By: Frank Voisin
Urbana Corp (URNAF.PK) is a Canadian investment fund with holdings in the financial services sector. The fund also trades on the TSX under URB and URB.A. I track Urbana’s holdings, share repurchases and NAV each week on this Google Docs spreadsheet, which updates values of URB’s public holdings in real time.
There are a lot of things to like about Urbana as compared to other funds. First, it is managed in a completely transparent manner, with complete holdings being updated on a weekly basis which allows for easy valuation. Compare this to other funds which show only the top holdings on a quarterly basis!
Second, the company and its manager, Tom Caldwell, are open to shareholder communication and quick to respond to any queries. He wrote a candid memo outlining his perspective and plans for the fund here which is worth a read.
Third, the funds holdings: approximately 19% of the fund is devoted to non-public holdings, which include investments like the Bombay Stock Exchange, the Budapest Stock Exchange, and the Minneapolis Grain Exchange. The investments were available to URB as a result of Caldwell’s connections, and have historically been one of URB’s major selling points. In fact, the difficulty in getting access to these investment opportunities is a major reason URB historically traded at a healthy premium to its NAV.
The rest of the fund is invested in major public companies in the financial sector, including CBOE Holdings (CBOE), NYSE Euronext (NYX), Bank of America (BAC), Morgan Stanley (MS), Manulife Financial (MFC) and Sun Life Financial (SLF). There are also a small number of energy and commodity firms such as Barrick Gold (ABX) and Canadian Oil Sands (COS), which act as an inflation hedge.
Given the fund’s holdings, it is hardly surprising that the recession was tough on the fund, leading to a decline in NAV from $3.23/share at the beginning of 2008 to a low of $1.60 in May, 2012. The result is that investors fled the stock, causing its share price’s historical premium to NAV (once a healthy 50 – 70%!) to become a discount of approximately 45% today, despite a rebound in NAV to $2.66. Translation: buying URB today is equivalent to buying $1 for $0.55.
If the story ended here, one might be justifiably wary. After all, discounts to NAV can persist for many years and erode the investor’s annualized return. Thankfully, the story does not end here, with several near-term catalysts.
First, as URB’s largest shareholder (and controller of the fund’s voting shares), Caldwell is feeling the same pain as existing shareholders and is actively working to rectify the discount to NAV by aggressively repurchasing shares. Over the last three years, he has repurchased 23.1 million shares, or 26.5% of the shares outstanding. Due to the Toronto Stock Exchange’s misguided regulations, he is limited to repurchasing no more than 10% in any given 12 months via a normal course issuer bid unless he launches a substantial issuer bid which would necessitate the sale of a major asset to fund. In my communications with Caldwell, he has stated that he does not want to do this, but would consider it if there was a “big win” in the portfolio that freed up significant cash.
There are several potential “big wins” in the portfolio. First, URB’s second largest holding is NYX which is in the midst of being acquired by IntercontinentalExchange (ICE). Shares of NYX Will convert to ICE shares at a rate of 0.2581 ICE per 1 NYX share. NYX is still trading at a significant discount to ICE shares (after conversion, ICE is trading 7.2% higher). Given that this transaction is slated to close before the end of 2013, this presents a strong annualized return, which could explain why Caldwell is still holding NYX shares. Once this completes, Caldwell could liquidate URB’s ICE holdings and use this cash for a substantial issuer bid.
The second possible catalyst is that URB’s largest private holding, the Bombay Stock Exchange, is planning on an IPO in 2013 and seeking a $1 billion valuation, to “pave the way for nearly 6,000 investors to cash out.” This may be pushed out a year, but it is now a stated goal for the BSE to do an IPO, so this should be expected sooner rather than later, and once it occurs URB will find itself with significant cash to put to work, and Caldwell has already stated a “big win” like this could lead to a substantial issuer bid.
The third possible catalyst is that URB’s largest holding, CBOE, is increasingly looking like an attractive takeover target now that it has successfully negotiated a renewal on its monopoly over S&P index futures (OEX).
Note that URB has approximately $60 million in tax deferrals with which to offset gains from any of the above catalysts.
Even if none of these catalysts emerge, investors have little downside. The discount to NAV serves as strong protection from a permanent loss of capital while investors wait patiently as Caldwell continues to maximize the allowable share repurchases under the NCIB. So, heads you win big (nearly 100% upside and growing), tails you don’t lose much (if at all).
As URB is currently near a three year low relative to its NAV, I believe this is a great opportunity to buy good assets cheaply.
DISCLAIMER: The following report was prepared by an outside source, independent from the management of Urbana Corporation. This report is being provided for information purposes only.
