sometimes all you have to do is pick up the $20 note

There is an old economics joke that tells the story of a Finance Professor and his student walking down the street together:

The student looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”

Without even looking, his older and wiser Professor replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now.”

In stock-picking circles, we use this joke to make fun of the lunacy associated with the Efficient Market Hypothesis. EMH proponents argue that it’s not worth trying to find undervalued assets in financial markets, because if they exist, someone else would have already bid up the price and removed the arbitrage. Today I’m going to walk through a current investment we hold and explain how on rare occasions, after turning over enough rocks, you can come across a $20 note just lying on the ground.


Firstly, I want to give some more background into this “type” of idea as it falls under the special situations category, which I didn’t discuss in my post on investment situations I look for. I call this type of investment “Ak-Sar-Ben” after the racetrack in Nebraska that Warren Buffett used to visit as a child. After a days racing, Warren would walk around the main betting area, picking up the discarded betting slips. He would then take them home and go through each of them, one-by-one, and compare the backed horse, to the winners (plural is key) of the race. The vast majority of these tickets were worthless and correct to have been discarded. However, on occasion he would find a winning slip that had been discarded by a drunk patron who failed to realise that he bet on a win or place finish. When he found a winning ticket, he would send his Aunt Alice in to cash the ticket for him as he was still a minor at the time. The moral of the story is that if you have a big enough haystack, and enough patience/grit, on occasion, you can find free money.


Zegona Communications is an investment vehicle listed on the London Stock Exchange that recently announced the successful exit of its main investment – a Spanish telecommunications company that was acquired by Euskaltel. Post this transaction, the London PLC would consist of some shares in Euskaltel (listed on the Spanish stock exchange) and cash (which they planned to distribute promptly to shareholders in a tax efficient manner). To explain the thesis, I’ve broken the investment down into three key points in time, explained below.


  • Point A – 26/07/17
    • Price: ~160p
    • Announcement:
      • Plan to return 71p per share via a tender offer
      • Will pay a 5p dividend
      • Will retain an interest in Euskaltel worth ~110p per ZEG share
    • Therefore, the shares should be worth 186p (71+5+110) and yet they’re trading for 160p with a hard catalyst to close the arbitrage through the tender offer
  • Period B – 26/07 until 30/08
    • Price range: 160-170p
    • Volume traded: >800k
    • Volume weighted price: 165p
    • Implied value transacted: >£1.3m
    • Expected profit at 186p: ~£168k
  • Point C – 30/08/2017
    • Price: 178p (close)
    • Announcement:
      • Tender to be completed at 200p per share
      • If all shareholders apply for the tender, each shareholder will be able to sell approximately 36% of their holding
      • If the GBP price equivalent of Euskaltel shares trades above £7.99, the tender price will be increased by 14p for every £1 it exceeds the base price


This is an example of a $20 bill, that was on the ground, in broad daylight, that nobody wanted to pick up. In a little over one month, you could have generated a return of 13.45%

Average entry price: £1.65
Shares acquired: 800,000
Total investment: £1,320,000
Tender price: £2.00
Shares sold into tender (36% of total): 288,000
Profit: £100,800
Market price: £1.80
Shares sold at market (remainder): 512,000
Profit: £76,800
Total profit: £177,600
Return on investment: 13.45%


The key risks to the investment were:

  • Negative movement in the GBP/EUR spot rate, given Euskaltel shares are quoted in EUR
  • Negative movement in the value of Euskaltel shares

These were both negated by the very short expected holding period.


It’s also worth noting that the Euskaltel share price has declined materially of late and the business does not look expensive trading on <9x forward EV/EBITDA for a stable telco with identifiable synergies through their recent acquisitions.


Sometimes all you have to do it turn over a LOT of rocks and pick up the $20 note when it’s just lying there…


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