DENALI INVESTORS, LLC

1120 Avenue of the Americas, Fourth Floor

New York, NY 10036
(646) 484-9896
www.DenaliInvestors.com




July 14, 2014


Second Quarter 2014 Investor Letter


PERFORMANCE


Denali Investors
S&P 500
(Total Return)
2014 Q2 Performance +28.6% +5.2%
2014 Year-to-Date Performance +33.7% +7.1%
Total Return Since Inception* +187.9% +46.6%
Annualized Return Since Inception* +17.2% +5.9%
* Return from inception November 2007


GENERAL COMMENTS

During the second quarter, we were able to generate strong returns in a challenging
environment. The returns were driven by a sequence of idea specific catalysts that offered
good visibility since their initial announcements six to twelve months ago. The
outperformance was generated while maintaining significantly less exposure due to our large
cash position as well as our high position level and market hedges. We took advantage of the
volatility early in the quarter and were able to increase a number of positions including the
National-Oilwell Varco (NOV) + Now Inc. (DNOW) spinoff. We also initiated new
positions including the Fidelity National Financial (FNF) + FNFV Group (FNFV) spinoff
and Chicago Bridge & Iron (CBI), among others. As certain investments hit their price
targets and other opportunities arose, we scaled back and exited investments including Iron
Mountain (IRM), and the Penn National Gaming (PENN) + Gaming and Leisure Properties
(GLPI) spinoff. In addition to the investments disclosed in this letter, a number of additional
ideas are discussed in our recent in-depth interview in the highly regarded Graham &
Doddsville newsletter (Link).






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The special situations pipeline for 2014 remains robust and continues to expand. There are
numerous specific and understandable catalysts with attractive risk/return profiles. Our
portfolio contains a series of hard catalysts that are expected to occur during the third
quarter. From the 2014 vintage of special situations, we are increasingly finding and
selectively layering in a base of investments that we believe to be high-quality, high-
compounding, multiyear vehicles.


SELECT PORTFOLIO POSITIONS

National-Oilwell Varco, Inc. (NOV) We first identified NOV as a potentially interesting
name in Q3 2013 when the company announced plans to spinoff its DistributionNOW
(DNOW) business. We established our position in Q1 2014 ahead of the spinoff expected
to occur in Q2 2014. The spinoff was completed in early June 2014.

New NOV provides equipment, components and services used in oil and gas drilling and
production industry. New NOV will reorganize its two remaining segments, Rig Technology
and Petroleum Services, into four reporting segments: 1) Rig Systems, 2) Rig Aftermarket, 3)
Completion & Production Solutions, and 4) Wellbore Technologies. New NOV will be able
to highlight the significantly higher margin profile and substantial FCF of its core business.
It should be rewarded with the higher valuations of similar margin competitors. We expect
more dividend increases (dividend was doubled in Q2 2013 and nearly doubled again in Q2
2014) and continued accretive acquisitions. We believed New NOV would be worth more
without DNOW obscuring the value of the core business.

DNOW provides the supply chain management, distribution and transmission of
maintenance, repair and operating supplies and spare parts to drill site and production
locations worldwide. DNOW is now the second largest for the energy industry. It is similar
to an Autozone for the energy industry but operates in an industry that remains highly
fragmented. DNOWs current industry structure is similar to Autozones before its
consolidation phase as well as that of New NOV itself before its own consolidation phase.
At the risk of history repeating itself, DNOWs industry is ripe for consolidation and we
believe DNOW will be the company to do it.

Unlike most spinoffs, DNOW will begin with a favorable net cash position and a $1b
revolver to help fund future acquisitions. Interestingly, the highly regarded NOV Chairman
& CEO is moving to DNOW. The management has a long track record of structuring





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favorable deals and seemed deliberately quiet about the spinoff prospects. At our cost basis,
we believed that DNOW was being created for free and that New NOV was priced at a
substantial discount. This has turned out to be the case.

Fidelity National Financial Inc. (FNF) We first identified FNF as a potentially
interesting name in Q4 2013 when the company announced strategic alternatives. In January
2014, the company announced the intention to separate the FNF Ventures assets into a
tracking stock FNFV Group (FNFV) and with New FNF also becoming a tracking stock
FNF Group (FNF). We established our position in Q2 2014. The company completed the
FNFV spinoff at the end of Q2 2014. We believe the market was not assigning any value to
the FNFV assets.

New FNF is the largest title insurance company in the US and a leading provider of title
insurance, escrow and other title-related services for real estate transactions. FNF has about
one-third of the US title insurance market in an oligopolistic market (top 4 companies have
90% market share).

New FNF also completed in January 2014 the acquisition of Lender Processing Services
(LPS) for $3.4b. New FNF has a two-thirds stake in LPS which has been reorganized as
Black Knight Financial Services (BKFS). BKFS offers the mortgage and finance industries
leading provider of integrated technology, data, and analytics solutions as well as transaction
services. The market seems to be discounting the impact of the BKFS segment. Interestingly,
LPS (now BKFS) was once a subsidiary of FNF and both companies continue to share a
corporate campus. In November 2006, FNF spun off Fidelity National Information Services
(FIS) which included LPS as a subsidiary. In July 2008, FIS then spun off LPS into a separate
public company.

FNFV will hold interests in Remy International (REMY), American Blue Ribbon Holdings
(ABRH), J. Alexanders Holdings (JAX), Ceridian HCM, Comdata, and Digital Insurance.
The stated NAV of FNFVs holdings is approximately $5 per FNF share (pre reverse split).
However, the stated NAV figure is based on at-cost metrics. Based on our analysis, the true
NAV is significantly higher than the stated valuation. FNFV contains valuable assets and
trades at a substantial discount. We believe management has numerous options to unlock
value in the near term, including additional spinoffs, splitoffs, sales, buybacks, etc.

Tracking stocks are widely misunderstood and underappreciated. In fact, both Glass Lewis
and ISS proxy advisors recommended against the FNF and FNFV tracking stock





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conversions. Of the securities universe of 695,528, there is active trading status for 171,471
securities. Of those, only two were tracking stocks - LINTA and LVNTA. These are among
the Malone entities, which we have discussed at length. LINTA will soon reorganize into
QVCA tracking, LDCA tracking, and New LVNTA tracking (post separation of LTRPA).
The only other tracking stocks are now FNF and FNFV. These are among the Foley entities.
Currently, the quietly established universe of American tracking stocks consists of only four
stocks that are all highly productive, highly creative, and managed by two exceptional owner-
operators.

Chicago Bridge & Iron (CBI) We first identified CBI as a potentially interesting name in
late Q2 2014 when a short selling focused research firm released a detailed white paper that
triggered a 20% price drop over a short period. CBI is familiar to our partners due to our
investment in Shaw Group (SHAW), which was purchased by CBI in 2012. We initiated our
position in SHAW in 2011 when it traded at a 0x EV/EBITDA multiple and first analyzed
CBI during that period. Upon the merger announcement, we conducted a thorough analysis
and believed that the deal terms substantially undervalued SHAW and would be
disproportionately beneficial to CBI.

Our extensive analysis regarding SHAW and the CBI merger can be found here: Letter to
Board December 2011, Letter to Board August 2012, Press Release September 2012, Press
Release October 2012, and Main Presentation - Demanding Fair Value October 2012.

The current short thesis centers on the Purchase Price Allocation (PPA) and Goodwill (GW)
adjustments as well as recent reduction in cash flow (CFO) metrics. Our conclusions differ
regarding the severity of the PPA/GW/CFO implications and consequences, as well as the
ultimate valuation. The next material catalyst will occur in the near term during the
upcoming earnings call this month, which will provide management with an opportunity to
address the issues.


EXITED POSITIONS

Penn National Gaming, Inc. (PENN) + Gaming and Leisure Properties Inc. (GLPI)
We first identified PENN as a potentially interesting name in Q4 2012 when the company
announced plans to spinoff GLPI, the first casino focused REIT. We believed this step
would unlock significant value for the PENN shareholders and established our position in
Q3 2013 ahead of the spinoff that was completed in Q4 2013. The valuation for the new





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publicly traded casino focused REIT and the planned acquisition strategy of privately owned
properties at lower multiples would result in a long runway of accretive transactions for
GLPI. A number of transactions were announced and a healthy pipeline of deals is expected.
The founder of PENN moved to the GLPI spinoff. Including the special dividend of ~$12
received Q1 2014, GLPI may continue to produce positive returns. However, the investment
was exited for other opportunities.

Iron Mountain Inc. (IRM) We first identified IRM as a potentially interesting name in
Q2 2013 after the Internal Revenue Service (IRS) announced a tentatively adverse position
on a number of REIT conversions, including that of IRM. We believed the value of IRM as
a REIT to be materially higher. We established our position in Q2 2013 after the stock fell
by one third on the IRS uncertainty. There were uncertainties about the IRS working group
in terms of their personal incentives, political motivations, process, and timing. We believed
there existed precedents that would result in an affirmative decision. The IRS Private Letter
Ruling (PLR) is independent for each company and so while one cannot rely solely on
precedents, the alternatives would be much less probable (grandfathering, new rules and
legislation, etc.). The decision process was initially expected to be complete by Q4 2013,
however, there were a series of delays that were primarily due to the potential government
shutdown that developed in Q4 2013. Although a decision point would resolve the
uncertainty, the investment was exited early in the quarter for other opportunities. A positive
decision was announced late June 2014, after our exit.


CONCLUSION

We believe our investment framework and process will continue to produce outperformance
over time. As always, above all else our focus remains on investing for survival.

Sincerely,

Denali Investors LLC






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ADDENDUM


DENALI INVESTORS = VALUE + SPECIAL SITUATIONS + HEDGES

H. Kevin Byun founded Denali Investors in 2007. The firm employs an opportunistic special
situations and value-oriented framework. Denali seeks to identify catalyst driven situations
that will unlock value and produce market agnostic returns. Mr. Byun has a triple major from
Rice University and an MBA from Columbia Business School.


FRAMEWORK

Value + Special Situations (Catalysts): Denali seeks to identify value-oriented and special
situation investment opportunities at substantial discounts with definable catalysts or by
being the catalyst through proactive methods. Our special situations focus and experience
has generated outstanding market agnostic returns.

Fundamental Research + Analysis: Denalis research and analysis have consistently
produced a high rate of success. Our investment process uses a combination of thematic and
rigorous fundamental research on individual companies and catalyst driven situations.

Portfolio Construction + Risk Management: Denali invests in only its highest conviction
ideas. Concentration into 5 15 very attractive, non-market correlated investments is an
advantage. Our opportunistic style of investing allows the firm to select investments with
highly favorable risk-reward profiles. We structure the portfolio to have favorable
asymmetric characteristics that we believe will provide substantial upside yet preserve capital
in a downturn.

Flexible & Opportunistic Mandate: Denali has a flexible mandate that allows the firm to
look at opportunities across the spectrum. Unlike other funds that are designed to fit into a
limited style box, we are opportunistic generalists focused on special situations. Our flexible
approach has resulted in numerous outstanding investments.

Net Cash = Fortress: Cash is a valuable strategic asset. Our cash has typically averaged
20% to 35%. Cash remains the default in the absence of greater opportunities.