Saturday, July 15, 2017

Equity Management ( Last Episode ) : Time to move on and how to think about GLP.

I'm closing this segment in favour of something more reader-friendly next week based on more interesting hedge fund strategies.

I thought perhaps I'd like to show how the stuff I wrote on this column would be applied to the latest news on GLP.

Based on what can figure out on the news, GLP is being bought out at $3.38 and dividends declared in May will not reduce it's value which means that potentially whoever owns GLP will get to exit at $3.44 by latest April 2018. Looking at the current price, GLP is also trading at $3.29 which provides a nice 15 cent profit even for investors who decide to buy after the news has been declared.

Here are a few points :
  • Basic maths says that buying and holding GLP until next April will return around 4.55% or around 6.825% annualised. A lot of friends and bloggers have been sounding the alarm on such an arbitrage opportunity.
  • At this stage it is very easy to fall into a trap of equating this deal as a short term bond issue which gives 4.55% in 8 months. A 4.55% corporate bond is relatively stable but a buyout largely depends on whether the buyout will succeed. Serious losses can result in the buyout does not take place. 
  • At this stage, we can give benefit of the doubt to the folks who see this as a bond-like investment because the underlying mechanism is what we folks in law school know as a s210 Scheme of Arrangement which is welcomed by initiated by internal management. ( But a s210 can be shot down by the courts in a myriad of ways which will not be the subject of this article. )
  • So will you invest your money to earn an annualised 6.825% ? Depending on your level of risk aversion, some folks might. For me, I have much more attractive counters yielding 8-10% on my radar.
What is more interesting is when you apply leverage and try to mirror what some professional hedge fund managers do.

If you look at Maybank's lending rates for GLP, they consider this a Tier 1 stock so they only charge 2.88% for margin. Suppose you leverage at 300%, You can expect to earn over 6.825 * 3 - 2.88 * 2 or 14.715% annualised over 8 months.

14.715% is a decent return, but take note that if the buyout fails, you may be looking at perhaps 20% drop which would cost you 60% of your capital. There is no such thing as a free lunch.

This is something that I don't have the guts to do, but thinking about risk and return in this manner may provide more interesting insights that you can't find elsewhere.

( I am not vested in GLP )

Anyway, beginning next week, we will trying to go through the following book :

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