The following segment was excerpted from this fund letter published by Massif Capital.
Teekay Offshore (NYSE:TOO) (Long): The waiting game with Brookfield Business Partners (NYSE:BBU) appears to be over. To review, we made our investment in Teekay following a balance sheet restructuring of the company by BBU in 2017. We built a large position at a cost below that of BBU and following months of work done by BBU and TOO management to set the company on the right course. Because of the progress made by management, which includes a reduction of the leverage ratio from 7.4x to 4.5x, a restructuring of the debt such that there are no meaningful debt maturities until 2022, and a 64% improvement in EBIT from 2017 to 2018, BBU is now attempting to buy the company from minority shareholders. Despite the operational progress made, the stock did not respond, presenting BBU with the opportunity to pursue a takeover at a roughly 38% discount to their initial investment. Unfortunately, the recently accepted $1.55 offer (currently 38% below the initial purchases of TOO by BBU) is "significantly improved" on relative to BBU's initial offer, which was 58% below their initial investment and at the time of the offer roughly 9% below where the company traded in public markets.
The result of the initial $1.05 offer was to drive the stock down roughly 9%, which of course, makes the $1.55 offer BBU has now made seem much more generous, but only if judged next to the artificially suppressed price of $1.05. Either way, we believe BBU is attempting to abscond with the company in a way that they would not do if it were a large-cap company, and the transaction was taking place on the front page of the Wall Street Journal. They are not doing anything illegal, but we are disappointed in how minority shareholders have been treated in this process. As we noted in our second-quarter letter, an important takeaway from this investment has been that although private equity can make for an interesting strategic investor, they have incentives that can be very different than minority equity investors.
We wrongly viewed Brookfield's involvement in the company, at the time of investment, as a positive. They are largely well respected and have an excellent operating track record in many of the fields we invest in. Their initial statements suggested that they were investors with interests well aligned with minority shareholders, which has unfortunately turned out not to be the case.
We expect to to close out the position in the fourth quarter of this year. We will incur a 28.9% loss in the position when we are bought out by BBU.
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