Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

Dorsett Hospitality International / Event-Driven

I started my first piece on Dorsett saying "Stocks like Dorsett Hospitality (2266 HK) are&nbsp;the reason why value investors love what they do."Under-covered. Under-loved. Under-understood.&nbsp;Dorsett&nbsp;had their Scheme meeting where minority shareholders&nbsp;numbering just 2.6% of shares outstanding - a measly US$12mm - could have blocked the vote to give up its shares at a 70+% discount to NAV in selling themselves for cash and scrip to parent company Far East Consortium International Ltd. But minority shareholders could not be bothered to get past a 55% turnout, and only 0.3% of shares outstanding voted against so the vote looked pretty much like a landslide. It actually wasn't. If just 2 people had voted no instead of yes, this deal would have been blocked&nbsp;(by the headcount rule as Dorsett is a Cayman-domiciled company).&nbsp;But that deal is now done, dusted, and investors have two days to trade DHIL before they get FEC.More below the fold.&nbsp;

I started my first piece on Dorsett saying "Stocks like Dorsett Hospitality (2266 HK) are&nbsp;the reason why value investors love what they do."Under-covered. Under-loved. Under-understood.&nbsp;Dorsett&nbsp;had their Scheme meeting where minority shareholders&nbsp;numbering just 2.6% of shares outstanding - a measly US$12mm - could have blocked the vote to give up its shares at a 70+% discount to NAV in selling themselves for cash and scrip to parent company Far East Consortium International Ltd. But minority shareholders could not be bothered to get past a 55% turnout, and only 0.3% of shares outstanding voted against so the vote looked pretty much like a landslide. It actually wasn't. If just 2 people had voted no instead of yes, this deal would have been blocked&nbsp;(by the headcount rule as Dorsett is a Cayman-domiciled company).&nbsp;But that deal is now done, dusted, and investors have two days to trade DHIL before they get FEC.More below the fold.&nbsp;

QUICKNOTE:  Dorsett:  Done. Dusted. Dirt Cheap. FECIL too.

Under-covered, under-loved, misunderstood. Stocks like Dorsett Hospitality (2266 HK) are the reason why value investors love what they do. <a href="http://www.smartkarma.com/insight_providers/12" target="_blank">Jon Foster</a> wrote a <a href="http://www.smartkarma.com/insights/flash-note-2266-hk-parent-offers-to-buy-out-minorities" target="_blank">Flash Note</a> on the Dorsett Hospitality (2266 HK) deal three days ago after the hotelier's parent company Far East Consortium (35 HK, a.k.a. FECIL) offered to buy out minorities at a 33% premium to its current price. Jon concludes that despite FECIL offering 20% less than the price at which they IPOed Dorsett in 2010, "Dorsett shareholders are likely to be pragmatic, and accept this outcome."I disagree. I think this deal is being set up to fail. <ul><li>The discount to NAV is too egregious, the relative discount to NAV of Dorsett vs FECIL after taking into account the 0.72/share of cash consideration suggests a 55% comparative discount (i.e. on life-for-like basis, Dorsett shareholders would be getting 45% of what they should get).</li><li>Out of the last 4 property deals to fail, one failed because noone supported it, two failed because they failed the Cayman headcount rule despite overwhelming voter support in percentage terms (disgruntled private investors forced it to fail), and one failed after a "not fair and reasonable" opinion (one could go a bit further back and look at PCPD as well).</li><li>This deal takes a 2.6% holder to block it. That's about USD $12mm and that much traded on Day1. There are a few investors on the shareholder list of Bloomberg who I believe are unlikely to vote yes (off the top of my head, #2 and #9 are easy ones). </li></ul>Similar deals (substantial majority owner tries to take minorities out at a largish discount to NAV) in a similar space (real estate) in the last few years have gotten blocked. This one is the most egregious of them all. The ONLY saving grace for this deal is that it is more scrip than cash. Unfortunately, this has repercussions on the IFA's conclusions. Investors need to understand that aspect.Investors who allow this deal to go through should have their heads examined. For you hotel guys out there, at what EV would you buy a hotel room?This makes trading this from a RiskArb perspective complicated. It's a bad deal; it is being set up to fail. It is very easy for an investor or investors to block this deal cleanly, and pretty easy for people to block this deal by less above-board means. 3 of the last 4 deals blocked in this space in Hong Kong saw their stock price smacked afterwards. The fourth was a matter of education, and investor commitment. It didn't go down much, but has not performed with the market afterwards, though the NAV has, making it even more of a bargain now than it was.The fact that people haven't been looking at this stock is the reason for the deal.This deal is being done at COMPLETELY the wrong price. FECIL knows it and that's why it wants to buy back the asset.  If this is successful, I wouldn't be surprised to see a take-private deal for FECIL itself at some point later too. CONCLUSIONS<ul><li>If you are a RiskArb buyer, prepare for this deal to be blocked and fail. Nevertheless, it might be a near-term buy. </li><li>If you are an investor who demands that everything you own be highly liquid, look away. This is 75% owned by someone else, and it traded US$1mm a day for most of the last year. </li><li>If you are not a RiskArb buyer but you have a long-term fundamental outlook, and you don't mind illiquidity, you should have bought on Day1 after the announcement, and you should still be buying. This stock is waaaaay underpriced for what it is. </li><li>Usually what one does in scrip deals is they short the acquiror. This creates opportunities for longer-term value investors to buy.</li><li>If FECIL is successful (heaven forbid) in getting this deal done, FECIL will go up. If it is not successful because people come to understand what Dorsett really is, and how it fits into FECIL's business, it might go up anyway. If the deal breaks and RiskArb investors got heavily into the deal, they will have to buy back their FECIL short. </li></ul>

Under-covered, under-loved, misunderstood. Stocks like Dorsett Hospitality (2266 HK) are the reason why value investors love what they do. Jon Foster wrote a Flash Note on the Dorsett Hospitality (2266 HK) deal three days ago after the hotelier's parent company Far East Consortium (35 HK, a.k.a. FECIL) offered to buy out minorities at a 33% premium to its current price. Jon concludes that despite FECIL offering 20% less than the price at which they IPOed Dorsett in 2010, "Dorsett shareholders are likely to be pragmatic, and accept this outcome."I disagree. I think this deal is being set up to fail. The discount to NAV is too egregious, the relative discount to NAV of Dorsett vs FECIL after taking into account the 0.72/share of cash consideration suggests a 55% comparative discount (i.e. on life-for-like basis, Dorsett shareholders would be getting 45% of what they should get).Out of the last 4 property deals to fail, one failed because noone supported it, two failed because they failed the Cayman headcount rule despite overwhelming voter support in percentage terms (disgruntled private investors forced it to fail), and one failed after a "not fair and reasonable" opinion (one could go a bit further back and look at PCPD as well).This deal takes a 2.6% holder to block it. That's about USD $12mm and that much traded on Day1. There are a few investors on the shareholder list of Bloomberg who I believe are unlikely to vote yes (off the top of my head, #2 and #9 are easy ones). Similar deals (substantial majority owner tries to take minorities out at a largish discount to NAV) in a similar space (real estate) in the last few years have gotten blocked. This one is the most egregious of them all. The ONLY saving grace for this deal is that it is more scrip than cash. Unfortunately, this has repercussions on the IFA's conclusions. Investors need to understand that aspect.Investors who allow this deal to go through should have their heads examined. For you hotel guys out there, at what EV would you buy a hotel room?This makes trading this from a RiskArb perspective complicated. It's a bad deal; it is being set up to fail. It is very easy for an investor or investors to block this deal cleanly, and pretty easy for people to block this deal by less above-board means. 3 of the last 4 deals blocked in this space in Hong Kong saw their stock price smacked afterwards. The fourth was a matter of education, and investor commitment. It didn't go down much, but has not performed with the market afterwards, though the NAV has, making it even more of a bargain now than it was.The fact that people haven't been looking at this stock is the reason for the deal.This deal is being done at COMPLETELY the wrong price. FECIL knows it and that's why it wants to buy back the asset.  If this is successful, I wouldn't be surprised to see a take-private deal for FECIL itself at some point later too. CONCLUSIONSIf you are a RiskArb buyer, prepare for this deal to be blocked and fail. Nevertheless, it might be a near-term buy. If you are an investor who demands that everything you own be highly liquid, look away. This is 75% owned by someone else, and it traded US$1mm a day for most of the last year. If you are not a RiskArb buyer but you have a long-term fundamental outlook, and you don't mind illiquidity, you should have bought on Day1 after the announcement, and you should still be buying. This stock is waaaaay underpriced for what it is. Usually what one does in scrip deals is they short the acquiror. This creates opportunities for longer-term value investors to buy.If FECIL is successful (heaven forbid) in getting this deal done, FECIL will go up. If it is not successful because people come to understand what Dorsett really is, and how it fits into FECIL's business, it might go up anyway. If the deal breaks and RiskArb investors got heavily into the deal, they will have to buy back their FECIL short. 

Dorsett Hospitality:  Sellers leave BILLIONS on the table and it's easy to block; maybe it's a buy!

Hong Kong

Far East Consortium International Limited, through its subsidiaries, develops and invests in real estate.  The Company also operates hotels.

Far East Consortium International (35 HK)

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Far East Consortium International (35 HK)

QUICKNOTE: Dorsett: Done. Dusted. Dirt Cheap. FECIL too.

I started my first piece on Dorsett saying "Stocks like Dorsett Hospitality (2266 HK) are the reason why value investors love what they...

Travis Lundy

Dorsett Hospitality: Sellers leave BILLIONS on the table and it's easy to block; maybe it's a buy!

Under-covered, under-loved, misunderstood. Stocks like Dorsett Hospitality (2266 HK) are the reason why value investors love what they do. Jon...

Travis Lundy

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