Updates – February 2020

Below is February 2020 update on new and currently active ideas as well as recently closed transactions.



Syncora Holdings (SYCRF) 7% in 5 months

Syncora Holdings was selling its monoline insurance business and intended to distribute proceeds to shareholders. The stock was trading around the value of the expected distributions from the sale, giving no credit for the remaining stub, which with conservative assumptions suggested additional 8% upside. Management later indicated that it is looking to sell the remaining non-core assets and fully liquidate the company. Following sale of monoline business and cash distribution the initial spread has narrowed materially resulting in 7% gain in 5 months. The stub now trades at c. 20% discount to the conservative estimates of the remaining distributions, however management believe that it might take a year to fully liquidate the company. Management did not provide any estimates of the remaining distributions.

Sprint (S) -15% in 1.5 weeks

This was a speculation on potential price renegotiation for an all stock T-mobile/Sprint merger. After judge unexpectedly approved the transaction Sprint's stock jumped up by 80%, yet it still traded with 14% spread to merger consideration. Large spread mainly reflected expectations of possible price renegotiation between the companies. Over the last 1.5 years since merger announcement, financial performance of both companies diverged significantly - TMUS performed decently, while Sprint showed lackluster results with its stock trading below pre-announcenement levels. Due to increase in TMUS share price during the period, existing merger terms implied 45% premium over the initially agreed price for Sprint (in $ terms). So not only it seemed likely that merger terms will be amended, but it also looked like the market underestimated the size of the potential cut. Besides that, TMUS CEO himself has hinted about possible renegotiation a few times, while rumours on the amendment were spreading in the media. Softbank, 84% owner of Sprint, appeared to be in a weak position for any negotiations.

In the end, the merger terms were amended indeed, but only to Softbank. Merger consideration and exchange ratio for the remaining Sprint shareholders were left unaffected. The spread closed after this announcement resulting in 15% loss for the trade.



McKesson (MCK) -1% so far ($1040 upside remains)

A standard split-off transaction whereby McKesson (MCK) is distributing its remaining stake in Change Healthcare (CHNG). Every $100 of MCK shares accepted in the tender will be converted into $107.53 of CHNG shares, subject to an upper limit of 11.4086. Tender will expire on the 9th of March 2020 and exact exchange ratio will be determined a couple days before that (5th of Mar). Odd lot tenders will be accepted on priority basis. Borrow on CHNG shares stands at 9%. Hedging with options is also possible. There is a risk that the offer might get cancelled due to the market volatility - currently S&P 500 and Dow Jones Healthcare indexes are down 11% and 10% respectively since the offer announcement. According to the offer conditions the company might cancel the offer if the indexes fall below 15%. Nonetheless, in the last 7 years there have been no examples of similar split-off transactions getting cancelled.

Yixin Group (2858.HK) 20%+ remains

Tencent is acquiring Chinese e-commerce company Bitauto and due to the change of control clauses it will also have to make mandatory offer for listed BITA's subsidiary Yixin. Calculations that are commonly used in these type of situations (mandatory offers) in Hong Kong suggest that the price, which will be offered to Yixin shareholders might range from HK$1.76 (5% upside) to HK$2.14 (27% upside). Moreover, a major shareholder of Yixin (11%) announced that it will not agree to sell the position if the offer is priced below HK$2.00/share (14% upside). Commencement of the mandatory offer depends on the successful closure of Tencent/BITA merger (for which spread stands at 7%, so market clearly sees some risks).

Altran (ALT.PA) 5%+ remains

Consulting giant Capgemini launched friendly takeover of Altran at €14.50/share. 43% of Altran shareholders have participated in the tender offer and as a result of that Capgemini now owns 54% stake in the company. Nevertheless, opposing shareholders have filed in court arguing that the agreed takeover price is unfair and was driven by a conflicted process and numerous corporate governance failings. Now CAP is unable to take full control of Altran until the court's decision on the validity of the initial tender (expected in March'20). In case the court invalidates the offer, CAP will have to return already tendered shares and make a new offer correcting all of the irregularities in the previous offer and potentially increasing the price right away or after 7 months to satisfy minority shareholders and reach a squeeze out threshold (90% needed). If the court judges in favor of the offer, CAP will reopen the current offer (€14.50/share), meaning that downside here is negligible.



CBA Florida (CBAI) +17% so far (19% upside remains)

An illiquid nano cap liquidation trading at a discount to net cash. Finally the liquidation process has moved forward and the company has announced initial distribution of $0.0048/share, subject on shareholder approval in Q2. With conservative cash burn and liquidation costs estimates, distributions are expected to amount to $0.0098/share in total (assuming full recovery on escrow funds and 1 year until the liquidations process gets completed), which provides additional 19% upside from the current prices.

Aimia (AIM.TO) -7% so far (material upside remains)

Aimia continues to trade at a sharp discount to SOTP valuation (C$6+). This month the company has reported annual results - sum of parts valuation still suggests more than 100% upside to current prices and the main asset (PLM) continues to grow gross billings and EBITDA at 10%+ rate. Besides that, the company has also finally announced board reconstitution. 6 previous directors have stepped down and were replaced by 6 new independent directors. 4 out 8 seats now belong to the activists, who together own 32% of AIM. The board will be chaired by Charles Frischer (owns 5%). All in all, the new board should revitalize Aimia and now that the management's interests are much more aligned with shareholders', investors should expect some positive developments going forward.

ADLER Real Estate (ADL.DE) -13% so far (10%+ remains) 

ADO Properties is buying Adler Real Estate in an all share transaction (public takeover). So far 55% of total shares have been submitted to the offer. Acceptance period ends on the 6th of March. If the acceptance ratio does not reach 75%, it is expected that ADO will go for the next step of the takeover (sometime in 2020) and make an increased offer for the remaining shareholders.

Bolsas y Mercados Espanoles (BME.MC) -1% so far (7% upside remains)

BME (operator of Madrid stock exchange) trades at 1% premium to €34/share merger consideration from Swiss peer SIX in anticipation of a competing bid. BME has posted annual results with continuing downtrend performance (YoY): revenue decreased 6%, net income down 10%, EBITDA shrunk by 9%. Government is expected to rule on the merger before mid May, potentially giving green light to the competing offers.

Asta Funding (ASFI) -1% so far (8.5% remains)

Controlling owners of Asta Funding submitted a non-binding proposal to take the company private at $10.75/share. There have been no further updates on the matter in the recently released quarterly report - no significant new developments, 1% increase in BV as well as 5% increase in cash & equivalents.

J. Alexander’s (JAX) -23% so far (43% upside remains)

JAX is in the process of a strategic review, which is expected to result in the sale of the company. No update on the strategic review yet. With no apparent news this month JAX price has fallen by 14%, following the downtrend in the whole restaurant sector (Dow Jones restaurant index down 9% as well).

Mack-Cali (CLI) -19% so far (significant upside remains)

CLI REIT board changes with 4 seats given to activist suggested the company might be moving towards partial or full sale. Q4 results were announced this month showing continuing downtrend in the business: still no positive signs in core office leases with FFO down -2% YoY (although +10% QoQ), company’s calculated NAV fell 5% YoY. CLI has also received an indication of interest from UDR/Ritz to acquire the company at $24-$27/share (27%-42% upside), however it was withdrawn due to lack of engagement from the board. The board, on the other hand, denied refusing to engage with the potential acquirer and stated that it only asked for additional information, which was never provided. It is not clear if any transaction will materialize from this public arguing between the parties.


Cornerstone (CGP.V) -62% so far (significant upside remains)

Cornerstone owns 15% of the prospective Ecuadorian copper-gold project Cascabel and likely will eventually become a takeover target. Dmyant Sangha (largest shareholder) has increased his stake from 16.5% to 19% at C$2.5/share.

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