Alt Resources (ARS.ASX) – Merger Arbitrage – 5% Upside With Considerable IRR

Current Price: A$0.048

Offer Price: A$0.0505

Upside: 5%

Expected Closing: August 2020

Target's statement

This idea was shared by Olivier.

 

Alt Resources is subject to an all-cash takeover offer by Aurenne Group Holdings (ref. Aurenne) at 0.0505 AUD per share.  The offer was tabled on the 7th of May and will expire on the 7th of August. Alt currently trades at 0.048 AUD (and last trading day some trades were executed at 0.047 AUD) per share, which means that a 5% spread is outstanding for what I believe is a relatively low-risk takeover, that is expected to close in 3 weeks’ time. The payment will be made within 21 days since the expiration date. The proposal is conditioned on certain regulatory approvals (shouldn't be an issue given that Alt is a A$28m market cap gold mine developer) and 90% minimum acceptance condition, which looks very achievable given Aurennes current holding (28%), the addition of the director’s votes (9.95% including options, which are  82% in the money), likely support from another major shareholder (7.6%) and difficult financial situation of the company, which should incentivize other shareholders to accept the deal as well. The offer is not subject to financing.

The 90% threshold is not uncommon in Australia as this is the limit from which the buyer can compulsorily acquire the remaining outstanding shares. If the required acceptance rate is not met, I think it is very possible that either the offer will get extended by Aurenne or the whole minimum acceptance condition will get waived (Aurenne reserved the right to do so). Usually, when a similar proposal fails to reach the 90% limit, a standard playbook is to extend the offer alongside with a threat to delist the remaining minority shares. This usually motivates the last holders to tender their shares. Aurenne could go choose this route if it ends up controlling +75% of the shares (threshold required to pass a special resolution), which seems likely. A very recent example is the XCD Energy takeover by 88 Energy which was completed on the 13th of July'20. The initial expiration date was set for the 25th of June, however, with only 79% shares tendered at that time the offer got extended to the 13th of July. The extension came with a warning that if the acquisition fails, XCD will get delisted from ASX in a way trapping the shareholders and option holders under low liquidity. Eventually, on the 6th of July, the minimum acceptance condition (90%) was reached and the takeover closed successfully. So overall, even if the offer for Alt gets extended by a few weeks, the potential annualized payout is still compelling here.

 

Aurenne

Aurenne is a privately held Australian gold miner with not much information available on the net. Nonetheless, its intentions regarding Alt seem credible and it has already invested a sufficient amount of capital in the target company. Besides the takeover offer, Aurenne has also agreed to provide a very much needed A$3.7m financing to Alt via convertible notes (already issued). The conversion is exercisable at any time into 122 million ordinary shares representing almost 17% of the issued capital at Aurenne’s discretion. So in case the 90% acceptance is not reached, Aurenne could use these notes for the additional stretch.

Moreover, the buyer has been accumulating Alt shares in the open market. It became a major shareholder on the 19th of May (5.1%), a few days after the offer announcement, and since then has increased the stake to 28% (20th of July). In July alone it has acquired almost 12% of outstanding Alt shares.

On the other hand, the information on the buyer is limited - their website is unavailable, while the bidder's statement provides only very vague information - the company has certain ownership in several gold mine development projects in Western Australia. So although the offer is not conditioned on financing, it is a bit worrying whether the buyer will be able to find the cash for the acquisition. There isn't much information provided on this matter except the statement that Aurenne considers that it 'will be able to pay the Maximum Cash Consideration required for the acquisition of the Alt Resources Shares in sufficient time". I haven't been able to find any other acquisitions made by Aurenne, except 50% stake purchase in Kalpini Gold Project in 2018 (transaction size unknown) and acquisition of certain other gold mining assets in Australia for $2.5m in 2019.

 

Alt Resources

Alt is an Australian gold exploration company with its primary assets being Mt Ida and Bottle Creek projects in Western Australia. Both projects are in very early development stages. PFS (pre-feasibility study) for Mt Ida has been completed just this month, while Bottle Creek has been dormant since 1989 - the current goal of Alt is to advance the project to a pre-feasibility stage. Furthermore, Alt doesn't own Bottle Creek completely yet - by November'20 the company has to make a final vendor payment of A$4.5m. In March'20 Alt's cash balance stood at A$0.8m, while it requires about A$3m/year to run the operations. Therefore, it seems that even with the recently provided A$3.7m financing from Aurenne, the cash balance in Nov'20 will not be enough to settle the payment and if the current acquisition proposal fails, the company will need to raise cash and dilute current shareholders. As stated by the board of Alt:

Under the Offer, the need for further significant dilution to shareholders to meet the Bottle Creek vendor payments, fund ongoing exploration, resource development and Corporate overheads is mitigated.

Management owns 3.38% of the shares outstanding + 9.95% in the form of options (of which around 82% are in the money at the current offer price).

Besides the management and Aurenne, there is one more significant shareholder -  a small Australian fund (A$10m AUM) specializing in special situations - Harvest Lane (7.6%). Harvest began acquiring shares after the off-market takeover offer was lodged on the 7th of May and exceeded the 5% threshold on the 20th of May. HL kept acquiring shares in the market until at least the 9th of June when they filed their last notification of change of interest of substantial holder which stated their interest at 7.61%. A nice example of a recent merger arbitrage that was successfully executed by Harvest (and in which the author of this writeup also happened to participate) is the Windlab takeover. More info about Harvest Lane, their past performance, and the previous special situations they have invested in can be found in their monthly reports. Overall, one can reasonably assume they will vote in favor of the takeover offer.

 

10 COMMENTS

  1. Vinn

    Thanks for the write up. I agree it will likely close, however it seems to be a big downside risk compared to small upside. If it works out 95% of the time it is a good bet, but if it works out only 90% of the time you lose money here. Not enough margin of safety for me, but that’s probably just because I don’t have enough knowledge/experience to be comfortable.

  2. DavidW

    Aurenne has been buying very agressively in the open market, they own 30%+ of shares at this point. Do you have any idea what happens if they go over 50%? Are they incentivized to stall while buying on the open market in the mean time?

  3. Olivier

    Thanks for your interest in this idea.

    In general I wouldn’t invest in a situation like this (like mentioned, relatively high downside if deal doesn’t go through and relatively small spread) if the potential purchaser wasn’t purchasing this aggressively. That makes me quite comfortable that the acquisition will go through.

    As for the 50% stake, I don’t see any issue here. In general they could stall this purchase and pass all sort of resolutions which do not require a 75% interest.
    But one should know that the jump in ownership in the last few days is from the shares which were subscribed to the offer, not just from open market purchases..

    1. DavidW

      You probably know this, but for the people that don’t. Tendering your shares in Australia counts towards the sharecount of the acquirer as I understand it correctly. Olivier mentioned this as well and I wasn’t aware of this. So the latest increase in their stake is simply shareholders tendering their shares.

  4. Olivier

    The offer period got extended to 21st of August.

    It appears that this will go through.
    They already own almost 56% of the shares from the tender and purchases.
    Add to this the 30 million shares (about 5% of the company) they today issued after the shareholder meeting to “directors, key executives and staff” and the convertible loan which converts into 16% more shares and you already get to +75%, enough to force the delisting if they want to.

  5. Ilja

    The offer will expire on the 21st of August. Aurenne already collected over 79% of shares (including Harvest Lane stake).

  6. Olivier

    Aurenne crossed the 90% treshhold today meaning they are now able to force out the remaining 8% of the holders.

    I think this concludes the takeover (which expires on the 28th anyway).
    All in all, despite the 3 weeks delay in the closing of this acquisition the IRR was more than respectable.

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