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Collection: Mohnish Pabrai - #93 'Special Situations'



The fourth criteria is what I call bankruptcies, reorganizations, public LBOs, and special situations.

So how many of you have heard of Sam Zell? Raise your hand if you've heard of Sam Zell. At least one person, the professor. Well, you know, I think you should extend an invitation. You should extend an invitation to Sam to come speak to your class.

Sam is called the grave dancer. He dances on the graves of companies that are left for dead. And if you get a chance to invest with Sam, generally speaking, it's going to go really well.

So Sam – You know, Warren Buffett, Sam Zell, and the Pritzker's – these are some of the very best people on the U.S. tax code. They know U.S. tax code better than anyone else. Way better than Donald Trump. They really know the tax code. And I don't think Sam Zell has ever sent much of a tax bill to U.S. government because he's just so efficient with the way he runs his tax affairs.

So anyways there was – this story is an interesting story, but it goes back about 26 years. So in 1990, there was an insurer called Mission Insurance that went bankrupt. When this insurer went bankrupt, they had $630 million in NOLs (Net Operating Losses).

So these net operating losses that the company have, have a lot of value if you can bring that shell company into a company that has profits because you can shield $630 million of profits because of that loss.

So Sam was able to buy that company for like $30 million, you know, because it had nothing other than the losses. And you have to find something to – So he bought the $630 million of losses for $30 million about seven or eight years after the bankruptcy. This was in '98 or '99.

And then there's another investor, Martin Whitman from Third Avenue, who also bought some of the shares in Mission Insurance. And then they went looking – the two of them went looking for a profitable business that they could join with these operating losses so that they would suddenly have no taxes on the business.

And they found a barge shipping company on the Mississippi River, you know, like [Inaudible] on the – Mark Twain on the Mississippi River. They found a barge company which used to send, you know, goods up and down the Mississippi and it was profitable so they said, "Okay, we'll buy the barge company, and now the barge company's not going to pay any taxes because we've got these NOLs, and that's how we'll make our money."

And then what happened right after they bought the barge company? The barge business went to hell. So the rates collapsed and the barge company went bankrupt. So they now had bankruptcy to the power of bankruptcy.

And I don't know whether you teach them, Professor, how to calculate bankruptcy to the power of bankruptcy, but it's not good. They have two bankruptcies now instead of one. So instead of having $630 million in NOLs, they now had $800 million in NOLs – even higher.

Then they went looking for another company that they could buy so they could take both these things and pair it together. And so they had a company called Danielson Holding that was trading at $1 a share. And then they found a waste to energy recycler.

So what this company does, it's a plant where you put garbage in on one end and you get electricity on the other end. It's a German process. And there's a bunch of these plants in the U.S. which convert waste materials, garbage, into electricity.

And the economics of this purchase was; this company had two billion in assets, it had two billion in debt, and they bought it for $30 million. Okay? And it was very highly leveraged but it had this kind of energy business, and they thought that they could tie it in. And so they tied it in but then they needed some capital, so then they started to do a rights issue. That's when I found them.

So the stock was at $1. By the time that I was able to invest in them, it was at $9, so it had already gone up like nine times. And then they did a rights issue – they did two rights issues, they bought another company and basically, in about 13 months I had a double and I sold. You know and basically, if I had kept the position that was about 40x from that dollar price they had and about 4x from where I had bought.

As you can see, you know, we have all these companies that are in these weird places. They're not great businesses but they do really well.


[YAPSS Takeaway]

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