Good read
Rupert Hargreaves: WMI Holdings is actually one of your largest holdings. What do you like about this cash shell as an investment and what do you think the market’s missing?
Ali Meshkati: The markets are missing a lot here. First, it’s important to realize that markets are terrible at accurately evaluating shells because they cannot be modeled according to any traditional methods. You essentially have these hollow structures with no history of earnings, only the promise of earnings to come at some future date. Inherently, the markets will run away from such an investment due to the uncertainty involved.
It is that uncertainty that creates the opportunity, however. In the case of WMI Holdings, I see the uncertainty as being temporary. Every indication points to a substantial financial organization that will emerge from this shell.
The most important asset contained within the shell are the $6 billion in net operating losses carried over from the former Washington Mutual. The second greatest asset comes in the form of the partnership created with KKR since December of 2013. KKR is an equity partner and a lender to the company to the tune of over $600 million in capital to perform an acquisition.
The $600 million in capital was raised through a convertible preferred offering that converts into common stock upon a qualified acquisition. The search for an acquisition was recently handed off to a highly-incentivized CEO and CFO, formerly in charge of the liquidation/restructuring of Capmark. A majority of their compensation comes in the form of shares that will only vest upon a qualifying acquisition. So they have every reason to do well by shareholders.
Earlier this year, KKR highlighted the investment during their Q2 conference call saying: “We listed 3 of the larger uses of funds, including an additional $200 million investment we made in WMI Holdings, the former holding company for Washington Mutual. We made this investment opportunistically, as we think WMI is a great vehicle through which to facilitate acquisitions. WMI’s stock is up 27% through June 30, so our investment is performing well so far.”
Additionally, KKR has put Tagar Olson, who heads the financial services industry team at KKR on the WMIH board. Perhaps more importantly, KKR has Paul Raether serving on the board of WMIH, as well. He is a General Partner with the firm having started with KKR in 1980 and is very close to the original founders.
It’s obvious this investment has some level of importance for KKR. That importance is not being expressed in any share price below $3 per share. With the KKR capital infusion, the company has close to $3 per share in cash. The market is discounting the current share price below cash levels because of the obvious dilution that will take place once a qualified acquisition takes place converting the preferred shares into common stock. Essentially, the market is telling us that the return on capital that WMIH will achieve on a fully-diluted basis will be negative at the current share price. I couldn’t disagree more.
When you have skilled capital operators and management with a history of doing deals with a high rate of return, I think that WMIH being discounted for future dilution represents substantial value given the track record of the operators. And any share price below $3 is a dilution discount, you can call it.
Every indication points to a large deal taking place here. The Chairman of the Board has explicitly stated, most recently at the shareholder meeting in April, that they are looking exclusively for accretive acquisitions. Once the deal is announced, I think the markets will be surprised at the aspirations at work here.
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