Seth Klarman case study: Harcourt Brace Jovanovich

Dear friends,
here is a case study i did on the ever popular manager and head of Baupost Group, Seth Klarman. For those who have not heard of him, you just have to google him and find that he has been a wildly successful manger of funds and his portfolio includes both debt and equity. First up lets take a look at some of his guidelines for investing in distressed debt before we look at a company he invested in.

Seth Klarman guidelines
1) Sees opportunity mostly in junk bonds that are trading between 20cents and 40cents
2) Looks at tangible assets and ignores intangible assets

Seth Klarman case study 1
Company: Harcourt Brace Jovanovich
- Has 2 businesses, publishing and insurance
-Total market capitalization of debt and equity was 4.6 billion
- Theme park was sold for 1.1 billions dollars and proceeds were used to pay down bank debt
- This should have reduced debt by 1.1 billions and the market capitalization of debt would have been 3.5 billion
- But because of panic selling in junk bonds, market capitalization of debt and equity sold at 1 billion
- What was the true worth of the company? à company’s operations spurned off 180 million pretax earnings and at a multiple of 12 times, after tax valuation of the company was around 1.4 billion ignoring debt àequity was worth 1.4 billionà Company was at a discount to what it was worth

- Catalyst according to Klarman: ‘The pressure to pay off the debt tends to put a firecracker under management. Either the company will tender for the bonds at something less than par but above their unceremoniously low prices, or, if they cannot, bankruptcy will lead to the underlying values being realized through a court-ordered reorganization or liquidation.’

Written by:

Lucas Lim