Outerwall was discussed for the first time in the last letter, and shortly after that writing the company announced its sale to the private equity firm Apollo Global Management. As discussed, this was an outcome I viewed as reasonably likely. The large investment we held in the company’s unsecured bonds was subject to a change-of-control provision that required their tender at 101. The decline in Redbox volumes combined with the overall unease of the high-yield bond market in the first quarter of the year punished Outerwall’s bonds and created what we saw as an attractive opportunity. We bought our bonds (unequally weighted across the two unsecured issues) at a significant discount to par and we sold our bonds shortly after the deal was announced at prices at or above the 101 threshold. The smaller investment we held in the common shares remained until the acquisition closed in September.

In hindsight this was an interesting experience. I remain convinced that this company, in the (public or private) hands of an intelligent capital allocator, can generate an excellent return over time. The second quarter results reported in late July confirmed much of my thinking about where the business is heading, particularly the attractiveness of the Coinstar segment and the durability of Redbox’s cash flow. It may seem odd to gripe about a significant gain but it is bittersweet to lose an opportunity to make an even better return, especially with the knowledge that the company’s new owners are likely to do very well with it over time.

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The above commentary is excerpted from the quarterly letter of Anabatic Investment Partners LLC. The fund’s Managing Principal and Portfolio Manager is Philip C. Ordway. Please note that the complete text of the disclaimer included with the fund’s quarterly letter is also reproduced below.

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