|Shares Out. (in M):||47||P/E||NA||NA|
|Market Cap (in $M):||75||P/FCF||NA||NA|
|Net Debt (in $M):||0||EBIT||0||0|
Ambase (ABCP) is a very interesting litigation outcome opportunity
with asymmetric payoff potential. Ambase, today a shell,
was once one of the nation's largest thrifts until 1992 when the FDIC
seized its bank subsidiary. Ambase subsequently sued the US Government under
the Winstar doctrine. After many years, the Ambase litigation looks
as if it is finally coming to a conclusion. If Ambase's trial court
win is upheld on appeal, ABCP should liquidate for $4.33 per share. The expected
value of Ambase across scenarios is at least $2.95 - almost double
where the stock is today. Final resolution of Ambase may occur within
weeks as settlement negotiations with the government are
* The Case
ABCP is one of the last Winstar cases, which are likely familiar to
many VIC members. In the mid-1980s the FDIC encouraged healthy
financial institutions to acquire troubled banks by offering
regulatory forbearance. In many cases, the FDIC contracted that
acquirers would be allowed to count goodwill towards their required
minimum capital levels. However, in 1989 Congress passed FIRREA which
disallowed the use of goodwill as regulatory capital. This change in
policy forced a large number of previously healthy financial
institutions, including Carteret, into distress.
The Winstar case, which was ultimately decided by the Supreme Court,
determined that where the FDIC entered into contracts explicitly
allowing the use of goodwill regulatory capital, the Government was liable to pay
damages for subsequent harm caused by the enforcement of FIRREA.
In August, 2011, a US Court of Claims awarded $205MM of damages to
ABCP under the Winstar doctrine. The award explicitly requires the
FDIC to make a tax gross-up payment, if necessary, to render the $205MM
an after-tax award to ABCP. ABCP has 47.2MM fully diluted shares
outstanding. $205MM in damages + $10MM current equity less $5MM in
projected expenses for liquidation yields a value of $4.40/share. The
CEO has an incentive program linked to the results of the FDIC
litigation which subtracts $0.34 from this amount for a total of
$4.07. The trial court opinion can be found at: http://www.uscfc.uscourts.gov/sites/default/files/SMITH.AMBASE083111.pdf
As expected, the government appealed the judgement to the US Court of
Appeals for the Federal Circuit. On March 8, the Department of
Justice filed a motion to extend their deadline for filing an initial
appellate brief. Ambase released an 8k explaining that it was in
preliminary settlement discussions with the US and "[i]n light of
those discussions, the Company does not intend to contest the DOJ’s
motion [for an extension]."
I allocate probabilities to the following potential outcomes as
10% : Award overturned on Appeal: ABCP value = 0
60% : Settlement for 65% of award: ABCP value = 2.59
30% : Award confirmed on appeal: ABCP value = 4.07
Expected value = $2.76
I believe that ABCP has a strong position going into the Appeals
process. After reviewing the case, most of the issues I would
highlight as most uncertain for ABCP are matters of fact, not law, and
an appellate court will show tremendous deference to the trial court on
matters of fact. Moreover, as this is one of the last Winstar cases,
much of the relevant case law is well settled by this point.
* The Tax Case
A second potential source of value for Ambase lies in another
lawsuit, Ambase Corp v USA. In the case Ambase brought an action
seeking a Federal tax refund for the year 1989. At issue is whether
Ambase can adjust its 1992 bad debt reserve and carry back the 1992
net operating loss to tax year 1989. On summary judgment, the Court
determined that Ambase may increase its reserve addition for losses in
an amount "necessary to offset any net increase in taxable income, as
redetermined, as a result of the subsequent adjustment to its federal
tax return." Ambase believes that this decision entitles it to deduct
$69MM from its previous tax returns (although Ambase's interpretation
is being challenged by the US).
In its March 2000 amended, consolidated federal income tax return for
1989 Ambase sought $10.7MM plus assessed and statutory interest. I
must confess that while I have a legal background, I have a fairly
weak grounding in tax issues Thus, while I am very comfortable with my analysis of the core
Winstar litigation for Ambase, I am much less so with regards to the
tax litigation (all of you VIC ex-tax lawyers please chime in to help
Ambase filed its original amended tax return for 1989
in 1995. If statutory interest of approximately 3% is used back to
1995, the total recovery for Ambase would be $17.6MM or $0.37/shr.
Assigning a haircut to this number to account for my uncertainty
regarding the law here and the existing government challenge to
Ambase's interpretation of the law, I arrive at an expected value of $0.19.
This brings the total expected value of Ambase to $2.95 and a
potential value of $4.44. A settlement with the FDIC could be imminent.
If the case is not settled I would expect an ultimate resolution late
* Liquidation is likely
Beyond the lawsuits, Ambase is a shell holding $7MM in t-bills and a
commercial office building carried at $2MM (a 14.5k square foot office
building in Greenwich, CT). The CEO, who owns 38% of
the company, has been at Ambase for decades presiding over the
litigation effort. The terms of his 2007 Employment Agreement
stipulate that if the lawsuit has not been resolved by the end of this
year, he will enter into an independent consulting contract with
Ambase "solely for the purpose of assisting the Company in obtaining
such a recovery." A liquidation following resolution of the
litigation seems like the most likely option for Ambase.
Ambase did raise the possibility of making some form of acquisition
after the lawsuit in its recent 10-Q. While I consider this unlikely,
Ambase does have $38MM in NOLs ($0.80/shr) with a full valuation
allowance. This is potentially an additional source of value in a
non-liquidation scenario which is not included in my expected value
- Ambase loses on appeal or the settlement value is well below my
- The company does not liquidate but uses the lawsuit proceeds to make
a poor investment
|Entry||03/15/2012 01:14 PM|
does not have the best reputation. what's to stop him from pursuing some pet project with the proceeds?
|Entry||03/15/2012 01:32 PM|
I would have to second that motion. He controls the board and the company. Back in 2006 (?) or so he paid himself an obnoxious cash bonus in exchange for a reduced percentage of any litigation proceeds. That was in the face of activists applying pressure.
That said, you could also argue that this is already known and built into the discount. It had been hovering b/w $1.10 and $1.30 for a while (before the recent press release)....which was likley too steep. In relation to the other supervisory goodwill cases throughout the years, this was (I think) a larger discount at this stage of the game.
Question to Heffer or cfavenger -- with all the settlements finally complete, might this just be one where the gov' wants to close the books on this piece of financial history? Or do they keep up the good fight?
|Subject||FDIC Tax assessment and Incentive Payments|
|Entry||03/19/2012 09:51 AM|
Thanks for posting the idea. Looks pretty interesting. How do you factor the $120M ($32M + interest and penalties) the FDIC claims is owed on Carteret's 1995 taxes? If they have to pay a portion of this do you know if their existing NOLs could be used to offset a portion of the costs?
Also the management team is entitled to 10% of the increase in share holders equity and 5% of the increase in market value annually (subject to a high water mark type concept). This probably eats away at another 15% - 20% of your upside in the case of positive outcomes.
|Entry||08/13/2012 05:14 PM|
For a few months now the US and Ambase have been extending deadlines to file briefs in the appeal as they negotiate a settlement. An 8k recently hit containing the filing below. The language suggests that a settlement is imminent within the next 18 days.
UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT
AMBASE CORP., et. al,
Appeal From The United States Court Of Federal Claims In 93-CV-280
Senior Judge Loren A. Smith
DEFENDANT-APPELLANT'S MOTION FOR AN EXTENSION Of TIME
The United States, defendant-appellant, respectfully requests an
18-day extension of time, to and including August 31, 2012, within which to file our initial brief on appeal. This request is made under Rule 26(b) of the Federal Rules of Appellate Procedure and Federal Circuit Rule 26(b). Our initial brief is due August 13, 2012. This is our fifth request for an extension for this purpose. Counsel for plaintiffs-cross appellants have stated that they do not oppose this motion.
As explained in the attached declaration of Jeanne E. Davidson, Director of the National Courts Section, Civil Division, Commercial Litigation Branch of the Department of Justice, settlement negotiations, which commenced in November 2011, are now in the final stage. If approved, the settlement will fully resolve this appeal and any further proceedings in this case. Because of the amount at issue, the Acting Associate Attorney General and the Acting Assistant Attorney General must approve the settlement. The Acting Assistant Attorney General's review
was delayed pending approval of the settlement by the Federal Deposit Insurance Corporatior1 (FDIC), but that approval has been secured, and the matter is now under active consideration by the appropriate officials within the Department. Absent unforeseeable circumstances, we believe this process can be completed within the time requested in our motion for enlargement.
Although we had anticipated the settlement would be approved within the time frame of the prior enlargement, because of the press of other business, the decision was delayed. In addition, the Office of the Solicitor General, which must approve all appeals, has not yet completed its internal review, and will only do so if advised that authorized officials have been unable to approve the settlement. We anticipate that an extension of the
briefing schedule, as requested in this motion, will allow the parties time to obtain supervisory approvals without the need to expend the time and resources required to brief the appeal.
As we noted in our prior motions for an extension of time, counsel working on this appeal have been pressed, and continue to be pressed, by filing deadlines, trial activities, supervision, and oral arguments in Winstar related and other cases, including: G4S Technology L.L.C. v. United States, No. 12-8CV (Fed.Cl.) (response to First Amended Complaint due March 5,
2012); Alvarion, Inc. v. United States, No. 2-9CV (Fed.Cl.) (response to Complaint due March 5, 2012); Midwest Tube Fabricators, Inc. v. United States, No. ll-774C (Fed. Cl.) (motion to dismiss and for judgment upon the administrative record filed Feb.10, 2011); Anne Marie Wilburn v. United States, 11-856C (Fed. Cl.) (motion to dismiss filed Jan. 27, 2012); First Annapolis Bancorp, Inc. v. United States, No. 94-522 (Fed. Cl.) (bill of costs filed Nov. 18, 2011); Maher and Gravee v. United States, No. 2010-5130 (Fed. Cir.) (oral argument held Dec. 8, 2011); United States v. American Casualty Co., No. 10-119 (Ct. Int'l Trade) (continung written discovery and depositions); and United States v. Rupari Food Services, Inc., No. 11-203 (Ct. Int'l Trade) (written discovery commencing Nov. 2011).
The undersigned principal attorney supervises a 200-person litigating section of the Department of Justice, and also advises various Executive Branch agencies concerning litigation risk avoidance.
An 18-day extension is necessary to permit reviewing officials to approve the settlement. In addition, in the event the settlement is not approved by supervisory officials, the 18-day extension will allow the Office of the Solicitor General sufficient time to complete its internal supervisory review. For these reasons, we respectfully request that our motion for an 18-day extension of time to file our initial brief in this appeal be granted.
Acting Assistant Attorney General
|Entry||08/31/2012 01:07 PM|
|Subject||Bigger than expected settlement|
|Entry||08/31/2012 01:13 PM|
Settlement was $181 million or 88% of $205 damages vs 65% base case in write-up; tax gross up on $181 million. Company may distribute $1.50 to $2.00 by year-end.
Stock is up about 20%, but still huge upside if stockholders receive anything close to book value.
|Subject||RE: Bigger than expected settlement|
|Entry||08/31/2012 01:16 PM|
P.S. nice job, cfavenger!
|Entry||08/31/2012 01:25 PM|
Shouldn't total payout be north of 3?
|Subject||RE: settlement announced|
|Entry||08/31/2012 01:30 PM|
jhu2000, as you can see in the comments below, one of the concerns here was what would happen with the money once the company got it. Would it be distributed or used in some new pursuit? We have a partial answer today with the expected distribution, but will need to wait to find out what happens with the rest. The stock will likely trade well below book value until there is clarity.
|Entry||08/31/2012 01:32 PM|
Great to see another litigation security work in the end. Probably will be a big fiesta at the CEO's house this weekend.
|Entry||08/31/2012 02:35 PM|
My estimate is the settlement brings you to around 3.50 in value assuming (and I will confess that tax law is not a strength) that this provides a full gross up against federal tax liabilities.
Assume you get 1.75 back at year end. The remaining 1.75 will likely trade at a discount since its a "blank check" but on the other hand you do have $38MM in NOLs to try and use to create additional value (see caveat re: tax law above to qualify comments on NOL usage).
All in value seems to be $3-3.50 range.
|Subject||Thoughts on the large holdback|
|Entry||08/31/2012 03:51 PM|
The company will clearly have much more than $2 to distribute to shareholders, so why are they holding back? One reason is that I think the IRS's stance would be that ABCP can not distribute funds that would be accounted for as federal income tax, even though there will be a tax gross up. The IRS will want to make sure it gets paid first, regardless of the agreement. Only after that matter is settled could the company distribute the remaining cash. Has anyone seen past examples of such a scenario?
|Subject||New board member|
|Entry||08/31/2012 03:55 PM|
And here's where the uncertainty comes in. Bianco's daughter was named a board member today. What is the significance? Does this imply that this company is not dead yet? If so, why distribute the big dividend this year? Maybe she's just a smart person and will help maximize liquidation value. Does anyone know anything about her?
|Subject||RE: New board member|
|Entry||08/31/2012 04:00 PM|
Through Google, I have identified Ms. A. Halloran as formerly Alessandra Bianco, just married a couple months ago.
|Entry||10/12/2012 09:51 AM|
Settlement was approved by the court today with order to pay within 10 days. Not surprising but I assume its why the stock is up today.
|Subject||RE: Settlement Approved|
|Entry||10/12/2012 10:26 AM|
Yeah, I'm surprised by the reaction today on pretty good volume. I'm much more interested in what the company says it is going to do with the cash.