Current Price: $25
Target Price: $30
Expiration Date: Q1 2022
This idea was shared by blades.
The recent settlement between Renren’s activists and management should net ADS shareholders at least $25 per share after legal fees. A seemingly comparable settlement case suggests that lower legal fees and distribution of $30/share is in play. Investors are also getting the remaining RENN stub for free. The downside is fully protected and there’s a strong chance of potentially significant upside within 3-4 months.
Renren’s litigation saga is finally coming to an end – activists have settled with the defendants (management), who basically stole Renren’s best assets from the minority shareholders in 2018. The settlement includes a payment of $300m or $38.69 per ADS to all eligible (ex. defendants and their affiliates) class A shareholders minus attorneys fees and expenses awarded by the court to the plaintiffs counsel, and less administrator fees associated with the settlement. The payment will be made directly to eligible shareholders by the payment agent and there should be no issues here as the judge has already frozen $560m of the defendants’ assets. The distribution won’t be taxed, as, in essence, it is a recovery of ill-gotten gains from the defendants.
After the settlement announcement, the stock trades at $25/ADS. I believe that this is near the minimum amount that ADS holders will receive in distribution, and the stock is trading as if there were no potential for any upside from lower legal fees or any value in the other Renren assets. The market might be missing that the lawyer expenses are capped at 1/3rd of the settlement (This fact is indicated in the stipulation of settlement filed in court, but not in the press release.).
A recent example of a much lower attorneys fee award was the case of GCI Liberty, which involved a $110 million settlement. The fee and expense award was indicated to be not in excess of $22 million. That’s a 22% recovery for the lawyers of fees and expenses, which might be the lower bound of possible results. If applied to the Renren case, shareholders would receive $30.95 per share. I think $5m for other fees is reasonable and would reduce the proceeds by a further $0.65 per ADS.
The settlement hearing will take place on the 9th of December. After that, the payments should come within a few months.
Case docket can be found here.
From the stipulation document:
“In light of the risks undertaken in pursuing the Action on a contingency basis and the benefits created for Renren and Renren’s shareholders through the Settlement and the prosecution of the Lawsuit, Plaintiffs’ Counsel intend to apply to the Court for an award of attorneys’ fees in an amount not to exceed thirtythree percent (33%) of the Settlement amount…”
It’s quite likely that something less will be received by the lawyers in this case, which as these things go was resolved pretty quickly, did not involve a trial, and the stipulation of settlement indicates that mediation and settlement were ongoing for about a year. The case was brought March 7, 2019. The plaintiffs won a major victory in May, when the court approved an order of attachment which levied on the assets of the defendants up to the amount of $560 million. The investors who spearheaded the case are sophisticated hedge funds, who have a substantial interest in keeping lawyer fees as low as possible. I believe that the judge will likely have an interest in protecting the shareholders generally from an excessive award.
Aside from the settlement distribution, Renren currently owns the below-listed assets. However, any value in the stub is gravy. In January 2020, it traded about $1.70/share.
- 33.8% stake in a publicly listed Chinese used car auto dealership group (ticker KXIN, $220 market cap), which amounts to $4.5 per RENN share. As of Dec’20 KXIN had 14 dealerships and was significantly impacted by COVID-19 (revenues down 90% in 2020), but should be recovering now. This year KXIN merged with Chinese luxury auto e-commerce platform Haitaoche and signed a 5 year supply contract with s state-0wned China National Vehicle (will supply old cars to sell through Haitaoche platform) – the contract was valued at $2.3bn. So at a quick glance, it seems KXIN has a legitimate business although I am not in a position to comment on the valuation. KXIN exposure could be hedged at 13% borrow fees.
- Two young SaaS businesses – Chime (client relationship management platform for real estate agents) and Trucker Path (trip planning app for truck drivers). SaaS segment was growing 44% in 2019 and 112% in 2020. During 2020 these businesses generated $17.5m in revenues and burned $12m cash.
- At the beginning of the year Renren also had c. $75m net cash (after deducting OPI’s note repayment in January), not clear how much of this cash balance has been burned since.
Renren was founded by Joseph Chen (current CEO and Chair). The company became famous around 2010 for developing a “Chinese Facebook”. It made an IPO in 2011, raising $760m at $14 per ADS and was said to be the latest social networking platform in China. In 2012 the company had 56 monthly logins and 178m activated accounts. However, the rise of smartphones and competing apps (WeChat, Weibo, etc.) pretty much killed the platform – it was finally sold in 2018 for $20m.
Renren began to transform into something similar to a VC fund. In 2012 it invested in SoFi (Social Financial) – a mobile-first American personal finance company with a number of different products including student loan refinancing, mortgages, personal loans, etc. SoFi started growing rapidly and attracted well-known names such as Third Point management, Softbank, etc.
RENN’s management quickly understood that they’ve stumbled upon a potential goldmine. Joseph Chen tried to privatize Renren at a lowball $1.4bn offer in 2015 but the move infuriated shareholders and Chen backed down. However, his wish to snatch SoFi did not disappear and as he was writing to the COO in 2016 (document #743, p.112): “Starting to have second thoughts on letting go SoFi so early… How can we hold on to it in longer terms?”. They quickly found how – management decided to spin-off RENN’s stake in SoFi together with most of its investment portfolio at a materially depressed valuation. The spin was completed in April 2018 with the investment portfolio being spun into OPI (Chen’s vehicle) for a total valuation of $500m, whereas SoFi’s stake alone was worth $600m at that time, based on the last funding round. The move received criticism and attention from Oasis Investments – prominent Asian activist, who acquired a 5% Renren stake in 2018 (eventually raised to 16.5% as of Feb’21) and filed a lawsuit in 2019 against the management/Softbank/Duff & Phelps.
The first major win was in Sept’20 when the judge denied the defendant’s motion to dismiss. In September 2021, the document containing all of management’s/DF/Softbank correspondence was released (the already mentioned document #743) pretty much proving that management tried to undervalue the portfolio. I particularly liked the correspondence between Chen/Liu (COO) and Shinzo Nakano (independent director of RENN), who refused to sign the spin-off (p. 148/149), was forced to resign and was even told how to explain it to the auditor (p. 193). Page 208 shows comments on the initial valuation made by Duff & Phelps, where the consultants claimed that they need “some evidence” to make such a huge discounts on spin-offs assets. The initial discount on SoFi’s last funding round proposed by DF was 30%, but on P.307 Liu (COO) writes that after all, they want to make it 50% based on the uncertainty of its IPO and competition. Eventually, SoFi’s discount ended up at 50% and all other assets received 30%-75% discounts vs their last funding rounds.
On the 29th of September 2021, the judge denied the motion to seal Duff & Phelps valuation documents. Then on the 7th of Oct when it was pretty much clear that the defendants won’t make it, both parties have reached a settlement of $300m. The settlement also includes a Governance Change – with conditions involving that RENN must never hire Duff & Phelps again, etc.