Description

Overview

After receiving a $181mm legal settlement from the federal government in 2012, and paying a $2/sh special dividend in Dec 2012, ABCP now holds nearly $2/sh in cash net of liabilities, has a minimal burn rate, but currently trades at only $1.05. An investor could realize substantial gains with minimal risk, even if ABCP only trades up to a more modest discount to cash.

Background of Lawsuit and Settlement with Government

Although it does not matter much at this point, it’s worth briefly mentioning the “supervisory goodwill” settlement that ABCP reached with the US Government. In 1988, AmBase purchased Carteret Bancorp. At that time, Carteret had roughly $180mm in “supervisory goodwill.” Goodwill is an intangible asset that could normally not be considered as part of a bank’s regulatory assets, but at that time, Congress allowed acquired goodwill to be counted as part of a bank’s regulatory assets in order to incentivize stronger banks to acquire weaker ones.

The following year, in 1989, the law was changed so that supervisory goodwill could no longer be counted as a regulatory asset. As a result, Carteret was way out of compliance with capital requirements; it tried to regain compliance, but the bank was ultimately seized by OTS in 1992.

In 1993, Carteret (along with many other financial institutions that were similarly affected) sued the federal government for the damages it sustained as a result of the change in the treatment of goodwill towards capital requirements.

The case was not resolved for many years. In August 2011 the Federal Court of Claims awarded $205mm in damages to Ambase; the government then appealed this ruling, and finally, in August 2012, the parties reached a settlement whereby the government agreed to pay AmBase $180.65mm. As part of the settlement, the government will also pay any federal taxes that might be imposed on the settlement amount (the “tax gross-up”)..

As part of his 2007 Employment Agreement, Ambase’s CEO stood to receive a potentially large bonus based on how much AmBase recovered. The settlement turned potential into reality and the CEO is now entitled to $13.6mm, leaving AmBase with a net of $167mm in cash from the settlement.

Finally, AmBase paid out part of the money received in the settlement agreement by paying out a $2/sh special dividend in December 2012.

Current Financials and the Discount to Cash

Summary financials of AmBase based on 9/30/12 balance sheet and giving effect to the $2 Special Dividend: 

(Real Estate: I’ve neglected this in the above cash value analysis, but Ambase also owns a 14,500 sq ft office building in Greenwich, CT. The building was purchased by Ambase for $2.4mm in 2001; it is now booked at $1.9mm. I’m assuming the building is likely worth substantially more than what they paid for it 12 years ago. With a 43mm share count, the gain on the building would likely not move the needle by a huge amount, but could be material.)

There are a few reasons that ABCP is (and should) trade at a discount to cash, but I think there is one reason that ABCP is currently trading at such large discount on a % basis. I’ve seen this effect in companies making liquidating distributions that are large relative to the stock price, and I see it in ABCP now. The effect is that, when a company that is trading below cash makes a large distribution relative to the stock price, the price of the stock needs to go up (sometimes by a lot) in order to keep the same % discount. I just think that ABCP has not fully adjusted yet.

If you look at ABCP’s chart, you can see that after the settlement, but before the Special Dividend, ABCP was trading at roughly $3/sh. Based on $3.98/sh pre-dividend cash, that is roughly 75% of cash. I think this is a fair valuation based on the fact that the ownership is concentrated in the Bianco family, and that ABCP has no real sources of upside (the office building is the exception, but just assume for now that any gain on the building offsets future overhead expense). If you run screens looking for this sort of thing, you should be able to find some similar situations, where the stock trades at about ¾ of cash. My experience generally backs this up.

But now ABCP pays out $2 as a special dividend. What was a $3 stock with $3.98/sh in cash is now a $1 stock with $1.98/sh in cash. And what was a stock trading at 75% of cash, is now trading at 50% of cash. 75% of cash seems about right, but 50% of cash is too cheap. If ABCP once again trades at 75% of cash, then that gets you to $1.49, which gets you a 42% return from $1.05. And I don’t think there is much risk, because after all, you are buying a stock that is trading at 50% of cash. Plus, you have the office building in Greenwich as a kicker.

Risks

I think the risks are largely offset by the discount, but the main risk is management. The Bianco family run the company and they own roughly 40% of the stock. CEO Ralph Bianco got himself a sweet deal that netted him a $13.6mm bonus as a result of the legal settlement, even though the lawyers must have done just about all the work.

But, even with this, I believe that 50% of cash is just too cheap, and that now the dividend has been paid, I think the stock price should re-adjust to about 75% of cash, i.e., the same discount it was trading at before the dividend.

Catalyst