Updates – May 2019

Below is May 2019 update on all currently active ideas as well as recently closed transactions.

 

RECENTLY CLOSED IDEAS

Maxwell Technologies (MXWL) +2.5% in two months

This was a short bet that Tesla’s acquisition of MXWL will either fail or that the merger consideration will be materially lower than $4.75/share. There were at least several potential catalysts for this to come in play - poor expected Q1 results of TSLA, SEC not allowing Tesla to issue new shares, and/or either parties simply walking away. Although TSLA indeed fell considerably after the Q1 report and the approval from SEC took 3 months, the merger was completed with a final price of $4.4/share. With hindsight, simply shorting Tesla turned out a better (albeit higher risk) play as TSLA shares have declined by 15% till the close of the merger and have fallen another 20% since then.

 

Thestreet (TST) +15% in 2 months

TST was trading below cash balance following the sale of their B2B business and promised to distribute a substantial portion of this cash to shareholders. I expected the eventual distribution would serve as a catalyst to lift the share price upwards - if not before then after the event. TST shareholder base was very concentrated and downside seemed to be protected by the balance sheet - remaining B2C operations were estimated to add another 25%-50% value to the cash. The actual distribution ended up being surprisingly large - 80% of their cash in a form of dividend and as expected gave pushed the share price upwards.

Easy money on this deal have already been made and although the stub still trades at material discount to cash + expected value of B2C operations, there is no catalyst in sight and it may take time till B2C business is sold or profitability is improved.

 

EV Municipal Bond Fund (EIM) +3% in one month

CEF buying back 20% of outstanding shares through three consecutive tenders after activist pressure to close the discount between NAV and the share price. As expected the first tender ended up being more than 3x oversubscribed with a proration of 26.4%. After the tender discount has widened again (currently 8.7%). Due to partial tender acceptance as well as improved NAV during the last month the result of this trade so far is +3%. Another tender for 5% of shares is expected in 4 months if discount larger than 6% persists.

 

GrainCorp (GNC.AX) -10% in 5 months

A freshly founded private equity company Long-Term Asset Partners (LTAP) made a non-binding cash offer to acquire Graincorp - one of the leading players in Australia’s agriculture industry. Buyer’s team looked strong & competent and even attracted a $3.2bn funding from Goldman Sachs. The fact that it was also LTAP’s first and name defining transaction also gave confidence about their commitment. Two largest shareholders (combined 30%) were supporting the sale. Surprisingly, after 5 months of due diligence and no updates from the buyer, LTAP has withdrawn its bid explaining that their operational assumptions have not been satisfied.

 

ATRM Holdings (ATRM) 0% in 9 months

Nanocap ATRM was supposed to be acquired by Digirad as part of Digirad’s conversion into a holding company. However, long postponement of the transaction, Digirad's purchase and lease-back of ATRM's real estate, formation of joint venture where only Digirad invests seem to suggest that merger is unlikely to happen. The final straw was no mention whatsoever of ATRM acquisition neither in Q1 earnings release nor conference call. All previous release had a line or two about it. So closing this one out as I no longer think the merger will happen. Although share price of both companies are down significantly, hedged trade resulted in breakeven.

 

NEW ACTIVE IDEAS

J. ALEXANDER’S (JAX) +2.5% so far (7.5% upside to rejected offer remains)

Restaurant chain JAX has received unsolicited and non-binding offer from their 8.6% shareholder Ancora Advisors (supported by another 6.6% holder), but the board quickly rejected it and JAX currently trades at the discount to this rejected offer. I think the company is still likely to get sold with an added upside from potential bidding war. The play here rests on three key assumptions: (1) JAX is undervalued; (2) a number of parties are potentially interested in JAX and Ancora’s actions will put company in play; (3) shareholders will force management to either sell the company or will force a board change. Shareholder stand will be more accurately revealed in the meeting (June 20), where Ancora is agitating (proxy fight) to withhold voting for the reelection of 2 current directors. As for now, JAX’s valuation (6.1x EV/EBITDA vs 10x peer, low leverage etc.) and stable financial performance gives confidence in holding the position while waiting to see how situation develops further.

 

UPDATES ON OTHER ACTIVE IDEAS

Realm Therapeutics (RLM) -1% so far (90% upside remains)

Realm is a failed biopharma cash shell that trades at 48% discount to NAV. Following a strategic review management has announced value destructive merger with Essa Pharma. Essa effectively steals RLM's cash at 60 cents on the dollar, and pays those 60 cents in securities of questionable value (high cash burn on early stage drug development programs). Although the deal already has a support of 45% of shareholders, getting the remaining votes (75% majority required) might be difficult. Bavaria (6% holder) has written two letters to the board complaining about this deal and noted that if nothing better can be done, Bavaria would be open to providing an exit opportunity for interested shareholders, by way of a tender offer themselves (not clear if they have sufficient resources for that). For now there is a 12% spread to Essa’s offer, but there is no way hedge it due to lack of liquidity and borrow. Shareholder meeting is set for 24th of June. Webcast to discuss the transaction will take place on the 11th of June.

 

Aimia (AIM.TO) -10% so far (remaining upside unclear)

Aimia launched tender offer (price range of C$3.8 - C$4.5) for 25% of their shares. The offer ended up being oversubscribed by 65% and priced at C$4.3/share (which was 11% premium to write-up price). However, following the announcement of tender results, shares dropped sharply by 20%. The next catalyst – expiration of Mittleman (largest shareholder with 23.5%) standstill in July 2019. If Mittleman does not take any action then bridging the gap between the share price and SOTP valuation (C$6+) will prove difficult.

 

Cornerstone (CGP.V) -10% so far (significant upside remains)

Potential merger between two junior miners, which together own Ecuadorian copper-gold project Cascabel. Over the last week shares of both companies sold-off as communities around the Cascabel project asked the Ecuadorian court to hold mining referendum. The hearing is going to be held on the 5th of June. Both companies have issued letters to shareholders saying that they haven’t received any negative signals from the government, that overall Cascabel is too valuable to the country and that the government still fully supports it. By the way, PEA results came out with positive results and the pre-feasibility studies are expected to be completed by the December 2019. CGP currently trades at 18% discount to the rejected SolGold offer - the widest so far.

 

Dexia Israel Bank (DXIL.TA) +6% so far (3% upside remains)

Micro cap merger between two Israeli banks. Mercantile Discount Bank (3rd largest) is acquiring Dexia at what looks to be a fair price relative to BV. The biggest concern - antitrust approval has been lifted, as the regulators have conditionally approved this deal and the spread has narrowed down as a result.

 

Trez Capital Senior Mortgage (TZS.TO) -5% so far (43% upside remains)

TZS has liquidated a majority of its portfolio and has two potentially problematic mortgages left outstanding. In Q1 report it was again mentioned that the previously defaulted borrower has made all scheduled payments in 2018 and Q1 2019. BV has increased to C$3.21/share vs C$2.31 share price.

 

CBA Florida (CBAI) +7% so far (5%-36% upside remains)

This is an illiquid nano cap liquidation trading a a discount to net cash ($0.011/share). Q1 report showed unchanged $100k cash burn, which was partially offset by $50k of other income (most likely interest on the cash balance) and so far nothing has been claimed against the escrow funds. No detailed comments were given on the initial distribution other than that is still expected in 2019.

 

Integrated Asset Management (IAM.TO) 0% so far (8% upside remains)

Fiera Capital is acquiring Canadian listed Integrated Asset Management (IAM) in a cash and stock transaction with likely incremental payout from cash balance at the time of closing as well as CVR linked to performance of two IAM managed funds. Current expected combined consideration - C$2.82/share. Shareholder meeting is planned for the 14th of June and 62% of the votes are already in the pocket. Closure is expected shortly after the meeting.

 

Avenue Therapeutics (ATXI) -8% so far (multibagger upside remains)

A large Indian pharmaceutical company InvaGen Pharmaceuticals has completed the first part of ATXI acquisition and now the second part (full buy-out at $13.92/share) is conditioned on FDA approval of ATXI's opioid medication by Dec 2020/April 2021. Q1 earnings release stated that 2nd Phase 3 study results should be reported by the end of this quarter. If the results are positive, bump in the share price is expected.

 

Cantabio Pharmaceuticals (CTBO) +$8 so far ($40 upside remains)  

Small upside ($50) opportunity for odd-lots. Cantabio, which is basically a bankrupt entity, is doing a 5000:1 reverse split. Information statement was mailed on the 24th of May and the the reverse split is expected to happen by mid June.

 

Pacific Biosciences (PACB) -10% so far (17% spread remains)

DNA sequencing machine maker Illumina is acquiring biotechnology company in an all cash deal. No updates were given about the pending regulatory approval in Q1 report, but the closing is still expected in mid 2019. Interestingly since mid May spread has widened considerably (due to 8% drop in PACB) and I have been unable to find any correlating news that could explain such movement so far.

 

Medley Management (MDLY) - upside not clear yet

Merger of two BDCs and the management company that has received strong opposition from shareholders as well as proxy firms. MCC shareholder meeting is set on the 4th of June and for a few weeks now a proxy fight has been going on as NextPoint (activist shareholder) is trying to shake up the board by agitating to change two current directors with new independent ones. Proxy firms ISS and Glass Lewis have recommended MCC shareholders to vote for the NextPoint nominees. So overall, I think that MDLY/MCC/Sierra merger is now completely dead.

Published on: May 31, 2019  •  Published by:
Category: Updates

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