CPD: Reduced holding

I’ve been on vacation for the past couple of weeks, so I haven’t posted an update on CPD. I’ve been able to think about CPD for the past few days and have decided to sell out of the holding.

CPD is my biggest holding and I’ve held it for over 2 years, I’ve been in and out of this company for many more years. My initial thesis on the buy was that CPD would work out of its FDA issues, regain compliance, restart production, and get back on the high double-digit growth. Today’s news about the delay in FDA issues, definitely a set back, would not have compelled me to give up on my initial thesis that CPD would work through the FDA issues.

Although with the Sun Pharma offer on the table and recent news from CPD, the investment in CPD has completely changed. The investment in CPD now is based on the independent party’s valuation of CPD and the likely outcome of the Sun Pharma offer. There is a possibility that the independent valuation comes back with a higher than $4.75 valuation, which could mean Sun ups the offer price. There is also a possibility that the minority shareholders are able to raise hell and force the Board to reject the Sun offer as substantially undervalued. I have no idea on how you put the odds on these scenarios. The minority shareholders raising hell is pretty low. As for the independent valuation, I have no idea what they will come up with.

For me, the reason to hold on to CPD has changed from my initial reasoning. I don’t know what the odds are with the current scenarios for CPD. It is no longer dependent on clearing FDA regulation. I’ve started selling my position in CPD and likely exit it soon. At the current offer from Sun Pharma you are looking at CPD selling close to $4.75. I think it is highly unlikely that Sun Pharma walks away from the $4.75 offer. So you could hold and wait until the final decision from the independent board members on the Sun Pharma offer. For me, when the reasoning for the investment has changed and I can’t understand the new odds, its time to move on. At current market price of $4.55, you are leaving about 5% of the table based on the worst-case scenario (Sun Pharma buying out CPD at $4.75). The upside could be more but I have no clue on the odds.

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