One of our significant ABC Funds shareholdings, Saxon Energy Services Inc., is the object of a corporate takeover. Three of our ABC Funds own 6,250,000 shares or approximately 7.4% of the company including: ABC Fundamental Value Fund - 4,500,000 shares, ABC North American Deep Value Fund - 1,000,000 shares, and ABC Dirt-Cheap Stock Fund 750,000 shares.
The acquiring companies, Schlumberger Ltd., First Reserve Corp. and some members of Saxon’s management are offering $7 per share. We believe that fair value is $7.50. Clients and interested parties can review our investment analysis of Saxon Energy Services on our www.valueinvestigator.com website under ‘Value Favourites.’ We have had an extensive series of commentaries on Saxon Energy over the past two years, which we believe will highlight our view that Saxon should command a higher takeover price.
The takeover of Saxon Energy, we believe, is more important for a couple of other reasons. Firstly, the past nine months have been very difficult for deep-value managers such as ourselves. We believe many value stocks during that time became grossly undervalued on a relative and absolute basis as the market became mesmerized by the growing macro concerns of recession, subprime mortgages, asset backed commercial paper, etc. As a result, common stock valuations were erratic and inconsistent. Many value stocks were severely punished and we were not immune. Nonetheless we stuck to our fundamental analysis and remained disciplined, focused and patient. We believe the Saxon Energy takeover is a prelude to more mergers, takeovers and privatizations of deeply undervalued securities.
With regard to a second point, as analysts/portfolio managers we have several responsibilities:
1) to select deeply undervalued securities for our ABC portfolios,
2) to patiently sit with these selections until their value is recognized by the marketplace, and
3) to liquidate fully-valued selections which have reached our targeted price.
But more importantly, an added responsibility is to fight for full and fair valuations on behalf of our clients when we believe an offer is below net asset or intrinsic value. This is clearly our fiduciary duty with regard to our position in Saxon Energy considering our $7.50 target price versus the current takeover offer.
In summary, we remain optimistic as we believe that a significant number of our holdings are excellent merger/takeover/privatization candidates much like Saxon Energy. Although we expect worldwide markets to be volatile for the balance of 2008, we foresee higher equity prices over the next six to twelve months. We are confident in our deep-value philosophy, disciplined in our analysis and patient with respect to each of our holdings in our ABC funds.
Irwin A. Michael, CFA
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