How to make 10% in 2 months — a case of bad governance.
How the controlling shareholder can mess up but you still profit from it.
There is a very interesting situation in the Brazilian small caps space currently, in which we have taken a position and believe to be a very asymmetrical opportunity.
The deal is the combination of HBRE3 and HBOR3, structured as an acquisition of Helbor by HBR.
This deal was announced late last month, with the controlling shareholder who owns the majority of both firms deciding to merge both of them.
1 Presentation - Helbor Share Exchange Offer (OPA)
As for the shareholders of HBR this sounds like terrible news, as the business of HBR is way less risky than Helbor.
HBR is a properties company, which develops and holds commercial real estate like shopping malls, strip malls, hotels, collecting rent from them, hence having quite a predictable and recurring revenue.
On the other hand, Helbor is a typical home-builder, that buys land, builds and tries to sell the apartments, having way less predictable cash-flows, which depend both on the construction costs and the actual sale of the apartments.
Making things worse, both businesses are extremely leveraged with about 7x (net debt/mkt cap) each. So the combination has a potential to be quite explosive, which was displayed by the melting of both names immediately post announcement:
While leverage is not too troublesome for HBR on a standalone basis, as they have cash-flowing assets which can be sold for repaying the debt, for Helbor on the other hand, leverage has been very troublesome as they have struggled with selling the apartments which have been built as can be seen both on the velocity at which they launch new buildings versus what they sell.
2 1Q26 Helbor Release * Typo is credited to Helbor IR team
And evidenced by how much of this inventory is apartments that can be as old as 8 years!!
(1) = Buildings launched until 2017, (2) Buildings launched after 2018.3
If you run the math about 20% of the apartments in their stock are finished. The issues with finished apartments are several: (a) they give the company both maintenance expenses, yearly taxes and condominium expenses; (b) as they took debt to build the apartments in the first place, the interest eats all their profits; and (c) the apartments become obsolete with people preferring to purchase an apartment launched now, rather than 8 years ago!
How to play this?
You might want to argue that the combination of both businesses will be worth more than the standalones because they will have some synergies, and yadda yadda, as the management and controlling shareholder are trying to push on the market - and just buy the stock for what will be a better company.
But… I think there is a more interesting way to make money out of this mess situation.
The idea here is to go Long HBRE3 and Short HBOR3.
HBOR3 currently is trading about 10% above the parity of the merger, (1 HBRE3 to 0.81553398 HBOR3).
If the merger goes through (which the management hinted it will be all done by October), then you will make about 11 cents per share of HBRE3.
As you might have noticed the math results in a negative which makes this trade even better: because you are selling a larger notional of HBOR3 than HBRE3 you are actually receiving a credit of 0.11/share today! And not paying anything when the deal is completed.
Which is exactly how you would make 10% in 2 months.
Now you ask me, isn’t this free money?
Yes, kind of … Well, there is a chance that the deal doesn’t go through: namely, if the minority shareholders of Helbor refuse the merger.
In my opinion this is quite unlikely as you should have noticed that Helbor is a way worse company than HBR. So the shareholders of Helbor should happily vote in favor of the merger.
Another risk is an anti-trust blockage by the Brazilian government, which is even more unlikely than the voting down by the minority shareholders as both of these companies are quite irrelevant in their area of operation (mainly São Paulo).
In this unlikely event of the merger not going through you might think that the stocks would revert to their previous price, which in this case you would make about 20% from your long position in HBRE3 and lose about 22% in your short on HBOR3, netting -2% on this trade.
Now, if you do take a look at the chart of HBOR3 and look at their latest results, you will realize that Helbor is actually in trouble.
So there is a chance that even if the deal falls apart, HBR shares would rebound while Helbor would keep dipping, making this L&S even more profitable.
Final words
In our opinion this deal is quite asymmetrical, making it a very appealing trade, but please remember, do your own due diligence and research before acting on any of the information above, especially given this trade is a Long and Short, which requires investors to be experienced and know what they are doing!
We do hold this trade, but we can change our mind and our positions at any time without notice or warning. I do think I will update this in the future, but don’t hold your breath.
As always, best of luck out there in the markets!
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