Author Topic: DEST - Destination Maternity  (Read 7074 times)

writser

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Re: DEST - Destination Maternity
« Reply #30 on: May 16, 2017, 02:48:34 AM »
Somebody messaged me that he/she thought the spread was way too wide and wondered what we are missing and what my biggest concerns are. I'll post my reply here to encourage further discussion (or ridicule of my ideas).

I have no special insights. My main worries with this deal:

1) That as an outsider I am misjudging the chances of this deal getting cancelled or restructured. I can see no signs that point in that direction but maybe I am missing something.
2) That KAZI is trading at an elevated level because it cannot be shorted and has a low free float. Meaning that KAZI (and thus the ADR) collapses after the deal.

Imho it is dangerous to think: "the spread is 32%, something must be wrong". While discounted deals are often hairy, with such a thought process you have to be careful that you don't end up buying the same deal at a 5% discount (because the discount looks reasonable) but refuse to buy it at a 32% discount (because something must be wrong). It's a trap I have fallen into before. If you can't find what is wrong with your thesis the large discount is a good thing, not a bad thing. Frankly I don't expect to capture the full spread when buying DEST now. KAZI will probably drop after deal completion but even if it drops 30% you are still pocketing a profit. As I said before, the truth is probably somewhere in the middle. My assumption is that the spread is made up of several components, let's say:

a: discount rate.
b: uncertainty about deal completion.
c: US investors not liking receiving an ADR in a small French company.
d: investors wanting an extra premium because they currently hate the retail space.
e: investors expect KAZI to drop so they want an extra margin of safety.

My reasoning is that I expect to lose some money on point e but the bet is still profitable because of a, b, c and d. This is not an 'arb' because you cannot capture profits beforehand and I think that is one of the reasons an opportunity exists in the first place. It's not a fundamental value play but a bet that investors dislike the uncertainty inherent in owning DEST and that that depressed the stock price too much. A similar situation (where the acquirer could not be shorted) last year was AFCO/FPI. Current similar situations (only for PA's) are ADGE/TGEN or one of the many microcap bank mergers. These plays are volatile but I think they are +EV.

The weak point of my analysis is that it is mostly psychological mumbo-jumbo. I sized accordingly. A more sensible investor should probably do a valuation of combined entity as well to see if the current KAZI price makes any sense but I'm very lazy (and I give the market some credits for being approximately right most of the time).
« Last Edit: May 16, 2017, 03:08:21 AM by writser »
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

awindenberger

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Re: DEST - Destination Maternity
« Reply #31 on: May 16, 2017, 09:15:02 AM »
Another great example of a merger that had a massive spread at one point was the TSLA/SCTY deal last summer/fall. Many people didn't expect it to be completed, and SCTY was at one point trading with a 30% discount. I bought in at that point, although I was concerned TSLA would tank to eliminate much of the gains. In the end they actually went up and I pocketed 50% (of course had I held til now that would have been 100%)

JayGatsby

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Re: DEST - Destination Maternity
« Reply #32 on: May 16, 2017, 01:12:11 PM »
To whomever commented about KAZI financials.  If you look at their site in French they have an investor page.  Then they have links to recent documents.  The language to get to these is all in French.  But bizarrely the financials themselves are in English.
Thanks. I could only find the revenue, but it looked solidly good enough. I opened a small position in DEST.

whistlerbumps

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Re: DEST - Destination Maternity
« Reply #33 on: May 17, 2017, 12:29:23 PM »
At the end of the day, if this works out you get the KAZI ADR... Based on the numbers I have seen KAZI looks overlevered and non FCF generative.  So why would I want to get the ADR?  I understand the arb if you can put it on but don't understand why people are interested in just being long the merged entity.

NBL0303

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Re: DEST - Destination Maternity
« Reply #34 on: May 17, 2017, 01:45:35 PM »
To those that have been following this, what have the companies said about the timeline for closing this?  I realize that is largely contingent on the shareholder vote and everything, but just curious has management discussed a timeline for closing?

writser

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Re: DEST - Destination Maternity
« Reply #35 on: May 17, 2017, 02:00:51 PM »
Initial press release from last December:
Quote
The parties currently expect the transaction to close mid-2017.

From the latest conference call (about a month ago):
Quote
Now before I wrap up, I again want to reiterate that we believe we are positioning our company well for long-term success and a major part of this positioning relates to our merger with Orchestra-Prémaman. We've been busy working diligently with Orchestra on preparation of its stock registration statement with the SEC and related documents. And we believe we are on track for closing in our third fiscal quarter.
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

clutch

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Re: DEST - Destination Maternity
« Reply #36 on: May 19, 2017, 07:18:27 AM »
The spread has become so ridiculous now that I bought more shares today...  ???

roark33

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Re: DEST - Destination Maternity
« Reply #37 on: May 19, 2017, 10:25:40 AM »
Everyone keeps talking about the spread, but like the above poster mentioned, no one mentions what the combined entity should be worth.  The liquidity of DEST probably reflects the value of the combined company much more than the KAZI shares, which are highly illiquid and probably impossible to short.

clutch

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Re: DEST - Destination Maternity
« Reply #38 on: May 19, 2017, 10:39:05 AM »
Everyone keeps talking about the spread, but like the above poster mentioned, no one mentions what the combined entity should be worth.  The liquidity of DEST probably reflects the value of the combined company much more than the KAZI shares, which are highly illiquid and probably impossible to short.

Following this logic, are KAZI shares then significantly overvalued?

roark33

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Re: DEST - Destination Maternity
« Reply #39 on: May 19, 2017, 12:01:46 PM »
That would be my conclusion.....