Terra Nova Financial Group Inc (TNFG) is another liquidation investment that recently completed a sale of substantially all of its assets.

Following the asset sale, TNFG will formerly dissolve the company and liquidate remaining assets, with estimated total distributions to shareholders of between $0.95 to $1.07 per share.

With the stock trading at $0.94, the high-end of this range represents a possible return of almost 14% in only a few short months.


Terra Nova is a registered broker dealer based out of Chicago. The stock has languished since the internet bubble popped back in 2000, and the company has a storied history – it was investigated for failing to maintain adequate procedures regarding automated trading in client accounts in 2008.

Most recently, TNFG was linked to the unusual trading action in Proctor & Gamble stock during the flash crash in May 2010.

On June 16, 2010, the company announced that it would sell 100% of its membership interest to Lightspeed Financial, Inc. for a total of $27.6m.

The purchase would be payable with an initial cash payment of $22.6m, followed by a $5.0m promissory note due within six months of closing.

After the sale, TNFG’s only assets would consist of cash that would be distributed to shareholders as part of the dissolution and liquidation of the company.

The transaction required approval by the company’s shareholders along with regulatory clearance (a voting agreement for approx. 44% of shares agreed to vote for the asset sale, almost ensuring the vote would be approved)


On September 15, 2010, Terra Nova announced that the asset sale was approved at a special meeting of shareholders.

On October 20, 2010, the companies announced the formal completion of the asset sale for the agreed-upon price of $27.6m.

According to the press release,

“TNFG expects to make an initial distribution of cash soon after the closing of the sale of Terra Nova Financial and the dissolution of TNFG, with a further distribution being made in connection with the expected liquidation of TNFG following receipt of cash payment on the Lightspeed promissory note. “

Based on these results, the initial cash distribution should be announced and distributed very soon, likely sometime in late November or December.

Final distribution should occur by April, although possibly several months sooner if TNFG can finish clearing out all trades and obligations.

Liquidation Value

While the company hasn’t released audited financial statements breaking down the account values for its liquidation estimates, management currently estimates that shareholders will receive cash distributions between $0.95 and $1.07 per share.

With 25.05m share outstanding, the full purchase price of $27.6m would translate into a per share price of $1.10 – obviously there will be additional liabilities and expenses to wind down the company but management’s estimates look reasonable.

Return Scenarios

TNFG - Valuation Scenarios

Note: These return scenarios do not account for transaction and commission costs, which could significantly affect the return calculations.


In any liquidation, the biggest risk is an inaccurate estimate of the total amount of distribution proceeds, causing a capital loss on the workout. The transaction could also get held up in legal or regulatory hurdles which could significantly delay distributions, potentially by years.

The risk in TNFG’s case is mitigated since the company expects to distribute a large portion of cash early in the process, allowing an investor to put that money to use elsewhere.

Specific to this transaction, there is also a risk that Lightspeed backs out of the final promissory note, although I view this scenario as remote.


The TNFG stock liquidation presents a solid risk/reward scenario for investors looking for special situations investments or workouts.

I have made several assumptions regarding the timing and amount of the initial distribution – modifying these assumptions will significantly affect the annualized return on this investment.

By buying now, investors are getting an (almost) free call option to roll the dice for future gains.

I’m adding TNFG to the Value Uncovered portfolio at Friday’s closing price of $0.94.



Similar to the FCEC/TOBC merger from a few months back, small community bank mergers can provide a tremendous source for arbitrage profits.

Jacksonville Bancorp Inc (JAXB) and Atlantic BancGroup Inc (ATBC) are two tiny micro-cap banks that agreed to merge back in May.

Due to their small size – a market cap of $13m and $2.6m for JAXB and ATBC respectively – the transaction seems to have flown under most investors’ radar and offers attractive returns for patient individual investors who are able to pull off the trade – at least in theory.

Merger Background

On May 10, 2010, JAXB and ATBC signed a definitive merger agreement where ATBC, along with its subsidiary Oceanside Bank, would be acquired by JAXB.

Both banks operate locations in the greater Jacksonville, FL area. According to ATBC’s CEO,

“We believe that a well-capitalized local bank run by local people will offer our customers and our shareholders the most benefit in the long run. This is truly a unique opportunity. “

To help finance the transaction, JAXB also announced a stock purchase agreement with a group of four investors, led by CapGen Capital Group, to provide $30m in new capital through the sale of newly issued shares of JAXB common stock.

Deal Terms

Under the original merger agreement, ATBC shareholders would receive 0.2 shares of JAXB common stock plus cash consideration of up to approx. $0.65 subject to the sale of certain assets.

These assets were eventually sold on June 30 for $700k in cash, or approx. $0.56/shr.

JAXB would also plan on issuing 3m new shares at $10.00 to the new investor group to finance the transaction.

Subsequently, the merger agreement was modified on September 17 to increase the amount of capital raised from the JAXB stock sale, to a total of $35m at a per share price of $9.00.

This modification also served to set the cash consideration of the merger agreement at $0.67.

Final Stock Exchange Ratio: 0.20 JAXB common stock for each share of ATBC common stock

Cash Consideration: $0.67 per share of ATBC common stock

Regulatory Approvals

Like most banking transactions, the merger requires approval from a number of different governing bodies, including the Federal Reserve Board, the Florida Office of Financial Regulation, and the FDIC.

After Federal Reserve Board approval, the companies must wait 15 days before officially completing the transaction. The OFR approved the transaction on September 22, with the Federal Reserve following on October 14.

Shareholder Approval

To complete the transaction, at least 70% of ATBC’s shareholders must vote to approve the transaction.

Executive officers and management of ATBC hold 15.46% of outstanding stock, with the only other large shareholder being Apex Investment Management, with 9.91%.

ATBC’s shareholder meeting was scheduled for October 28, but the company hasn’t yet posted any news regarding the results of voting.

JAXB’s special meeting of shareholders is scheduled for November 9 in order to vote on the sale of stock to accredited investors in order to guarantee the financing for the transaction.


ATBC & JAXB - Merger Arbitrage Returns

To lock in the arbitrage spread, investors would purchase shares of ATBC and short shares of JAXB according to the merger ratio.

While the timeline is still uncertain, management believes that the transaction will be closed in the fourth quarter of 2010.


Financing – The merger relies on investors committing $35m in fresh capital to JAXB in order to pursue this transaction. If these investors walk away – due to economic conditions, further deterioration in ATBC’s business, etc – the transaction could fall apart.

Approvals – ATBC’s management team only controls 15.46% of outstanding stock, leaving some risk for shareholder approval.

However, ATBC’s board determined that the bank would need to pursue a strategic transaction or merger in order to survive. While the bank recently reported a quarterly profit, it remains on shaky ground – the failure of the merger would have severe consequences for existing shareholders.


The biggest factor in this transaction is that both banks are very thinly traded.

JAXB hasn’t traded for the past several days, although there was a decent amount of activity the week of Oct 14-22, with several thousand shares changing hands.

Low trading volume makes it difficult to find JAXB shares to short in order to complete the other side of the merger arb.

The bid-ask spread could also be a factor that cuts into expected returns.

With these factors, the implementation of this arbitrage opportunity could be difficult for most investors – although attractive on the surface, this merger shows the importance of checking ‘paper theory’ with actual trade execution.


No positions

REMEC, Inc. (REMC) was a high flying stock back in the internet bubble days (trading over $36 in Mar. 2000), only to effectively close up shop only 4 years later.

After selling off the various business units, management and stockholders approved a Plan of Dissolution and Liquidation on July 21, 2005, but the stock has languished on the OTCBB ever since.


Immediately following the asset transfer, the company paid an initial cash distribution of $1.35 per share. Several other distributions followed over the next two years, adding up to total payment to date of $3.35 per share.

The last liquidation distribution was in June 2008.

Lawsuit Settlement

Back in 2004, several shareholder lawsuits were filed against the company alleging that former officers made “false and misleading statements and failed to disclose material information regarding the Company’s financial condition.”

After the case made its long and painful way through the court system, positive signs appeared in April 2010 when the court ordered a ruling for summary judgment.

Finally, on August 30, 2010, despite another appeal (and cross-appeal!), the parties finally entered into an agreement to dismiss the case.

After 6 long years, the markets reacted very favorably to the news, as the stock jumped over 6% with over 2M shares trading hands (a huge volume compared to prior months, where the stock often went several days with no trades at all).

With this news, all outstanding litigation against REMC was finally satisfied, and the company could now move towards wrapping up the liquidation process.

Liquidation Estimates

As of July 30, 2010, the company’s assets were as follows:

REMC - Net Assets in Liquidation

On September 17, REMC announced a cash distribution of between $0.81 and $0.87 per share payable to shareholders of record on November 24, 2010.

The company plans to hand over its remaining assets to a liquidating trust on December 31, 2010, for the final wind-up and liquidation.

The company expects to complete the liquidation of the trust by March 2011.

Catalysts for Higher Returns

As shown in the chart above, $1.32m of the company’s remaining liabilities are taxes payable. However, a line in the latest quarterly release is key:

“We believe that it is reasonably possible that $1.3 million of our current remaining unrecognized tax positions may be reversed by January 31, 2011 as a result of a lapse of the statute of limitations.”

Although tax laws and rulings can be complex, the company has already written down tax liabilities before (i.e. $6.7m in the 2010 fiscal third quarter).

If the statute of limitations passes on this liability as well, it should add approximately $0.05 per share to the final distributions.

In addition, one of the company’s major shareholders has been aggressively buying up shares at prices ranging from $0.85 to $0.95.

S. Muoio & Co. LLC, a value-oriented activist firm, has purchased over 5m shares in 2010, bringing its stake to over 28% of REMC.

The purchases have been recent as well, with the firm buying over 440k shares on 9/27 for $0.94.

This seems to be a strong indication that the company will pay out on the upper end of the liquidation range.


REMC - Valuation Scenarios

With the upcoming payout in December, a substantial portion of any upcoming stock purchase would be returned right away, leaving the rest on the table for potentially higher returns.


I think there is a strong possibility that the $1.3m tax liability will ultimately be returned to investors.

Combining this assumption with the strong insider buying, and I think the chances of a negative outcome are remote.

With some careful planning and a few positive developments (buying near the record date, tax payable is dissolved, distributions are at the high end of range), this investment offers potential for outstanding annualized returns.


No positions.