Mohnish Pabrai’s Spinoff Portfolio Starts Off With A Bang – CSRA Acquired

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A few weeks ago we highlighted Mohnish Pabrai’s S&P crushing Spinoff Portfolio. While the historical results were merely backtested, 2018 has gotten off to a tremendous start. Despite a big decline at Adient (ADNT), the fund was boosted by General Dynamic’s (GD) ~$9.6b (including debt) takeover of government IT services provider CSRA (CSRA). The deal is actually an all cash offer of $40.75 per share of CSRA leading to an over 30% jump in shares on the announcement. Interestingly, the deal will commence with a tender offer followed by a merger of the remaining stock at the takeover price. The transaction is expected to close in the second half of this year.

The deal turns Computer Science Corporation’s late 2015 spinoff (via Reverse Morris Trust) into another spinoff success and a big win for the Spinoff Portfolio. With only five names in the portfolio the deal will have a significant impact on results.

So what does this mean for the Spinoff Portfolio? Here are the portfolio rules for rebalancing after a takeover:

If there is an involuntary removal through acquisition/delisting/bankruptcy, then the cash is distributed equally among the remaining companies in the portfolio.

As a result, when the deal closes (or I guess now, if you prefer to avoid closing risk) the remaining holdings of Synchrony (SYF), Adient, Lamb Weston (LW) and GCP Applied Technologies (GCP) will all increase.

Anyone going along for the ride?

Disclosure: Author holds no position in any stock mentioned.