Grenville Strategic Royalty (GRC.V) – Merger Arbitrage – 100% Upside

Current Price – C$0.075

Merger Consideration - C$0.156

Upside – 100%

Expiration Date – TBD

Merger Announcement

This idea was shared by Michael.

 

Grenville Strategic Royalty is a small specialty finance company that buys royalties from small companies. The business hasn’t been a success, primarily because of impairments and G&A they can’t support. I believe they are doing venture capital style deals with a capped upside, so they lose money on most of them but don’t get the multi-baggers they need on their winners to balance things out. They are merging with a small asset manager which is also distressed. The merger could be helpful to both, simply because they will eliminate one set of public company/executive G&A, which is meaningful given how small these businesses have become (both companies under C$10m market cap)

There is a huge spread here, with Grenville trading at C$0.075 and the buyer, LOGiQ Asset Management (LGQ.TO) trading at $0.025. Each Grenville share will convert into 6.25 LGQ shares after the deal closes, or C$0.156 at current prices. You can’t short LGQ, so there is basis risk that LGQ shares decline between now and the close of the deal. LGQ should have some balance sheet support as it is trading at approximately tangible book value. All that said, even a 40% decline in LGQ shares to C$0.015 would still leave material profit potential in the deal.

Transaction is subject to 66.6% shareholder approval on both sides.

7 COMMENTS

  1. dt

    I am not getting the purpose of this merger.

    If I am reading the announcements correctly, then LOGiQ has fully sold out of all asset management businesses and now is a shell company with expensive management and almost C$2m cash burn in a single quarter. I doubt management of either company cares about elimination of executive G&A – why would they cut the branch on which they are standing themselves? Keeping in mind share price performance of both companies it does not seems execs are very interested in shareholder value creation. So in the end a company that is trying to play venture capitalists wants to merge with a company with no operations at all.

    My guess is that Grenville is simply after LOGiQ cashpile which will allow then to gamble a little bit longer with investor’s money – most probably they are not able to raise any additional funding themselves. Any other thoughts?

    Would you know the ownership structure of both companies? It’s hard to assess how likely is the shareholder approval.

    Also found this one interesting:
    “Grenville’s recent success with companies such as Boardwalktech, an emerging enterprise Blockchain company based in California, and its significant equity position in cannabis franchisor Inner Spirit”

  2. Michaelx

    Grenville is widely held, with insiders having a mid-single digits percentage stake, and Logiq has a 28% shareholder that is on the board. I think the 28% shareholder of Logiq (Gordon McMillan) who isn’t part of management there, probably wants the value of Logiq conserved, and thinks this is a good way to do it. There is a chance the combined entity will trade up on either blockchain/cannabis hype, and a royalty business is theoretically a good one.

    I think GRC shareholders will approve the deal, because the premium they are getting is significant, so it makes sense for them to do so.

    I completely agree that both companies have had terrible results. This isn’t something I would buy on the fundamentals or the future plan for the business. This is definitely riskier than a standard merger arbitrage.

    I do think the cash and royalty assets will provide some price support for the shares after the merger.

  3. dt

    Thanks for additional insight.

    So if there is no evident cost savings or synergies from businesses combination (as it does not seem either company will be willing to cut execs and motives for the merger are questionable) then the most investors can expect is that the combined company trades at sum of current market caps of individual companies. This results in C$0.015/share of new company- or C$0.095 per GRC share, 18% upside (potentially even lower if we ignore recent share price volatility).

    Is that in the ballpark of what you have for unhedged trade?

  4. Thinley w

    Is there any difference if you purchase the stock on the US exchange using ticker GRVFF?

  5. Michaelx

    I think the Logiq management will end up going, as I think its likely the major Logiq shareholder was the impetus for this deal moreso than the Logiq management. That reduction in G&A has the potential to improve value. There’s also a chance that the cash infusion to GRC allows them to make it to scale. My target sale price after the deal closes is $0.02.

  6. dt

    New merged company trades at C$0.01 on pre-split basis, albeit volume is non-existent. Relative to the write-up price this transaction resulted in a loss of 12%.

Comments are closed.