Input Capital (INP.V) – Merger Arbitrage – 13% Upside

Current price: C$1.56

Offer price: C$1.75

Upside: 13%

Expected closing: October 2020

Press release

This idea was shared by Tyler.

 

* Update: the buyer doesn't look credible. See comments below the article.

Input Capital is subject to acquisition by Bridgeway National. The merger was announced on the 12th of August, while the consideration stands at C$1.75/share in cash (C$97.5m in total). Conditions include 2/3rds of the vote cast and the meeting is expected to take place on the 23rd of September. Directors and several major shareholders (Emsley & Associates, Dalhousie Capital, and XL Value Offshore, combined 33% ownership) have agreed to support the transaction. Management's circular is expected to be mailed later in August.

Given the 3-year-high price (103% premium to closing price and 150% premium to the tender offer carried out in April), an attractive 1.4x BV multiple (reached only back in 2016) and support from the major shareholders it seems that the offer should go through. The situation likely exists mainly due to the small size of the deal and INP.V trading in TSXV, which isn't the typical hunting grounds of merger arb folks.

INP perf

There is also a certain strategic rationale for this merger - as Bridgewater seems to be interested in growing INP's mortgage stream business, which so far has struggled to attract the needed financing.

The Agreement includes customary deal protection provisions. However, INP.V may terminate the Agreement in favor of an unsolicited superior proposal, subject to the payment of a termination fee, and subject to a right of Bridgeway to match such superior proposal.

Worth noting that in case the merger breaks, due to the large premium, the downside is very significant.

 

Input Capital

Input Capital operates as an agricultural commodity streaming company in Canada. The company buys and sells canola (largest and most profitable crop in Canadian agriculture) from prairie farmers through multi-year streaming contracts. It also provides capital to farmers to assist with the working capital needs, mortgage finance, and crop marketing issues, as well as offers multi-year crop marketing solutions to farmers. Input Capital Corp. was founded in 2012 and is headquartered in Regina, Canada.

  • Capital streams - provides interest-free financing to farmers. Rather than charging interest - provides upfront deposit against future crop to be purchased at a discount from expected market prices. 5-6 year contracts.
  • Marketing streams - commits to pick up, market, and sell crops in exchange for a percentage of the net price realized.
  • Mortgage streams (launched in 2018) - financing farmland and enabling farmers to make their payments in crop instead of cash at a fixed price for five years.

Since 2017 INP financial performance has been under significant pressure due to falling canola prices, good harvest years (better financial position for farmers and reduced need for INP services) as well as trade disruptions with China (major Canola consumer, which started liming imports from Canada).

INP share price perf

Historical Canola Price chart:
canola

INP believes that the mortgage streaming segment provides the biggest opportunity for business growth, however since launching its mortgage streaming segment in 2018 the company has apparently faced issues with finding capital to finance the mortgages. Because of that, in Feb'19 the company has started a strategic review, however, in May'19 concluded that due to current market situation and trade disruptions, the effective funding of the farmland mortgage streaming business is not available. As a result, the company stopped new originations for the mortgage segment and instead focused on maximizing shareholder's value through share buybacks. During 2019 the company has launched a substantial issuers bid (SIB) and purchased 19.6% of its shares at C$0.82/share (the offer was slightly undersubscribed), while in April'20 it has completed another SIB for 12% of shares at C$0.70/share (undersubscribed as well - only 7.4m tendered out of 12.5m intended to be bought).

Despite the struggles, it seems that the current buyer is very interested in the mortgage stream business. Bridgeway's CEO stated:

The combination of Bridgeway with its strong financial backers and Input creates a strong foundation to accelerate growth of Input's innovative mortgage stream business

While INP CEO added:

Last year, our Board of Directors ran an exhaustive strategic review process, to seek out a partner with a source of scalable capital to grow our mortgage stream business. Shareholders will know that for the last 14 months, we have continued to search for a capital partner while focussing on growing book value per share. We are pleased to have met the team from Bridgeway and put together this proposed transaction that provides immediate liquidity and certainty of value that we believe to be in the best interest of all shareholders.

Shareholders:

image

 

Bridgeway National

Bridgeway National is a private equity firm specializing in control equity, structured equity, buyout, add-on acquisition, and acquisition investments. The firm prefers to invest in industrial services, technology, and consumer product sectors. It typically invests between $25 million and $400 million in equity investments in companies having EBITDA between $5 million and $50 million. It prefers to take a majority stake. The company was formerly known as Capital Park Holdings Corp. and changed its name to Bridgeway National in January 2020. Bridgeway National Corp. was founded in 2012 and is based in Washington. Bridgeway National is a subsidiary of Consumer Electronics Ventures Corp.

10 COMMENTS

  1. Writser

    I think the spread can be explained (at least partially) by Bridgeway National appearing a little bit shady. BDGY: penny stock, formerly known as LOGG or LifeLogger, a stock with a very dubious history: https://seekingalpha.com/article/3422376-lifelogger-ties-to-stock-promotions-pump-and-dump-schemes-price-target-zero . Eric Blue (the current CEO, chairman and only board member) provided financing in the form of a crappy note in 2016 ( https://www.sec.gov/Archives/edgar/data/1567771/000149315216011387/form8-k.htm ) and then took control of the company in 2019.

    Eric Blue’s LinkedIn profile is private, I can find no track record whatsoever and as far as I know Bridgeway has not done any deals whatsoever. It is currently a penny stock with zero assets that is not even up to date with their financials. How is this company supposed to cough up C$100m?

    Bridgeway was formerly also known as Capital Park Holdings. I can only find one deal for Capital Park: https://www.prnewswire.com/news-releases/capital-park-holdings-corp-announces-formation-of-prestige-value-brands-and-acquisition-of-joy-brands-300910635.html . Both the website of Capital Park and Prestige Value brands do not exist, despite this deal taking place in 2019. Very suspicious.

    And even more damning, Eric Blue and Capital Park are defendants in a bankruptcy lawsuit. You can find it on Pacer, but to make things easier I downloaded the complaint here: https://drive.google.com/file/d/1sVhxmbveblp3fVJ24O3dEearQFkYElK_/view?usp=sharing:

    Shortly after the parties met, Blue falsely represented to Maxwell that Blue’s business was preparing for a valuable merger transaction. Blue also falsely represented that he needed a loan to pay for legal fees in connection with the merger. The parties then negotiated what PSL thought was a loan agreement, with PSL negotiating in good faith on one hand, and Blue acting out a fraudulent scheme on the other. PSL learned of Blue’s scheme and his misrepresentations only after it transferred $1.9 million to Blue. By then, the alleged merger, if it were to ever happen, was already dead in the water. Blue knew this fact, but did not disclose it to PSL. In fact, Blue continued to hide this information and continued making false representations about the alleged merger for months after he received PSL’s money. Then eventually, Blue went completely silent and began evading PSL’s efforts to seek repayment.

    So, the buyer is basically being accused of scamming people with future mergers .. As of August, the US trustee filed a motion suggesting that Eric Blue is in contempt of court and should be arrested.

    WHEREFORE, PREMISES CONSIDERED, the Trustee respectfully requests that the Court enter the Order submitted herewith: (i) finding Debtors in civil contempt for failing to comply with the Violated Orders; (ii) requiring Debtors to immediately comply with the Violated Orders; (iii)(a) requiring Debtors to show cause why coercive sanctions should not be imposed within 10 days of entry of the Order, and (b) if such cause is not shown, automatically issuing a bench warrant for Blue’s arrest until the Debtors’ contempt is purged; and (iv) granting such other and further relief as is appropriate.

    I could be mistaken here. There might be another Eric Blue managing another Capital Park company who is a fraudster, while this guy is legit. Maybe there are legitimate reasons for all the stuff I discussed above. Maybe the deal is legit, maybe Eric Blue is duping the company, maybe the company is part of the fraud, I don’t know. But I’m pretty sure that I’m not going to burn my fingers on this deal, especially not for a meager 13%.

    1. Writser

      Scratch “little shady”, after doing some research for the post above I’d say “very shady”.

    2. patrick

      Thanks writser for that great writeup. Some very shady stuff there and it makes the deal look shaky. Eric Blue seems to be the same person for both Capital Park and Bridgeway since the name shows Eric C. Blue. Also, not sure how bridgeway could do the deal as its balance sheet was a mess with $1M in cash and $30M+ in notes and a credit facility in late 2019. The credit facility of $23M was used to buy some company from P&G if I’m reading the notes right.

      Maybe this guy’s whole strategy is to go out and buy assets with loans. If it goes under, not his money, but if it works he is leveraged up. Not sure what person, banker or other financial entity, gives this guy tens of millions to do such transactions. Must be a smoother operator to have the confidence to ask people for loans like this and just hope he can talk away his shady past. Either way, I have no interest waiting for this guy’s check to clear.

  2. iFindValue

    I’m trying to think of why the board would unanimously approve of and recommend the transaction to shareholders if they know Eric won’t be able to pay for it? Seems like a waste of time (unless they are selling their own shares as we speak and used this announcement to prop up the share price). Do they know that he has financing already or has soft commitments from other financing sources?

    Management and the Board has a large incentive for the deal to get done, owning majority of the stock. Input Capital’s management has founded and sold businesses before, they don’t seem like they just fell off the turn-up truck. I’m just trying to understand: why would management unanimously approve the deal if they knew Eric Blue was a fraud? Because they have nothing to lose if it falls through?

    There will be a offering circular with information on the transaction that is to be circulated and posted on SEDAR in the next few weeks prior to the shareholder vote. Perhaps that may shed some light on the situation.

  3. Jim L

    There’s much to be leery of. Blue has all the appearances of a wheeler-dealer. Filed a S-1 to issue common shares on 4/16/20.https://www.sec.gov/Archives/edgar/data/1567771/000149315220006525/0001493152-20-006525-index.htm Looks like nothing happened. Excuse for not filing financials is “social distancing”. https://www.sec.gov/Archives/edgar/data/1567771/000149315220008840/nt10-k.htm. The last 10Q is confusing and complex for such a little company. Like Buffett said, if the financials are confusing, they’re that way on purpose. Staying away from this one unless someone finds something more reliable about the buyer.

  4. dt

    Several insightful comments on the recent INP.V write-up on SA – raising the same risky buyer profile and financing issues:

    https://seekingalpha.com/article/4372005-merger-arb-opportunity-input-capital-8_7-merger-spread-and-expect-to-close-in-october-2020

    The remaining upside now reduced to 7%. Not sure if anyone had guts to participate in this so far, but given the commentary, I am tempted to remove this from active ideas.

    Also the management circular has been published on SEDAR:

    https://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00032915&issuerType=03&projectNo=03109822&docId=4793676

    On financing it reads:

    While financing is not a condition to the Arrangement becoming effective, Bridgeway is obtaining Equity Financing and/or Debt Financing in connection with its acquisition of Input Shares under the Arrangement. Accordingly, the Arrangement Agreement contains covenants of Bridgeway relating to the Arrangement, including that they will use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things reasonably necessary, proper or advisable to arrange and obtain the Equity Financing and Debt Financing on the terms
    and conditions contained in the Commitment Letters.

    I am not a lawyer, but it seems that financing has not been arranged yet and that Bridgeway can walk away from the transaction if financing is not found.

  5. dt

    As expected, the transaction INP acquisition seems to have failed. We closed this one out at the beginning of September when further additional commentary/research by SSI members showed a very risky buyer profile. Spread was 7% at the time. Here is what happened next:

    – 23rd of Sep – shareholders approve the transaction (expected closing on the 1st of Oct)
    – 28th of Sep – final court order obtained (expected closing on the 1st of Oct). Spread narrows to 1%.
    – 1st of Oct – closing pushed till 9th of Oct. Spread widens to only 2%-3%.
    – 9th of Oct – closing did not happen. Shares drop 35% but continue to trade above pre-announcement levels (C$1.25 vs C$0.8). Market still has hopes this one can close before an outside date of Oct 31.

    See here https://investor.inputcapital.com/news-releases/

  6. iFindValue

    Concerns were legitimate.

    On October 1st, Bridgeway said it’d be in a position to close on the 9th of October and then fast forward to the October 13th press release, it reported that the transaction didn’t close on October 9th. Will update if the transaction happens to materialize by some miracle.

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