Friday, August 7, 2009

It Trades For Less Than It Owns

Retail Ventures (RVI) is a holding company that owns 63% of another public company, DSW Inc (DSW). While RVI does have certain liabilities (related to its divestitures of other businesses) and its own corporate costs, its ownership in DSW is now the dominant determinant of RVI's value as a company.

DSW trades on the NYSE for almost $600 million, meaning RVI's ownership share is currently being valued by the market at $368 million. But RVI trades for only $169 million, less than half of its stake in DSW!

Buying RVI stock, however, is not guaranteed to return 100% even if these stocks converge over the next few years. This is due to the fact that it's entirely possible the market is overvaluing DSW and that it's price will eventually come down.

But by simultaneously buying RVI stock and shorting DSW, however, the investor is protecting himself from a decline in the value of DSW. As long as the values in these companies eventually converge, which will happen if RVI starts liquidating its shares or sells its stake in DSW, the investor will make money.

This trade, however, is not without short-term risks. Who knows how long it will take for the prices to eventually converge? In the meantime, the prices of these stocks may diverge even further, testing the mettle of the investor. Furthermore, the investor should understand the complex nature of RVI's other liabilities and expenses, to ensure they are manageable and don't represent a good reason for the price difference.

Investors appear well aware of this opportunity already. The short interest in DSW is 27% of its float, while the comparable number is just 1.5% for RVI. Nevertheless, the price divergence has persisted for many months. How much longer will it last?

We saw another arbitrage opportunity a few weeks ago. Here's how it ended.

Disclosure: None


Value Box said...

I am trying to learn a bit more about how this type of arbitrage works and could use some additional information on a situation like this--specifically how would you determine the number of shares to buy of RVI and the number of shares to short for DSW--Then how would you go about calculating the potential return.

By the way, thanks for your great work on this website--I find it very useful in learning about investment opportunities/strategies.

Anonymous said...

Shouldn't you be using RVI's enterprise value as opposed to equity value??

Anonymous said...

Is there good info in RVI's 10-k about its liabilities? Is it debt? Litigation claims? If there is uncertainty about them, or they are too large, this could explain what is going on.
I will look into it when I have a chance.

Saj Karsan said...

Hi CauseWheel,

The calculation is a bit involved to get into here, but there are some examples on the web. The idea is that your position in DSW should net to zero. Therefore if your shares of RVI indirectly give you ownership of X shares of DSW, you would then short X shares of DSW. The potential return is the price of the X shares of DSW minus the X shares of DSW you purchased at a discount through RVI.

Hi Anons 1 and 2,

You are correct. In another manner of speaking, you have to subtract out RVI's debts that are not matched by RVI's other assets.

another value investor said...

Maybe I did my calculations wrong, but it seems that RVI has negative equity if its DSW stake is excluded. If that's the case, the relative value arbitrage idea would fail since it implicitly assumes that the value of RVI ex-DSW is greater than $0.

On the other hand, to execute this strategy, buy 1 RVI share for each 0.568 DSW shares short. This is based on the fact that RVI owns 62.9% of DSW and there are 48.69M and 44.02M O/S of RVI and DSW, respectively

Anonymous said...


I assume "Disclosure: None" means that you are not investing in this yourself, may I ask why?

I have not looked at the fundamentals, as I think that the possibility of a short squeeze is non-trivial in this stock. As you said, short interest is currently running at ca 28% of free float. Given the average daily 3m volume of 300k sahres, it would take 15 trading days to cover the short interest. I am not very familiar with short selling, but this looks like you could be forced to cover at some point.

What do you think? Thanks.

Saj Karsan said...

Hi Anon,

I don't own it because I haven't fully investigated the liabilities of this company. On my first read-through, they did not appear simple to comprehend.

Anonymous said...

Anyone know a brokerage that has DSW shares to borrow. Ameritrade was a no-go.

shaunhhh said...

First, I want to say I really like your blog. Your ideas are great! I've talked about a few of your ideas in my blog.

However, the RVI and DSW pair trade does have some issues. The problem is the Premium Income Exchangeable Securities (PIES) that RVI sold to raise $128.1M.

I've explored at some length the PIES problem on my blog. Just thought you might like to take a look. Your feedback would be much appreciated.

Here's the link:

I can also be reached at