Comdisco Holdings CDCO S W
February 18, 2004 - 1:57pm EST by
2004 2005
Price: 49.75 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 209 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT
Borrow Cost: NA

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This is going to be a quick write-up of an opportunity that I do not suspect to be around for too long. Feel free to ask clarifying questions. I will try to answer them expediently.

Comdisco Holdings is liquidating. The stock currently is trading at $50.00 per share. They filed an 8-K this AM setting forth a range of the eventual liquidating distributions to common stock holders of $14.76 to $50.48 per share. I believe the final number will prove to be somewhere around $34.00 to $36.00 per share. Additionally, it will likely take years before the final distribution is made. Accordingly, the stock should be trading in the $25 to $28 range.

There is good reason for the mis-pricing of this security as until this morning it was very difficult to determine exactly where the chips would fall. It took me many hours trying to fully understand the post bankruptcy situation and I have been shorting the stock on and off for months (depending on the price). Given the increased clarity of the situation it is just a matter of time, and now probably not very much time, before this stock craters.

What happened is the old Comdisco shareholders were given rights that only had value once the creditors had been repaid 85% of their claims. Currently the creditors have been paid 95% and when all is said and done they will have likely been paid between 100% and 103%. Every incremental dollar of recovery over the 85% threshold gets split between the common shareholders (which are the creditors) and the rights holders according to a sliding scale. The rights holders currently get 21% of the incremental recovery. Once over 100% the rights holders get 37% of every dollar of recovery.

There are two main variables that will determine the final value of the common stock. The first is the actual recoveries from winding up of the company. Management estimates the range, as per today’s 8-K, will produce between $200 and $275 million for distribution to the common shareholders and the rights holders. How that money is divided depends on the second main variable, which is the disputed claim reserve.

The disputed claim reserve now stands at $289 million. It is very unlikely that all claims will be allowed. Only if they are all allowed AND if $275 million is harvested from the wind-up of operations will the common stock be worth $50.00. The more likely scenario is that a significant number of disputed claims become disallowed or settled for less than their face amounts. Two claims amount to 78%. One for $135 million I anticipate will be allowed. The bankruptcy court actually allowed the claim but Comdisco is appealing. The other large claim is for $90 million and that is likely to be a long drawn out battle. I have read through the pleadings and I believe it is impossible to know the eventual outcome, however, I do believe Comdisco has a good chance of having the claim disallowed, or alternatively settled for a significantly lesser amount. Either way this could take years to resolve. I anticipate that the remaining disputed claims in the amount of $64 million will result in there being at least as many claims disallowed as allowed.

As claims are allowed or disallowed distributions are made to creditors. This is very important to understand as no distribution of claim reserve funds are made to stock holders and amounts distributed carry with them a liability to Comdisco for payment requirements to the rights holders. For example, if $120 million is disallowed a $44.4 million liability would be incurred by Comdisco for the corresponding payment due to the rights holders (this assumes the 37% threshold applies). Assuming distributable assets of Comdisco is $237.5 million, the mid-point of management’s estimate, the total liability in this scenario for the rights would be approximately $100 million. That would leave $137.5 million for the common stockholders. With 4.2 million shares outstanding the corresponding liquidation value would $32.73 per share, which again might not be fully realized for years.

The above scenario is not unrealistic. There is NO downside to this investment at the current stock price. Please ask away if you have any questions. I truly believe this is an incredible situation.


The ultimate liquidation will prove to be an eventual catalyst in the scenario that the clarity of the situation as set forth by the company does not become an immediate catalyst.
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