had to get volume and generate sales in a tough environment
- We bought it when it got hit because the industry was facing all types of pressures
- The revenue number the 303%, which no one expected
- If you look at it, the relationship between travel providers and hotels is very abnormal
- Hotel owner, operators take all the risk and suffer thin margins where the travel providers skim off their margins
- People become addicted to those distribution centers
- The addiction was basically created at this moment
- This is where the hotels smoke the crack, the owners become addicted to those distribution
- Another one was a Canadian company that bought the 407 toll road, Cintra Infraestructuras Internacional S.L.
- Paid 3 billion, company did not look good with financials
- Bond market loved them
- They were discounted 200 million
- Then and now 407 highway
- Trips per year 2000 – 2018 1.8x increase
- Price per trip 2000 – 2018 2.3x increase
- Revenue 2000 – 2018 $150 million to $1.5 billion
- Ebitda 2000 -2018 9.5x increase
- Madison Square Garden
- Owns the most iconic sports and live events stadium in the world
- The only two professional sports teams on the island of manhattan
- MSG Network – wildly profitable regional sports network (the hidden jewel)
- 2009 1.3 billion market cap and EV value 1.0 billion
- The markets did not like them and they had losses at the time
- The network was worth 250 million and their were escalators in the contract which brought it up to 350 million
- Ballmer bought Clippers for 2.3 billion which raises the value of knicks
- The most profitable industry ever?
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