Passing on Atlas Mara

Every value investor, having read Joel Greenblatt's masterpiece "You Can be a Stockmarket Genius", knows the feeling when they stumble across a special situation: Ah excellent, another chance to go against the herd and show how smart I am.

Greenblatt's classic popularised spin-offs, LEAPs and distressed situations to the point that they don't work as reliably anymore, but extra competition shouldn't rule out watching the space.

Atlas Mara (LSE:ATMA) presents an intriguing proposition today, as a microcap about to delist from the London Exchange to satisfy its creditors, while appearing to have a generous equity cushion to protect those willing to forsake liquidity and hold it privately.

As it stands

The company was founded in 2013 to make strategic African banking investments, by a doyen of the banking industry and former Chairman of Barlays, Bob Diamond, who has arguably been exposed as extremely naive in his vision.

The plan soon soured, with economic and currency shredding a $625m IPO valuation into $9m today- apparently African banking wasn't as simple as westerners showing the locals how it's done. The company is currently heavily indebted, with creditors forcing a restructure of the business eariler this year and insisting on today’s delisting to save costs.

As early as 2019, Atlas Mara sought to divest several subsidiaries to lower its leverage, entering talks to merge its Rwandan, Zambian, Tanzanian and Mozambique operations into Pan-African power Equity Group. The company would have recieved equity in return, but the stronger player backed out of the deal, partly due to the pandemic.

Ironically Equity Group is backed by Helios, the African investors who merged with Fairfax Africa last year and immediately rebuked Prem Watsa's AM investment, seeking to guarantee its stake and ultimately transferring the asset back to the parent, Fairfax Financial.

Equity's withdrawal sparked a mad scramble to sell the same four divisions, which was ultimately achieved in a fairly successful way, given that the counterparties knew they were dealing with a forced seller.

These were as follows:

• KCB Group acquired AM's 62% stake in Banque Populaire du Rwanda for 1.09x book and ABC Tanzania for .42x (yet to close, but having received initial regulatory approval).

• Access Bank bought ABC Botswana for 1.13x and ABC Mozambique for .8x, with both closing earlier this year.

Today, Atlas Mara is left with its ABC Zambia, ABC Zimbabwe and Union Bank of Nigerian holdings. The company has done well to partially simplify its balance sheet and divest its sub-scale banks to larger operations where they will have a chance of success. Unfortunately, the leverage is still substantial, with $442m of gross debt ($300m net) made up of $91m in convertaible bonds and $350m of general borrowings.

This is obviously an enormous sum for a business that lost $59m last year (technically 14 months due to a financial calendar change), is facing US dollar denominated payments with weakening local currencies and seeing their primary asset (UBN) being used as a guarantee to keep its many lenders at bay.

In fact, two of the company's lenders (Norsad and TLG) refused to sign the "Standstill" agreement made with AM's other creditors this year and assumed possession of their proportion of the UBN shares held as collateral.

One positive from its latest strategic update was the company announcing that ABC Zambia would merge with Access Bank's Zambian arm, as similarly to many of its former stablemates, it will simply struggle to make ground in its current, sub-scale form.

The value proposition

Prior to the Covid outbreak Atlas Mara traded for $140m (around 25% of 2019 year-end book), probably reasonable given its emerging financial distress and headwinds in African markets. Like many emerging and frontier operators, the economic toll unleashed by the pandemic was immense and the stock was beaten down substantially- as low as $40m.

Source: Google

As the situation appeared to ammeliorate, the stock rallied back $80m (again 25% of a the now-lower book value) anticipating a favourable credit outcome and operational recovery, but this proved to be the high-tide mark. When management first floated its consideration of delisting in July, the shares began a slide that finally became a plummet on October 25 when the company confirmed these intentions.

The special situation nature is obvious. The market was beginning to warm to the company again, until the delisting was raised, thus immediately making it potentially (and then definitely) uninvestable to most managers with a public-only mandate. The falling price was also so steep and consistent that capitulation was an obvious contributor.

On the surface, Atlas Mara seems like a gift. Nigeria is forecast to be the second most populous country in the world by 2050 and the company has a footing on the ground floor.

At last reporting, the company stated equity value of $330m with a market cap of just $9m (or 3% of book value)- a near 90% wipeout since July. If this could be explained by the delisting alone, it would make Atlas Mara an incredible bargain for anyone with the ability to hold it as a private company.

At the end of the day, there are still powerful insiders with money and reputation on the line and anyone co-owning the entity would benefit from a future sale or liquidation. In fact the company has better prospects as a private entity, as the delisting process is being carried out to reduce costs and aid the balance sheet.

Being able to enter the fray at 12% of the pre-delisting price seems remarkable. If the company could continue to liquidate itself at prices close to book value, as it has with its other subsidiaries, the return looks well over 10x.

The catch

Atlas Mara's book value of $330m is an accounting illusion.

The company's stake in UBN is carried on the balance sheet at $471m as an "Investment in Associate" and a CAPM model is tortured in the footnotes to spit out this value, but UBN is publicly traded.

Currently UBN:LAG has a market cap of 143b NGN, so AM's 47% stake is only worth $160m in the market at the current advertised FX rate of 410 NGN/USD.

But it gets worse. The whole goal of writing this blog has been to meet fellow contrarians, learn and critique ideas. I consulted a couple of investors much smarter than me on this one and recieved a lot of great feedback about the positives and negatives of African banking. But the absolute key takeaway I wouldn't have realised myself, was that there is virtually no liquidity in the FX market at the advertised NGN/USD spot rate.

If you want to move funds out of Nigeria at present, you will be paying closer to 570 NGN/USD, implying an $118m price tag on the holding. Obviously a $353m haircut on a $330m balance sheet obliterates any margin of safety and made Atlas Mara a fairly comfortable pass, for me, in the end.

I wanted it to work. An obvious forced-selling catalyst made it seem like a lay-up to those willing to wade into the illiquidity mire, but maybe I'll get the next special sit. Ultimately, sitting and hoping, while inflation and operating costs eat into an arguably non-existent equity sliver seems like a tough way to make money.

Thanks for reading and I hope you enjoy the new Substack site.

Guy

As always, this isn’t investment advice. Please do your own due diligence and seek professional advice if you’re unsure about your finances.