Updates – January 2020

This month we have started a new feature - Quick Ideas. Quick Ideas is meant for short posts on potentially interesting and actionable special situation cases with more emphasis on making the situation available to members quickly.

14 quick ideas have been posted already - you can find them here.

We would like to express gratitude to the members who have already contributed with their submissions and encourage a further participation by others. Keep in mind that for the Quick Ideas section there is no need to submit an elaborate thesis - only a hint of a potentially interesting idea will do, while our team will cover the further research and write-up matters.

And as usual, below is January 2020 update on new and currently active cases as well as recently closed transactions.

 

RECENTLY CLOSED IDEAS

SORL Auto Parts (SORL) +5% in one month

This was a rather standard case of U.S. listed Chinese company getting taken private by a controlling shareholder. This time the offer came from insiders with 59% stake. The spread likely reflected limited trust by U.S. investors towards similar management buyouts of China based micro-cap names. It seemed that minority shareholder approval will not be an issue, so the main risk was that management will cancel their offer. Some recent data on Chinese companies’ privatization transactions indicated that almost every case with a definitive agreement was bound to close. Eventually the spread has narrowed down from 8% to 3%. Given that at least some cancellation risk was still in place, while closing was estimated in Q2, it seemed prudent to safely close the position and secure the profit.

Home Capital Group (HCG.TO) +C$140 in one month

Home Capital Group launched an odd-lot dutch tender offer to buyback c. 7.5% of outstanding shares (C$150m in total). The tender has closed at the lower price limit with 53% proration. Odd-lots were accepted on a priority basis.

Pacific Biosciences (PACB) -32% in over 1 year

DNA sequencing machine maker Illumina was acquiring biotechnology company Pacific Biosciences at $8 per share in cash. Shareholders had approved the transaction, however the main issue lied with regulatory consent. It seemed that as both companies operate on different technologies (short read vs long read gene sequencing) and operate in somewhat different markets – merger should not cause reduced competition. The buyer also looked confident on the approval and even agreed to pay a substantial termination fee ($98m). Nonetheless, regulators saw it differently and after a prolonged review (over 1 year) have finally decided to block the transaction.

Summit Bancshares (SMAL) -3% in 6 months

Nano-cap bank Summit Bancshares was getting acquired by privately held Faciam Holdings. Under the new business plan for SMAL Faciam planned to start providing services to marijuana based businesses, so this was a bet that this merger will mark the first time regulators officially approve cannabis banking. Although regulators appeared to be inclined to deny of the application, Faciam/SMAL continued the dialogue with FDIC arguing that many other banks provide services to marijuana industry anyways just without the official request. Nonetheless, as it became clear that the approval will not be received within the expected time-frame (if ever received at all) SMAL has decided to terminate the merger. This trade was backed by strong financial performance of SMAL and as expected the downside turned out to be minimal.

 

NEW IDEAS

Crystalox Solar (PVCS.L) 39% upside remains

Crystalox is a net net that has recently reorganized its business, distributed 80% of its cash and now is potentially looking to sell the remaining business. The chances are high that a full liquidation is in the cards. PVCS trades at 24-28% discount to current BV, while existing cash balance should be sufficient till about the end of '20 before this trade breaks-even. Moreover, there might be additional upside from the expected recoveries from an insolvent customer, sale of the operating business and fully depreciated PPE.

Bolsas y Mercado Espanoles (BME.MC) 6% upside remains

BME (operator of Madrid stock exchange) trades at 2.5% premium to €34/share merger offer from Swiss peer SIX. Several other exchange operators appear to be interested in BME as well and are likely waiting for regulatory response before proceeding further. So far it seems likely that regulators will give their blessing. In competitive bidding €37/share merger consideration for BME could be easily justified even before accounting for potential synergies and other strategic considerations.

ADLER Real Estate (ADL.DE) -6% so far (10% upside remains)

ADO Properties is buying Adler Real Estate in an all share transaction. In this German arbitrage situation the target is trading at 4% above the current offer price in anticipation of an improved bid to gain full control of the company and cash-out minority shareholders. It is expected that after tge initial offer ADO will proceed with a further takeover via DPLTA (certain M&A specialty in Germany) and then will have to make mandatory offer for the minority shareholders, which in turn is expected to drive the share price upwards.

 

UPDATES ON OTHER ACTIVE IDEAS

Parker Drilling (PKD) -$8 so far ($48 upside remains)

Parker Drilling reverse split was approved by the shareholders, however the exact exchange ratio has not been set yet.

Syncora Holdings (SYCRF) +4.5% so far (3% upside remains)

Syncora Holdings closed the sale of their main business (monoline insurance) and intends distribute the net proceeds with additional cash ($4.77/share in total). Shareholder approval has been received and the distribution is expected on the 31st of January. Subsequent liquidating distributions will follow after the retained assets are sold (potentially additional $0.5/share). The proxy did not provide any expectation on further distributions.

The remaining Active Ideas had no material news and no material price/spread changes over the month (see previous updates for further details on those).

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