Current Price: $0.285
Intrinsic Value: $0.86
Expiration date: 5th January 2021
This idea was hinted by Ryan.
Meten EdtechX Education Group is a failed post-merger SPAC that has temporarily reduced the exercise price of their warrants from $11.50 to $1.40 per each warrant. At the current prices, if the transactions goes through the warrant should be worth $0.86 ($2.26 stock price less $1.4 exercise price). So this idea presents either 200% potential upside on the warrant price or 36% potential upside on warrant+exercise price. Borrow is also available on IB – 200k+ shortable shares at a 29% annual fee. The offer expires on the 5th of January. Given a very short timeline, hedging costs make only a small impact ($0.07/share) on the potential upside.
There are a few aspects that make this situation attractive and suggest favorable outcome for the arbitrageurs:
- The rationale behind the offer makes sense and it seems that management should be incentivized to proceed with it on current terms. METX operates in China education sector (offline/online English language services) and had a severe impact from the COVID-19. Merger with SPAC was closed on the 30th of March – the timing was very unfortunate and resulted in 95% of shareholders abandoning the deal (redeeming their shares). The acquisition was carried out with lower than expected capital (except for last minute Azitum and PIPE investments) and the company is now in a difficult liquidity situation. The company burns around US$10m per quarter and as of Q3 it had $30m of cash remaining. This warrant program will allow them to raise an additional $17m. Moreover, given how beaten down METX share price is today, this move could also be a cheap way for insiders to increase their ownership in the company (the sponsor currently owns 26% of common shares).
- There is a 65% acceptance condition. However, a sponsor owns 30% of warrants and will submit 2/3rd of it for the offer. A further 25% of warrants are likely to belong to PIPE participants (assuming they still hold the position), who are also likely to participate. Overall, given the financial incentive this offer provides for the warrant holders, I don’t think this condition will be a problem.
- METX a rather unknown company with very limited coverage in the media or retail investor forums, etc. This coupled with sharp share price decline and limited/expensive borrow could partially explain the spread.
Nonetheless, there are several risks involved as well:
- The offer could get canceled or the terms (e.g. exercise price or timline) might get amended. There is not much to add besides what has already been stated above. METX management should be incentivized to raise cash through warrant exercise and should proceed with the offer.
- METX is not very liquid and borrow costs could increase substantially – decreasing or eliminating the upside or even causing a short squeeze. A recent example is what happened to the hedged AHT preferred/common exchange – although the situation provided very generous return eventually, the hedged leg was at a significant loss till the expiration.
- Warrant exercises will result in substantial dilution (12.7m warrants in total, share count to increase +24% assuming full exercise), so the share price is likely to be pressured after the exchange.
METX is a result of a merger between EdtechX Holdings (SPAC) and Meten International Education Group. The acquisition was closed on the 30th of March’20. Initially, share price skyrocketed (putting the company at a unicorn status for a short time), but eventually crashed down to current levels due to the impact on METX business from the pandemic.
EdtechX Holdings SPAC was sponsored by IBIS Capital – an investment bank and a minor SPAC player. They’ve recently announced intentions to launch another, larger SPAC. IBIS still owns 26% of METX ordinary shares and 30% of warrants. They’ve agreed to exercise 65% of their total warrants in the current offer and sell the remaining 35%. EdtechX SPAC was also supported by Azimut – a large Italian asset manager with $60bn AUM. Shortly before the closing of the merger, Azimut, together with a few other parties have made investments of $32m in exchange for METX units. Given how illiquid the warrants were before the current offer, I expect that Azimut and PIPE investors still hold the majority of their warrants and will exercise them in this temporary program.
METX offers English language training services in China. It owns a portfolio of course for multiple ELT segments and operates an offline-online (63%/37% revenue split in 2019) business model. The company owns 110 physical language training centers and 13 additional franchised centers. Due to COVID impact, all of them were closed earlier this year. This resulted in a severe impact on the business. Recent results show 9M 2020 revenue falling -39% YoY (-30% YoY in Q3), while gross billings decreased even further -56% YoY in 9M’20 and -49% in Q3. During the pandemic, most of the business was transferred to online, so this segment has improved, but not very substantially +25% YoY in 9M’20 and +7% Q3. The number of registered online users increased by 54% YoY. The company burns about US$10m cash per quarter. Regarding the future prospects, in 2021 METX expects to recover to pre-COVID levels and forecasts $31m EBITDA and $18m net income in 2021. So the company currently trades at 3.5x 2021 EBITDA and 6.6x 2021 earnings, which looks very cheap assuming full recovery in 2021.