Description

Aberdeen International (TSX: AAB)

Aberdeen trades at a substantial discount to liquidation value with an imminent catalyst.

Aberdeen is an investment company and merchant bank that is essentially a pile of assets that have persistently traded at a large discount to Net Asset Value (NAV), often 50% or greater.  The reason for this is that the insiders have persistently compensated themselves a substantial amount of the assets each year regardless of performance and in years where (on paper) performance was good (only to reverse itself later as it’s turned out), insiders stepped up the compensation to dramatically elevated levels.  This looks to change soon with a large shareholder initiating proceedings to cause improvements to the governance at the company.

Aberdeen has always traded at a large discount to NAV due to poor governance:

What’s new today?

• The value now consists primarily of liquid assets vs illiquid assets that likely would require a large discount to monetize.
• The change of control payments have been reduced over time as the 2011-2012 ultra-high comp years have rolled off the 3 year look back. Also recent case law in Canada (Unique Broadband, 2013) appears to indicate that these could be invalid payments.
• There is an activist shareholder with a successful record of causing change who has now committed publicly to improving the governance and changing the board.

What is Aberdeen worth? (values in $CAD)

Book value as of most recent filing (as of July 31, 2014) filed Sept 15, 2014: $34.3mm

On Sept 15, 2014, AAB announced a term sheet with a large PE firm Landmark Partners to sell their entire portfolio for $29mm (+$2mm potential earn out)

The portfolio formerly consisted of a hodgepodge of public and private small companies that were related parties that would likely require a large discount to liquidate.  Over the last two years however many of these assets have shrunk to near $0 in value while one investment has been a modest success (Rio Alto – RIO.to).  As a result, roughly 3/4 of the portfolio consists of shares of a highly liquid ~$1bb public company.  Aberdeen held 7.6mm shares of Rio Alto which closed at $3.25 sept 16^th when the Landmark deal was announced.

Since Sept 16^th, RIO has declined to $2.70 and if one applies this 15% discount to the Landmark deal then today it may conservatively value all the assets of the company at $29mm * 85% = $24.5mm.

Additionally there is a $4.2mm tax shield asset however this is not on the balance sheet any longer as there is a valuation allowance held against it.

Range of Net Asset Values: $24.5mm - $38.5mm (incl $4.2mm tax asset)

Share count: 87.3mm

NAV per share: $0.28 - $0.44

Current share price (12/7/2014): $0.15

Upside to reach NAV today vs current stock price: 87% - 193%

Recently the company issued 10mm additional units consisting of one share and one warrant (5 yr term @ $0.30) for $0.20 raising $2mm.

If this transaction is not reversed then it would increase the NAV by $2mm and sharecount by 10mm and the NAV per share would be: $0.27 - $0.42

Additional potential costs that could impair NAV include:

1. Cash burn of ~$1mm/quarter: $0.01/sh/quarter
2. Change of control payment (max $6.8mm as of most recent filing): $0.07/sh
3. Friction costs for proxy contest: $1mm: $0.01/sh

Downside case (worst case scenario): $0.27 - $0.09 = $0.18/sh (excluding tax shield asset of $0.04/sh), which is still 20% higher than the current trading price of $0.15.

The Path to Change and Value Creation is Underway

After the insiders recently issued stock to themselves at a discount in the face of superior terms from an independent party, an activist publicly committed to following through to improving the governance.  In Canada, a 5% shareholder can requisition a meeting to replace board members.

This is not the first time

The group (Forbes & Manhattan) currently in control of Aberdeen has been removed by shareholders from other undervalued companies in the past.

1. Longford Energy (mid 2012)
2. Dacha Strategic Metals (late 2012)
3. Forbes & Manhattan Coal (late 2012)

Forbes & Manhattan has over 30 controlled public companies for various projects they have incubated and sold to the public.  Aberdeen is unique in that it was a vehicle to invest in all of these other projects as opposed to a specific project itself – as such, its assets consist entirely of securities rather than potentially risky environmental liabilities, etc. that come with owning a mining project.

Why might shareholders desire change?

Aberdeen shares have declined over 80% since January 30, 2011 as shareholders have accumulated net losses of $98mm yet insiders have been compensated a staggering $13mm since that time.

There have been no fewer than six loans made by Aberdeen to related parties that have been substantially written off.

In other cases, such as with a loan to Forbes Royalty Corporation, deals appear to have been structured so unfavorably that it is questionable that truly independent directors would have accepted such asymmetric terms contrary to Aberdeen's interests.

A protracted nasty fight has higher risk to insiders than usual for Aberdeen

Aberdeen also has a unique situation in that it is connected to and has been damaged by the numerous related party uneconomic transactions at each of the other public companies where it owns a minority stake.  So not only have numerous shareholder-unfriendly actions taken place directly at Aberdeen but one could conceive a fairly deep chain of derivative claims against directors as there are over 30 related-party companies. 

There seems to be MUCH higher risk to the Forbes & Manhattan ‘empire’ of companies from a nasty protracted fight around Aberdeen as compared to the other isolated project-driven companies.  On the other hand, Aberdeen does not possess a great deal of assets compared the scale of Forbes & Manhattan.  It would seem that a quick private settlement would be much better for all parties involved rather than a highly risky and highly public proxy contest where if insiders lost at a vote (which would not come with a release from future claims as would accompany a settlement) it could mean years of lawsuits.  Stay tuned for more details if things bubble up publicly depending how things develop!

Catalyst

Activist investor going to cause changes imminently, trades well below liquidation value