AIX owns a collection of airports. The fund assets are subject to a contentious takeover. The returns are very high if the deal completes, however there are real risks involved.
Please note this idea is not original: it belongs to my former place of employment. However I have not bought AIX because a) initially when the deal was announced the return wasn't particularly appealing and b) subsequently, a challenge to the deal appears to have genuine merit. Given the price has since drifted lower AND the proposed closing date is getting nearer, the potential returns on offer are much higher so therefore the situation is getting more interesting and the purpose of this post is to discuss the merits of buying.
If successful, unit holders will be paid over a few different dates. In addition, franking credits may be paid or not paid. The table below indicates the potential money to be made:
And this is based on paying 100% cash for AIX shares: taking a leveraged position will magnify the gains/losses even further. While leverage is a dirty word at the moment, I noted the research demonstrating the power of leverage on Berkshire Hathaway's returns in an earlier post (click here) and personally I am on the hunt for situations where I can safely add some leverage in to make more money from the same situation.
Note the very big difference between the simple return and IRR (which takes all of the cash-flows and reconfigures it to a p.a. return): because a good chunk of the money gets paid back very quickly, the rate of return appears astronomical: and it is. This is particularly important if leverage is used as it allows ones capital to be recycled quickly. I have assumed the franking credits are returned in cash at a later date when tax returns are completed. Another scenario is the second payment will get paid by no later than 31 December. Assuming this is the case and assuming no franking credits, the simple return remains at 5.9% and the IRR drops to 46.1% p.a. pre-tax.
Risks? We need to look at the issues that may stop the offer and what might happen if the deal falls over. The first issue is particularly messy and it would be naive of me to think I could offer an edge. In a nutshell: the buyer (Future Fund) and management of AIX (Hastings Funds Management) have been accused of rigging the sales process by over inflating the value of some of the airports to put them out of reach of buyers enacting pre-emptive rights. The Future Fund and Hastings have rebutted this argument. To my simple way of thinking, I have to concede the deal could fall over, or at least be seriously delayed in a legal punch-up.
But let's not get bogged down in that and instead consider what happens if the deal falls over and whether we have enough margin of safety to bother with further analysis. And this is where my enthusiasm wanes: at $3.03, the distribution yield is a lousy 3.6% p.a. SYD is 6.6% p.a. AIX still has an expensive management structure in place gobbling up performance fees. Asset valuations are difficult to understand and believe in these types of investments and simplistically referencing the accounts could be misleading in understanding the downside risk. AIX after all has until recently traded a massive discount to NTA. It would be far easier and less risky if there were easily valued assets, but they are not. And given the potential legal issues, I am leaving AIX alone.
Kristian
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