Current Price: C$3.40
Offer Price: C$4.05 – C$4.25
Upside: C$65 (for odd lot accounts with no withholding taxes)
Expiration Date: 26th of November
SOL Global Investments has most of its portfolio in publically listed cannabis companies and trades at 50% discount to NAV. SOL announced tender offer for 14% of outstanding shares or 30% of the public float (as claimed in the circular) at C$4.05 – C$4.25/share. SOL trades below the lower tender limit offering a near risk-free C$65 profit on odd-lot positions for Canadian residents (potentially also IRA accounts). Paid-up capital stands at C$2.1/share and non-residents will be subject to withholding taxes of c. C$0.3/share at 15% tax rate. Management is vocal about company undervaluation and do not intend to tender. Due to the large tender size and significant discount to NAV the situation might be attractive enough for larger than odd-lot positions. Downside to pre-announcement prices is minimal at C$3.3/share.
Management/board owns 3.7% of stock + a lot of PSUs/DSUs. If fully vested management’s ownership would increase to 10%+ of outstanding shares. The circular also notes that the public float of the company is below 50% of outstanding shares. If that is really the case, it would mean that tender is for 30% of public float shares. However, it is not really clear who owns these non-public-float-shares.
As of October 13, 2021, there were 52,018,533 Shares issued and outstanding, of which approximately 24,861,007 Shares comprised the “public float”, which excludes Shares beneficially owned, or over which control or direction is exercised, by the Corporation’s “related parties”, as defined under applicable securities laws (which includes the Corporation’s directors and senior officers and any of the Corporation’s subsidiaries as well as any person that beneficially owns or exercises control or direction over 10% or more of the issued and outstanding Shares).
It seems to suggest that aside from the directors, there are certain very large shareholders present, however, the information on this in the recent filings is limited and in Nov’20 circular it states that there are no shareholders that own more than 10%.
SOL Global is an investment company with most of its portfolio in the cannabis sector and 82% of the NAV in listed securities. The company appears kind of cheap on NAV basis – as of Q2 (ending May’21) NAV stood at around C$9.15/share. This NAV is also a more conservative estimate rather than simply taking market prices – e.g. the largest asset Verano Holdings was discounted by 44% on Q2’21 balance sheet.
Since the last reporting period, the cannabis market took a dive and the current NAV should be much lower. In August the company mentioned that it managed to divest some assets profitably before the crash:
Although the cannabis sector pulled back over the last number of months, we were prudent in taking profits prior to the pull back at significantly higher prices. Based on our present Net Asset Value (“NAV“) we feel that our stock price is undervalued at these levels.
SOL’s portfolio reporting is quite messy, but my back on the envelope calculations indicate current NAV of C$7/share valuing public investments stakes at market prices and using management’s Q2 figures for private company valuations. NAV gets reduced to C$5.75/share if public investments are discounted at 20%.
Without dwelling into to much detail on the exact portfolio value, SOL Global trades at around 50% discount to NAV. I guess a decent part of that is attributed to significant corporate overhead (C$0.5/share during H1’21), uncertain valuation of stakes in private companies (mostly VC nature investments) as well as overall volatility of the cannabis industry. A large part of corporate overhead was driven by management/board bonuses and high M&A activity – investment portfolio doubled during H1’21. Going forward these expenses are likely to be much lower.
SOL intends to divest some of SOL’s non-cannabis assets (all private companies) through IPO of House of Lithium. More assets becoming public could be a catalyst for re-rate as well.
The company has recently completed NCIB (on the market buyback) for about 5% shares at way above the C$4/share average price.
The CEO is quite vocal about the undervaluation of SOL although he comes off as quite promotional too. In August he increased his stake to 2.2% (ex. PSUs/DSUs) buying about C$1m shares at C$3.60. I particularly liked this quote from the PR:
SOL is one of the best stocks in my humble opinion for upside based on our holdings and factoring in the temporary weakness in the US Cannabis sector. My best returns have come from betting on myself and once again I have a Super Star team supporting me.
From the circular:
The Corporation believes that the recent trading price of the Shares is not fully reflective of the value of the Corporation’s business and future prospects. Therefore, the Corporation believes the purchase of Shares under the Offer represents an efficient means of providing value to Shareholders.