How Did Sergio Marchionne Turnaround Fiat Chrysler (NSYE:FCAU)?

Our last video featured Mohnish Pabrai, where he spent some time speaking about Sergio Marchionne and Fiat Chrysler (FCA”) in general. Sergio (who unfortunately passed away this summer) was quite remarkable and we have a still-ongoing quest to find out more about the man that turned multiple companies around (and the only person to have turned two car companies around, being Fiat and Chrysler). We are still building an understanding of the automobile sector, but thought this video was particularly interesting. Here, Sergio addresses several issues.

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Trez Capital Mortgage Investment Corporation (TSX:TZZ) – Who’s Getting That Last Mortgage Payment

In 2012, Trez Capital Mortgage Investment Corporation (“Trez”) raised $230 million dollars to fund a mortgage loan book. The Company chugged along but by 2016 some wanted a change… Since then the Company has been in wind-up mode, with two mortgages left to finish up and some cash. And overall the team seems to have been doing a pretty good job at getting the book down to zero. It was trading below NAV and was expected to be all wound up in 2019 but now two funds are fighting over the scraps!

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OvaScience – Cash Flows Like Sand

Note: None of us own this or are providing advice. As always, do your own research.

 

Buying dollar bills for 60 cents is usually a winning strategy…unless of course, the dollar bills are being incinerated or being sold by someone else on your behalf for 30 cents. As we continue on our journey of value investing we should all be wary of value traps….

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Not necessarily related – but enter OvaScience! It’s a sad story, but sometimes things just don’t work out. It was once billion+ dollar market cap company that is “focused on the development of new treatment options for women and couples struggling with infertility.” About a year ago, the management team realized that <$100k in quarterly revenues was not sufficient to cover $14 million in quarterly G&A and R&D. After a severe restructuring this year, all but 8 employees remain in OvaScience as of September 2018. They did not reach the point of commercialization, as shown in their financials below:

With this newly lean, mean, non-revenue generating business model (as opposed to a large, cash-burning, non-revenue generating business model), OvaScience was able to woo Millendo Therapeutics into an all-stock merger. OvaScience shareholders would own ~20% of the combined entity. Millendo is in the middle of commercializing their own ideas as shown in their financials:

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The merger S-4 filed with the SEC makes for an interesting read. https://www.sec.gov/Archives/edgar/data/1544227/000104746918006443/a2236510zs-4.htm

 Let’s look at some numbers.

As of quarter-end June 2018, OvaScience had $48.3 million of cash and equivalents, net of all on-balance sheet liabilities, compared to a market cap of $27 million and change. Pro-forma for the merger, the combined entity would have $74.4 million of cash and equivalents, net of all on-balance sheet liabilities… which would be about $15 million ($74.4 X ~20%) for current NovaScience shareholders.

So OvaScience, instead of liquidating (recall – most of the employee severance had already been paid as of Q2 2018) and allowing shareholders to recoup let’s say around $40 million, decided that it was a “better” deal for shareholders to instead own 20% of a new entity, where current shareholders can claim interest to $15 million of net cash. Cash that soon, too, would be use for commercializing the next best thing.

Out of all of this emerges BML Investment Partners, which together with its principal Braden Leonard, have been buying OvaScience and recently raised their stake to about 10%. BML believes it would be better if “the company terminates the merger and liquidates.” The full filing can be found here: https://www.sec.gov/Archives/edgar/data/1373604/000156761918002599/doc1.htm

As individuals who (i) can add, and (ii) believe in the “bird in hand” concept, that might not be such a bad idea, in spite of the termination fee of up to $4 million to pay to back out of the merger.

We’re on the sidelines at the moment though, and wish BML all the best.