CD2’s 25 May announcement on Dominion is favourable, but...

CD2’s 25 May announcement on Dominion is favourable, but theconsequences for NTA and timing of distributions are (so far) hard to assess. The NTAat 31 May should be announced on about 12-15 June and should then fully reflect the Dominion settlement. Before that, CD2’s annual report (due by 31May) may comment on Dominion, but NB those figures are for the 12 months ending31 March, so they won’t reflect this windfall, either in terms of profit orcash.

I caution that CD2’s market price has nothing to do with theNTA, and has of course been at a big discount for several years. The two major questionsfor CD2 investors are: how much will the 31 May NTA rise and how large a distribution(if any) will CD2 announce (either arising from Dominion or from other cashheld)?

Conclusions: these are guesses- precision is impossible. Ithink (all else being equal) CD2’s 31 May NTA should rise by about 14c afterUS tax (v the 30 /4 figure). My crucial assumption is that the NTAs at 30 April and before incorporated NO allowance for a successful settlement on Dominion. The NTA would then fall once CD2 announcesany distribution of cash to its ASX investors and it goes XD.

The NTA is not affected by the location of CD2’s cash holdings. Usually, but not always, the LPs transfer surplus cash (in USA/Caymans)quickly to their investors including the CD funds (in Australia),then enabling the CD funds to make distributions fairly soon afterward to theirASX investors (if the RE chooses to do so). There’s a reasonable chance that CD2 will announce a distributionhigher than 14c, including some cash already held at the fund level. Perhapsthe annual report of CD2 will comment on that. These are of course my hopes, not certainties.

My reasoning is below. It’s long because its complex. There have to be a lot of guesses. The same generalrationale is relevant to CD1 and CD3, except that they didn’t get the large windfallfrom Dominion.

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The coming NTArise depends on what the carrying value was at 30/4 and 31/3 of the Dominion investmentheld by SSC II, the US PE fund, in which CD2 indirectly has a holding in D viathe LP. My guess is that the indirect carrying value at 31March of Dominion would have assumed nothing for a possible settlement.It would have been too early to count any chickens.

30 April NTA of CD2 fell 4.6% in April from assetvaluation falls, partly offset by A$ weakness (which added 1.1%). The Fox/Dominionsettlement was announced on 20 April. Did the value attributed within the NTAto Dominion change between 31/3 and 30/4? I guess not, but we don’t know- all we are told is that overall movementin April of all of CD2’s investments was minus 4.6%, but that would arise from perhaps70 to 100 investments.

The Fox settlement was announced on 20 April. My guess is thatNO valuation change was attributed to CD2’s 30 April NTA in respect of Dominion,because there were still so many large unknowns, like legal costs, fees andtaxes. They knew the gross settlementfigure but not how much would remain with D. I.e. during the 10 days between 20and 30 April it’s unlikely that SSCII would have felt confident in revaluing itsstake in D. That is logical, but impossible to prove and I doubt that Cordishor the RE would tell us even if they knew. I think, therefore, that CD2’s 30 April NTA probably did NOT reflectany change to its value in respect of D.

The 25 May CD2 announcement suggests that the figures are now(nearly) definite; hence SSCII should be able to give to Cordish and the RE an accurate,updated figure for its carrying value of D. That would allow for the bonuses, fees and taxes paid, and wouldincorporate any of the proceeds that D had decided to retain. The carrying value of D would of course NOTinclude the cash that has been paid out to its investors, including our LP onabout 24 May. CD2’s NTA at 31 May should reflect, separately, the increasedcash holding that it’s entitled to, and the new carrying value of D held viaSSCII. My guess therefore is that CD’s NTA at 31 May, which should be announcedon about 12 June, will include the new carrying value of Dominion and, separately,the cash that D has received (or LP2 is holding on its behalf) I.e. the 31/5NTA should jump, but that will be mixed with FX moves and all the valuationchanges of the 70-100 other investments.

Assume for simplicity that the carryingvalues of all the other investments don’t change during May. It would be unreasonable (but it ispossible) to think that the value of Dominion NOW has risen by MORE thanthe net value of the settlement after all fees and taxes etc. I.e. the mostbullish result for CD2 investors is to add ALL the 17.8c proceeds on to whatthe pre-tax NTA was at 30 April. It would be prudent to assume that some USWHT would be deducted out of the cash before it is distributed to Australia: sothe after tax NTA of CD2 might rise by only 13 or14c.

As of 25 May LP2 held that cash, so it is part of the assets held by LP2. The monthlyNTA figure is calculated prorata for its 87.3% of those assets and liabilities.This value doesn’t change irrespective of whether LP2 transfers some or all ofthe LP cash to CD2, even though the cash only comes under the legal control ofCD2 when it has been paid to Australia.In pure accounting value, CD2’s “look through” vale of the cash and otherassets is the same, irrespective of whether the cash is in USA or Australia. Thus at 31 May, the NTAvalue of CD2 should rise to allow for all the above factors, but it doesn’tmatter where the cash resides. That valuewill be cum div. When and if CD2 announcesa distribution to ASX invertors, whatever the amount, the market price should adjustdown when it goes XD

At 25/5, the cash had not been transferred from LP2 to CD2; when it is, the cash transfer may be more orless than the 17.8c, whether because of withholding tax or for other reasons. The NTA is not affected by whether the cash isheld in USAor paid to CD2 in Aust: CD2 still beneficially owns all that cash. However, the location of the cash affects howmuch CD2 can choose to distribute to its ASX investors. It does already hold some cash at the fundlevel. CD2 can only distribute cash held at the fund level: even though it beneficiallyowns its share of cash held in LP2, it doesn’t have the legal power to say whenthat can be transferred to Austrasia-only the GP can decide that. But itwould make sense for CD2 to wait until it gets the large cash transfer from USA, to be ableto distribute a bigger amount to ASX investors. The LP may decide thatit wants to hold onto some of the cash- in USA- in case it gets called on for capitalby the underlying funds to make further fooling investments. This is stillhappening, to a small extent.

Not advice, much guesswork. DYOR