In September last year I picked up a small position in Cadus Corporation (OTC:KDUS). The idea was as follows:
Cadus Corporation (OTC:KDUS) is an interesting play, but not without hairs on it. First, the good news: It’s trading at a discount to net cash with Carl Icahn disclosing an activist holding in 2002, and Moab Capital Partners disclosing an activist holding more recently. At its $1.51 close yesterday, the company has a market capitalization of $19.9M. The valuation is straight-forward. We estimate the net cash value to be around $20.6M or $1.57 per share and the liquidation value to be around $23.2M or $1.77 per share. The liquidation value excludes the potential value of federal and New York State and City net operating loss carry-forwards. It’s not a huge upside but it’s reasonably certain, and we think that’s a good thing in this market. The problem with the position is the catalyst. It’s a relatively tiny position for Icahn, so he’s got no real incentive to do anything with it. He’s been in the position since 2002, so he’s clearly in no hurry. That said, he’s not ignoring the position. He last updated his 13D filing in March this year, disclosing an increased 40% stake. He’s also got Moab Capital Partners to contend with. Moab holds 9.8% of the stock and says that it “has had good interaction with the CEO of Cadus, David Blitz, and feels comfortable that he will structure a transaction with an operating business that will generate significant long-term value for Cadus holders.” KDUS could end up being a classic value trap, but we think it’s worth a look at a discount to net cash, and two interested shareholders.
Fast forward to Friday’s close, and the stock is at $1.44. I got out a little while ago as I was liquidating holdings outside of my fund, breaking even on the position. In For Investors, Shaking Up Is Hard to Do (subscription required) Jason Zweig of the WSJ’s The Intelligent Investor column has some background on the goings on in KDUS:
Just ask Matthew Crouse of Salt Lake City. Starting in 2002, he sank roughly $190,000 into Cadus Corp., a classic “value” stock. The tiny company was selling for less than the amount of its cash minus debt.
In February 2009, Mr. Crouse wrote to Cadus, requesting that the board sell the company and return the cash proceeds to investors. He drafted a resolution to that effect, which he asked the board to include in Cadus’ proxy statement when shareholders were next asked to vote.
Yet Cadus didn’t hold an annual meeting last year. One large shareholder says that “time and again, we have brought opportunities [for mergers or acquisitions] to the attention of the board.” Each time, he says, the suggestion was rebuffed or ignored. “It’s been a decade of complete nonaction,” he says.
A little over a week ago—17 months after Mr. Crouse’s letter—Cadus informed him that it will hold its annual meeting on Oct. 6, that his resolution will be included and that the board will recommend that shareholders reject it.
“My goal is to get it on Icahn’s radar screen so that he’ll need to deal with us, not just ignore us,” Mr. Crouse says. “If you push for shareholder activism in other companies, I’d think you’d want to take care of your own.”
It isn’t that simple, Mr. Icahn counters. “We’ve been looking assiduously for three years for opportunities,” he told me this week. “But I don’t want to make a bad acquisition and lose the cash.” He added, “I strongly believe that in today’s type of market we will find a company [to buy] fairly soon.”
Furthermore, Mr. Icahn says, if Cadus distributed its cash to shareholders, it would have no money for an acquisition, losing the opportunity to use its tax benefits directly. “I don’t want to waste $25 million,” he says. Of course, Cadus could still be acquired by another firm that could make use of the tax break.
Cadus is less a company than a publicly traded checking account with a tax perk attached. The insiders are the only ones who can write checks. The minority shareholders can always vote with their feet by selling the stock—although they would have little to show for it.
For the proposal to pass, nearly 90% of all the minority shareholders would have to vote for it, since Mr. Icahn controls 40% of the stock.
I still think KDUS is good value, but the stock doesn’t trade, so good luck getting any. I don’t see Icahn just wasting the tax shelter, some of which starts rolling off in the next few years, but it’s all academic to me.
[Full Disclosure: No position. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]