Andreas Rialas, ARGO, Argo Group, Church House Investment Management, David Fisher, Guy Thomas, Jeroen Bos, Kenneth Watterson, Kyriakos Rialas, Michael Kloter, shareholder activism, shareholder value, tender offer
‘August 29, 2014
FAO: Andreas Rialas, CIO
Cc: Michael Kloter, Chairman
Kyriakos Rialas, CEO
David Fisher, Director
Kenneth Watterson, Director
Argo Group Limited
33-37 Athol Street
Isle of Man
Further to our prior conversations, I would like to confirm I now speak for 15.6% (in aggregate) of Argo Group’s outstanding shares. Excluding insiders, this represents 25.0% of Argo’s external shareholder base. Supporters now include well-respected funds and investors such as Church House Investment Management, XXX Capital Management, Guy Thomas, and over two dozen other Argo shareholders.
I first wrote to you and Kyriakos in Nov-2012. Since then, Argo’s assets under management have continued to decline, no significant fund realisations have been reported, fee receivables from three separate Argo-managed funds have been written-off, free cash flow has turned negative, additional shareholder funds have been invested in illiquid loans and investments, an emphasis of matter paragraph has been added to the most recent audit report, and the dividend has been eliminated. This performance is reflected in Argo’s current market capitalisation, which trades at a 34% discount to the company’s net cash and investments (and a 45% discount to net tangible assets), while clearly there is no public market recognition of the underlying value of the asset management business. Furthermore, there has been no tangible effort by management to improve investor relations/sentiment, to reduce the current discount to net asset value, or to otherwise enhance and realise shareholder value.
At this point, we believe a sale and/or wind-down of Argo Group now represents the best strategy to maximise and realise underlying intrinsic value for shareholders. Noting the breadth of shareholder support I have received to date, I believe this perspective is shared by a substantial majority of Argo’s external shareholder base, and I expect this letter will attract new support. I now intend to actively: i) seek out other/larger activist investors to take a stake in Argo, ii) consider requisitioning an EGM to present certain resolutions to shareholders, and/or iii) seek out trade/financial buyers for the company’s stake in The Argo Fund, the asset management business, and/or Argo Group itself (the listed company). Of course, a tender offer is also an obvious & immediate way to add value for shareholders.
As I highlighted to you, I would much prefer (as would most shareholders, I suspect) to see you and the rest of the board actively endorse & lead such a value realisation strategy for shareholders. Such a proactive approach would, I believe, maximise overall value and ensure the best possible outcome for Argo’s shareholders, its business, and its employees.
I am available at any time, of course, for further discussion. Please note I intend to publish this letter on the Wexboy blog shortly.
[NB: i) Church House’s Argo stake is held by the Deep Value Investments Fund, managed by Jeroen Bos – if you haven’t read it already, I can highly recommend his recent book ‘Deep Value Investing’, ii) XXX Capital Management is a well-known European hedge fund, which hasn’t publicly disclosed a holding in Argo to date, hence the redaction – Argo management are obviously aware of their shareholding & support, and iii) the letter was based on a GBP 14p share price & a higher GBP/USD rate – at the current 13.875p price and exchange rate, Argo now trades at a 36% discount to net cash and investments, and a 47% discount to net tangible assets.]
[If you’re relatively unfamiliar with Argo Group at this point, I encourage you to read their latest annual report (while noting the current market cap’s only $15.1 million). Some of my previous posts & letters may be worth reading also. I should highlight this latest letter focuses solely on the objective value of Argo’s balance sheet – its asset management business has a more subjective value, but is clearly valuable in its own right & worth far more than its implied zero/negative public market value.]
Not surprisingly, most of my efforts to seek out potential buyers, and/or other activist investors, will (by necessity) happen off-line – rest assured though, I’m already working on a promising target list of funds & firms. However, I know a significant percentage of readers here are finance & investment professionals, so this post’s also a good opportunity to beat the bushes a little… First, I should obviously call on:
Argo Group Investors: If you have an existing shareholding (large or small), and support a value realisation strategy for Argo & its shareholders, please email me at firstname.lastname@example.org – your support would be greatly appreciated. Please pass along this request to any fellow shareholders you may know. And if you have any professional resources to offer which you think might be useful here, I’d also like to hear from you.
Now Argo’s clearly a special situation, and its underlying intrinsic value could be unlocked & realised in a number of different ways, so there’s quite a few other potentially interested parties we can call on here:
i) Other Activist Investors: Any other fund (or family office, or investor) who might be interested in building a significant stake in the company, and becoming more actively involved (publicly, or privately) in unlocking Argo’s intrinsic value for shareholders.
ii) Trade Buyers: Argo’s asset management business currently has $271 million of AUM, annual revenues of $8.8 million, and earned a FY-2013 operating profit of $1.0 million (despite bad debt write-offs of $2.3 million) – in the right hands, it’s clearly a valuable business. And with some restructuring (e.g. in relation to AREOF), plus renewed AUM growth (aided by a new sales team/drive, and a potentially larger organisation), it’s also a business that’s potentially worth far in excess of Argo’s current market cap. For another asset manager, it may be a great opportunity to acquire additional AUM & diversity at an attractive price, funded by compelling cost & revenue synergies. Alternatively, buying the entire company could be an opportune route to achieving a London Stock Exchange listing. [Obviously, a UK-listed & regulated business might be of particular interest to an overseas buyer].
iii) Financial Buyers: Noting Argo’s current market cap & margin of safety, an activist or financial buyer might prefer to buy the company outright, and liquidate and/or sell off its assets & business in due course. Alternatively, a UK-listed & regulated asset management business might be an ideal vehicle for raising/investing funds in (for example) European distressed assets.
iv) Secondary Market Buyers: Argo’s main balance sheet asset is a $19.1 million holding in The Argo Fund (TAF) – which invests in emerging market distressed securities, and has racked up an impressive 8.1% CAGR since its Oct-2000 inception. [An improving valuation & a potential realisation of its stake in PT Trans-Pacific Petrochemical Industries has been a key value-driver recently for TAF]. A purchase of this investment might prove attractive for a secondary market buyer – and also for Argo shareholders, in terms of releasing cash for a value-enhancing tender offer (or a return of capital). Alternatively, a larger buyer might consider a potential buy-out of all Argo-managed fund investors – $271 million of AUM obviously presents a sizeable transaction & opportunity. [And an even larger transaction is also possible, if one considers AREOF’s gross (property) assets].
v) Lenders: Argo has $23.6 million of net cash & fund investments, and overall net tangible assets of $28.5 M – which should provide sufficient collateral for (say) a $10-14 million loan, at a reasonable interest rate. This would finance a substantial tender offer to shareholders – ideally, loan interest would be covered (on average) by returns from Argo’s TAF investment, with the loan being repaid in tranches via TAF realisations & redemptions.
If you’re reading this post, and any of these transactions are potentially of interest to you, don’t hesitate to contact me – I’d be delighted to have a preliminary or detailed discussion, to answer any questions you may have, to assist with any exploratory due diligence, and/or to make proper introductions (if appropriate). Of course, if you know of/want to suggest other potentially interested parties, I’d also like to hear from you – better yet, if you can nominate a specific person & their contact details, I’ll reach out to them directly.
Again, my email is email@example.com – thanks!