Saturday, June 14, 2014

Cadus Corporation: Flip this House with Icahn

Cadus Corporation (OTC:KDUS) might be familiar to a few value investors who enjoy having their patience tested.  Cadus is a former drug development company that sold essentially all their assets in 1999 to OSI Pharmaceuticals (which itself was purchased by Astellas Pharma in 2010).  Ever since Cadus has been more or less a shell company, with cash and some net operating loss carry forwards (zero revenues, no full time employees only a part time CEO earning $25,000 per year).

Carl Icahn has been a major shareholder of the company since the mid-1990s, and has resisted calls from investors to liquidate the company citing the $19,341,000 of NOLs.  It may seem tiny to a multi-billionaire, but Icahn is probably the type where it bothers him leaving any amount of money on the table.  In February, he finally got moving and Cadus announced "the company is currently seeking opportunities to profit from purchasing land and residential homes for construction or renovation and resale in the state of Florida."  He assigned his wife's son in law as the new CEO and as of 5/14/14, they have purchased 9 homes in Florida for $20.9 million, clearly targeting the upper end of the housing market.

Cadus Corporation's strategy sounds similar to David Einhorn's strategy with BioFuel Energy, however with BioFuel they're buying a larger operating company and have significantly more NOLs to monetize.  With Cadus, the house flipping venture appears short term in nature and maybe a simpler tactic to monetize the NOLs, and liquidate the company after the homes are sold?  Cadus should also be a less stomach churning ride as the retail day traders have likely long forgotten about Cadus.

To further fund the house flipping operation, the company went forward with a rights offering at $1.53 a share, one right for each share outstanding.  Icahn backstopped the rights offering and now owns 67.8% (40% prior) of the company after the rights offering, meaning almost all of the original shareholder base other than Icahn declined participating (I would expect a similar result in BIOF's upcoming rights offering).  The pro forma book value looks something like this:

3/31/14 Book Value = $22,314,215
Rights Offering Proceeds = $19,803,934
Proforma Book Value = $42,118,149
Shares Outstanding (after the rights offering) = 26,288,080
Book Value/Share = $1.60

The thesis is pretty simple with Cadus Corporation, it trades roughly at Icahn's recent cost basis and a liquid/current book value.  If the luxury flipping operation works out well, Cadus should be able to use up the net operating losses in the next year or two.  Due the short term nature of house flipping, I could see the company being liquidated once the tax asset is monetized.  It's not going to be a multi-bagger, but could provide an attractive return with minimal downside.

Disclosure: No Position


  1. Carl Icahn is no doubt a smart investor with a large following but is his wife's son in law equally smart is the question? OK, joking aside, I wouldn't draw a parallel to BIOF because Jim Brickman created JBGL homes in 2009, the depth of the housing crisis, and most likely bought the land parcels, financed by Greenlight, around then. Plus he has extensive experience in home-building and financing.

    In stark contrast, what we have here is someone's wife's son in law who has zero to little experience in this sector and is buying homes to flip after the housing market has fully recovered and close to where it stood before the crisis.

    (Excerpt from Form 424B3) "The Company bought its first residential properties for these purposes in February 2014. The Company has very limited operating experience in this business and the Company’s limited operating history makes it difficult to predict the long-term success of its business model. "

    This idea may still work (even a broken clock provides the correct time twice a day) but I would put my money on BIOF over KDUS.

    1. Thanks for the comment. I have my doubts that his wife’s son in law is really in charge, it’s probably more of a figurehead position and a way of Icahn maintain control without being part of the day to day operations. It is a bit of a leap of faith that they’re purchasing undervalued assets, you’re right in that most housing markets have recovered, so it’s not a slam dunk that it would have been if Cadus went down this path in 2009.

      Regarding BIOF, I haven’t read the latest filings (a little weekend homework for me), but I don’t think it matters when Brickman created JBGL, BIOF isn’t buying the company’s assets for 2009 costs, most likely they’re paying current fair value for the assets. I highly doubt there’s a free lunch here as some others suspect. The comparison between KDUS and BIOF to me is more how they’re going about it, where the KDUS stock price settled after the rights offering, and how that’s going to put pressure on BIOF’s stock price. KDUS was a 1 for 1 rights offering, BIOF is going to be a ~5 to 1 rights offering, much greater dilution for those that don’t participate.

    2. Thanks for your response. I agree with you that there is no free lunch in BIOF in that a lot depends upon the assets being plugged into the shell and their fair market value as well as future earnings for the opco and how those earnings will get valued by the Street. I should point out that NOLs are meaningful at BIOF and immaterial at KDUS.

      The number of BIOF shares issued will depend upon where they price the rights offering. If it's done at $5 then shareholders get 2.24 rights per BIOF share, at $4, then 2.81 and so on and so forth. Whether it is dilutive will depend upon the the value of the assets and future valuation of BIOF, not merely upon the number of shares issued.

      I look forward to reading your view after weekend reading...

    3. Are you including the shares that Greenlight and Brickman are going to receive outside of the rights offering in the 2.25 rights per share? It is a bit of a moving target, my point is its significant dilution, and I'm curious how the shareholder base is going to react.

      Also - I disagree a little that the NOLs aren't material to KDUS, that's the only reason the company still exists, and $19MM of NOLs on a $45MM market cap is worth something, plus you're not paying for them at the current price like you are with BIOF.

    4. Yes i did include shares to GL and Brickman in that estimate. You are dead wrong on dilution. Like I said, that will depend upon the value of the assets. I believe this deal will be accretive for shareholders even here at 7.20.
      The reason why you think NOLs are valuable at KDUS is purely because you have placed your chips on that stock and to be fair, I feel BIOF's are more valuable because mine are on BIOF. Just calling a spade a spade.

    5. Walk me through your dilution comment. $275MM purchase price, $150MM of that will come from the debt offering back to Greenlight, $70MM from the rights offering (let's assume that's at $5), there's about $10MM of cash on the balance sheet, what about the other $45MM? I guess it's not entirely clear to me, but assuming another 9MM shares gets issued at $5 to Greenlight/Brickman, I come up with ~28.5MM shares, or roughly 5x the current share count?

      I haven't placed my chips on either (no positions), just a curious bystander. Only was pointing out that the two situations have a lot of similarities: shell companies, famous controlling investors, NOLs, moving into real estate via a rights offering to take advantage of the NOLs. Nothing stopping someone from owning both, there's no real picking sides here.

      I also looked through the additional BIOF filings this weekend, didn't seem to be a lot new in there. I still find it difficult to justify the current market price without seeing JBGL financials, but I assume those will come when we get closer to the close date in the fall.

  2. No, your math is just about spot on on share count. Look at it this way and this is just hypothetical - what if I told you that JBGL could potentially generate $1 per share in EPS in year one as a public company and likely valued at 10x-15x EPS, would you still consider the transaction to be dilutive to existing shareholders? BTW. we are having a good discussion so let's forget about KDUS vs. BIOF, that was not constructive dialogue and I will take the blame for it.

    1. Agreed on the constructive conversation, and I'm still very much interested in BIOF.

      Regarding the $1/share in EPS, that would roughly mean they'd need to earn at least $43.5MM un-levered on the $275MM asset value (maybe a touch more to make up for additional overhead of being a public company), or about 16%, seems high to me in the current environment but I haven't run the comps. Goes back to my comment about there not being a free lunch here. Hard to say definitively without seeing JBGL's financials, but I don't know why Greenlight/Brickman would give the minority shareholders a free ride here? Without knowing more, I'd assume that JBGL's market value is $275MM, so the upside to minority shareholders is the financial leverage (although costly debt) and the use of the NOLs. If it's really worth $10-15 per share, then Greenlight/Brickman are leaving money on the table. But on the other hand, you could be right, they obviously want to put an asset into the shell that's going to spit off a lot of taxable income.