Michael Kao Pitches Long Comcast Zones – ValueWalk Premium

Michael Kao Pitches Long Comcast Zones

The 10th Annual New York Value Investing Congress takes place in New York on September 8th and September 9th 2014. ValueWalk will be providing coverage of the event- below is a summary of a presentation by Michael Kao in which he pitches his long idea on Comcast Corporation (NASDAQ:CMCSA)'s zones.

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Michael Kao Pitches Long Comcast Zones

Michael Kao is the founder and Portfolio Manager of Akanthos Capital Management, LLC, a hedge fund that runs an opportunistic, event-driven strategy that is capital structure agnostic. Akanthos utilizes fundamental, value-driven framework that is bottom-up and idiosyncratic. Prior to forming Akanthos in 2002, Mike worked at Canyon Capital Advisors where he co-founded and lead-managed Canyon’s Arbitrage Strategies Group and co-founded the Canyon Capital Arbitrage Fund. Mr. Kao is a graduate of the University of California at Berkeley (B.S., Electrical Engineering and Computer Science) and the Wharton School of the University of Pennsylvania (MBA, Finance).

Michael Kao: Multiple Zones of Optionality

Comcast Corporation (NASDAQ:CMCSA) issued 2 tranches of 30 year ZONES, exchangeable debt securities

zero premium option notes exchangeable securities


Rank as junior subordinated debt at Comcast Corporation (NASDAQ:CMCSA) , exchangeable into SPRINT PCS stock (now sprint and centurylink)

If comcast ever paid a dividend it would get paid through to the zone holder

Issued in 1999

convertible and exchangeable bonds

Michael has traded in and out of these Comcast zones several times over last 10 years

first bought in 2003 after the NASDQA bubble burst, and the zones became busted

on 4/23/04 sprint recombined its 2 tracking stocks

each share of pcs automatically converted into .5 shares of FON common stock

FON paid a dividend which was passed through to the ZONES

He isolated the event by going long the ZONES and shorting the premium corp bonds of Comcast —made 20% with no risk

Better to be lucky than smart

Michael Kao: 4 different ways to win!!!

zone 1: cheap credit/carry

6% yield, trading at 60 cents on the dollar

Comcast Corporation (NASDAQ:CMCSA) 5 year senior CDS trade at 100bps to treasuries

ZONES fair value is 30% higher than current market price

really single A bonds for the ZONES (even though ratings agencies label them BBB

zone 2: Early Takeout Candidate

90% of the November maturity ZONES have already been retired, only $62m of the original $657m remain outstanding

67% yield to to early takeout

can be triggered by technical default –activist could trigger this and make company pay the ZONES back at PAR

zone 3: Dividend options

Zones currently exchangeable into 1 share of Sprint (S) and .0685 shares of Centurylink (CTL)

ZONES pay total annual coupon

Zone 4: OTM Equity options

Equity options are valuable given M&A history of sprint and long remaining life


not very liquid

mark to market risk

interest rate/duration risk (this is hedgeable) — hedge out equivalent maturity treasuries

Comcast Corporation (NASDAQ:CMCSA) credit risk (seems quite low)


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