Thrift Conversion Results

Background paper here.

Before 1988 thrift conversions were done in a single step, leading to the earlier mentioned Lynch scenario of the free envelopes of money. Post 1988, two-step conversions were being performed. First steps would involve issuance of a minority stake of equity to the public, with the majority being held by the mutual holding company (MHC). In the second steps, additional offerings would distribute the remaining MHC shares to the public, raising additional cash and dissolving the MHC.

The published ratios for these firms are generally calculated on total shares outstanding, even though the MHC shares are not public and represent an overhang of untapped shareholder value. Also, when dividends are issued by these firms, MHC's generally waive their rights to the dividends which is an additional plus.

In attempting an extremely rough-cut valuation of these firms, I wanted to look at the post second-step offering scenario. One recently completed conversion was Abington Bancorp, Inc. (ABBC). As this press release states, 14.0M new shares were issued at approximately $10, and 10.5M shares were issued to existing shareholders. As of now, the bank trades at approximately 1.0 P/B ratio, which is cheap for a financial institution, but which we will use as our conservative estimate.

We assume a post second-step P/B ratio of 1.0 and fixed number of public and MHC shares to solve for the final share price.

1.0 P/B = (?? Price * Total Shares) / [ Shareholders Equity + (MHC Shares * ?? Price) ]

The numerator is the second-step market cap, assuming all shares are floated. The denominator is the current equity plus the proceeds raised from issuing the MHC shares. Rearranging for the ?? Price, we get the following equation.

?? Price = (1.0 P/B * Shareholders Equity) / [ Total Shares - (1.0 P/B * MHC Shares) ]

Using this rough guage for value, I analyzed 40+ current thrifts and published the results here: Thrifts Simplified. (BTW, Google Docs includes tools to automatically pull in information such as stock price) As you can see, 40-60% discounts can be found although the larger discounts are more prevalent in the nanocap space. If I had more capital under management, I might be tempted to make a Buffett control play. As a caveat, this is extremely rudimentary and there are no provisions made for earnings quality or growth, etc. I would, however, pay attention to those companies performing stock buybacks or issuing dividends. Given my inexperience with this strategy, I have diversified the allocation for a normal position into 8 separate positions.

Going Private Transaction: CNFL

UPDATE:

CNFL has received an SEC Notice for having an insufficient number of public shares. They have until Oct. 24 to submit a plan to regain compliance. The company "believes that the proposed Going-private Transaction represents "good cause" for which Nasdaq Staff may extend the October 24, 2007 cure period."

In my opinion, this is a slight complication, but does not violate the original thesis. Even in the case where CNFL shares are delisted, that does not preclude the GPT.

ORIGINAL:

CNFL

SEC Filings

10/04/2007
07/19/2007

The company will execute a 1-for-250 reverse stock split in order to go private. Shareholders who own fractional shares will receive $7.25 per share, effective Nov. 13. If you can pick up shares today for $6.75 (last trade, I picked up my shares weeks ago at better prices), that should give you a 7% return within a one-month turnaround, for a 137% annualized return.

Current Positions Updated

As you can see, it's been a busy few weeks. Despite my insistence on a focus portfolio, the number of ideas have proliferated. Lately I've realized that having a focused portfolio does not necessarily preclude a larger number of positions. Contrast the early Buffett focused portfolio of 20-30 positions, with single positions taking up to 30% of the entire portfolio, with Pabrai's 10 core positions or Greenblatt's 3-5 positions. Plus I suffer from rhinophobia, which I need to learn to control in order to improve my portfolio returns. I will do a brief synopsis on each later.