Sarbit Blog


February 7th, 2019

January 2019 Update

First Data (FDC) taken out
Fiserv announced on January 16th, their intention to merge with First Data. Both boards of directors approved the deal, and more importantly, First Data’s largest shareholder, KKR who owns 39% of shares outstanding (and 86% of the vote) approved the deal as well. It’s an all stock deal, in which First Data shareholders will receive a fixed exchange ratio of 0.303 Fiserv (FISV) shares for each share of First Data common stock they own, for an equity value of $22B. This represents $22.74 stock price based on closing prices as of 15-Jan. This values FDC at 11x 2019 EBITDA (their peers still trade 3-4x higher than this), which was frustrating. Management from both companies hosted a conference call and touted the $900M of cost synergies and $500M of revenue synergies the deal produced with increased scale and distribution. We think the deal does make strategic sense.

Although the stock was trading at a discount to the ultimate deal price, the value of FDC is now tied to the value of Fiserv shares. Thus, we sold a significant amount of stock at a 20% premium to the day before’s price. We thought the chances of an over the top bid were low. We do not have any interest in being shareholders of Fiserv at this point. Fiserv is now a much more complicated story and a general rule we use is that if the investment thesis changes and the outcome becomes much more unpredictable, we get out of the stock. This situation has changed drastically.

We really liked our position in First Data (hence, it was our biggest position). We are somewhat disappointed in the price, but we made a nice return (approx. 20% in less than a year at our cost) and we try to refrain from complaining when we make money for our clients. At the end of the day, the decision to sell was up to KKR who controlled 86% of the vote.

Newer positions

Burford Capital (BUR.L)
We believe we have found an extraordinary, unique business which has everything we look for: dominant position, huge barriers to entry, massive returns on invested capital and a market where the company has barely scratched the surface of the growth available. And, it trades at a price that doesn’t take any of these long-term factors into account. Burford is a investment company that specializes in litigation funding. Litigation finance/funding is a fast growing asset class in which a third party (Burford) invests money upfront in a legal claim and gets paid upon a positive outcome (adjudication or settlement). Investing in single legal claims is risky, as litigation outcomes are often unpredictable. Burford reduces this risk by creating a portfolio of legal claims that exhibit much lower risk, lessening the possibility that any one case skews the results. Since inception Burford has returned over 30% IRR and over 75% ROIC1
by investing in these claims. Litigation finance has grown substantially over the last 10 years and Burford is going to be the primary beneficiary of its continued growth. Burford is by far the largest player in the industry and enjoys the benefits of scale versus their peers. In late December, Burford announced that a Sovereign Wealth Fund would be investing $1B over the next few years with Burford and the terms stipulated that Burford could retain 60% of the profits. This is telling for a few reasons. The first is obviously the terms are extremely favorable to Burford. The second is that this SWF had the option to build out their own Litigation Finance business. They decided not to compete with Burford but instead, partner with them and pay Burford a majority of the profits, which speaks to the high barriers to entry in the industry and Burford’s dominant competitive positioning. Other entrants have come in to the market, only to withdraw, such as Jurdica, a company that exited noting “scale and diversity are required to compete”2. We think the litigation finance market will continue to grow for decades to come, and paying 15x trailing earnings for such a business is likely to be very rewarding, in our view.

Altice USA (ATUS)
Our investment in Altice mirrors Charter (Liberty Broadband) very closely. Altice and Charter (Liberty) are Cable businesses. Cable businesses have a lot of characteristics we look for: advantaged infrastructure (higher speed), high margins, recurring revenue, high cash flow and returning that cash to shareholders. As with the thesis on Charter, Altice is becoming much less capital intensive, and that means the free cash flow will ramp significantly.
There are a few differences between Altice and Charter. Altice has a different geographic location than Charter. Charter operates throughout Texas, Florida and the Carolinas. Altice is more exposed to New York State. Altice has a bit more leverage than Charter (about a turn of EBITDA), and trades at a much higher FCF yield of 12% than CHTR at 7%. We like both of the positions, as they will exhibit much of the same characteristics. Thus, we tend to view our position as our “Cable” position.

ADT Inc. (ADT)
ADT is a security and monitoring company that began trading early in the year with a mid-teens stock price. It currently trades around $7.00 per share on fears that Amazon and other tech players will displace their business. We think those fears are overblown. These tech players have no interest in staffing call centres, which is needed if you want monitoring. ADT is actually partnered with Amazon and has thousands of voice commands for their Echo device. Commercial represents 25% of the Revenue which is not affected by these trends. They have taken steps to reduce time to answer in their call centres and focused on higher credit quality subscribers which will reduce their subscriber churn. They also have some expensive debt that they should refinance at some point in 2019, which will result in large cash savings. We see a pathway for the business to double their free cash flow in the next 2 years. Stock currently trades under 6x 2019 EBITDA, which is extremely cheap in our opinion.

1 http://www.burfordcapital.com/wp-content/uploads/2018/03/BUR-28711-Annual-Report-2017-web.pdf

2 https://www.dandodiary.com/2015/11/articles/litigation-financing-2/litigation-funding-firm-to-close-its-doors/

Tim Skelly, CFA
Portfolio Manager
Sarbit Advisory Services

Disclaimer: Sarbit Advisory Services Inc.(Sarbit) is registered as an Advisor in the category of Portfolio Manager in the provinces of Manitoba, Ontario and Quebec. Sarbit is a sub-advisor to IA Clarington Investments.

This blog is for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter. The information is derived from sources believed to be reliable but Sarbit makes no representation that this information is accurate or complete. Our funds are not guaranteed and any discussion of past performance is not an indicator of future results.

 



January 15th, 2019

2018 Year-end Message—Not a Fun Year!

We, at Sarbit have experienced some significant declines in our holdings in the last few months. Small comfort that we are not alone. The general mood of investors is, we believe, gloomy; at times bordering on fearful. I wrote an article in the Financial Post, dated November 23rd in which I stated that people love cheaper prices for everything they buy—except stock prices. Most investors don’t appear to like paying less for publicly traded companies but are thrilled to pay more. It’s irrational but gives us what we are looking for: an opportunity to buy terrific companies trading at even greater bargain prices.

We are now buying. Amongst our purchases of already owned companies we have added to include ADT, First Data Corp., Lionsgate “A” shares, Liberty Sirius and IMAX. In addition, we have added two new names to the portfolio, which we will be able to discuss shortly.

As most of you know, we manage a very concentrated portfolio. We follow the Warren Buffett/Charlie Munger philosophy that says that if you know what you are investing in, being able to purchase more of such companies even cheaper, is a gift. They have taught us that owning a few wonderful businesses and being handed the opportunity to buy even more of them at even cheaper prices is something to be taken advantage of. We are being given that opportunity today and thus, we are no longer sitting on our hands. And, unlike most index funds and most equity mutual funds, which have little or no cash reserves to take advantage of bargains when they come available, we have sat on a mountain of cash for a long time. We have exercised patience, waiting for stock prices, both in companies we own and others we haven’t owned, to come down to what we view as greater bargain prices, offering us what we search for—a huge margin of safety and massive long-term upside potential. That cash reserve has given us two huge advantages over investment products which have no excess liquidity. First, at our discretion, we can buy bargains when we identify them and secondly; we can meet redemptions coming from the short-term, emotional participants that are fearfully redeeming our funds. Those cashless investment vehicles, in declining markets, don’t have the liquidity needed to buy when prices drop. Worse still, they are forced to sell the shares of companies in the portfolios in order to meet redemptions. In other words, the emotional owners of such funds have essentially taken control of the funds, dictating to the managers what will be done. This is exactly the position you don’t want to find yourself in as a professional manager or an index product.

The current environment of declining prices is exactly what we have waited for. We are seeing more companies we currently own, and others we don’t, come into buying range. As we said above, purchases of equities are now proceeding. We are excited because we strongly believe we are investing at levels that will result in enhanced returns.

Larry Sarbit
CEO & CIO
Sarbit Advisory Services

Disclaimer: Sarbit Advisory Services Inc.(Sarbit) is registered as an Advisor in the category of Portfolio Manager in the provinces of Manitoba, Ontario and Quebec.  Sarbit is a sub-advisor to IA Clarington Investments.

This  blog is for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter.  The information is derived from sources believed to be reliable but Sarbit makes no representation that this information is accurate or complete.  Our funds are not guaranteed and any discussion of past performance is not an indicator of future results.  



January 8th, 2019

Welcome to the Sarbit Blog! 

This blog is intended for investors of the IA Clarington Sarbit US Equity and Corporate Class (un-hedged) Funds.  Our purpose is to introduce (on a somewhat frequent basis) informal communication with our investors.  Our goal is to provide about 1 post per month on topics ranging from:

  • Updates on the investments of our current portfolio
  • Information on new positions entering the portfolio
  • Commentary on the current investment environment
  • Insights into our investment process
  • Anything else we find interesting

These topics are meant to give a high-level understanding of our thought process and not in-depth analysis.  If something interests you and you want to dive deeper, please feel free to contact us at : http://sarbit.com/contact/corporate-office/

The posts will be done by myself, Tim Skelly.  Occasionally, Larry Sarbit will chime in with some of his timeless words of wisdom.  Thank you for visiting!

Tim Skelly, CFA

Portfolio Manager

Disclaimer: Sarbit Advisory Services Inc.(Sarbit) is registered as an Advisor in the category of Portfolio Manager in the provinces of Manitoba, Ontario and Quebec.  Sarbit is a sub-advisor to IA Clarington Investments.

This  blog is for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter.  The information is derived from sources believed to be reliable but Sarbit makes no representation that this information is accurate or complete.  Our funds are not guaranteed and any discussion of past performance is not an indicator of future results.