Quick Pitches For GNX.AX, SIOX, SOT-UN, TBPH

GNX.AX – Merger Arbitrage – 25% Upside

SIOX – Strategic Review – 50% Discount To Net Cash

SOT-UN.TO – Strategic Review/Activist Campaign – Upside TBD

TBPH – Odd Lot Tender Offer – $75 Upside

 

NEW QUICK PITCHES

Genex Power Limited (GNX.AX) – Merger Arbitrage – 28% Upside
A brewing microcap acquisition in the Australian renewable energy sector. GNX is an owner/developer of renewable energy and storage projects, with a focus on hydro, wind, and solar power. The company has two operating solar assets (50MW each) and four other projects in development (2.8GW+ in total). In Jul’22, the company received an acquisition offer from a buyer consortium (combined 20% stake) led by Skip Essential Infrastructure Fund (SEIF) at A$0.23/share. GNX management promptly rejected the bid, claiming it undervalued the company. Then, in mid-August, the buyer consortium came back with a sweetened A$0.25/share proposal. In turn, GNX has said it will recommend the proposal if made binding and has granted due diligence. Updates on negotiations have been limited since, however, in September media rumors appeared that DD has been completed and financing has been obtained. Interestingly, GNX denied these claims and said negotiations are still ongoing. Due to this uncertainty and prolonged silence, the spread widened from the single-digit range to the current 28%. Downside to the unaffected share price stands at 30%.

The buyer consortium seems serious. It is composed of SEIF (owned by Skip Capital) and Stonepeak Partners. Skip Capital is PE/VC firm and the family office of billionaire Scott Farquhar – the co-founder/co-CEO of Australia’s software company Atlassian. Mr. Farquhar has shown interest in the energy sector before – he pursued the acquisition of AGL Energy (Australia’s largest electricity generator) and eventually amassed an 11% stake after a failed takeover bid in Feb’22. He also participated in GNX’s funding round for one of its development projects (Kidston Hydro) in Mar’21, purchasing GNX equity at A$0.20/share (in line with current prices). Meanwhile, Stonepeak is an alternative investment firm specializing in infrastructure/RE assets – last year it launched a renewable energy-focused fund, raising $2.75bn. GNX acquisition is a tiny transaction for these buyers. One of GNX’s largest shareholders is Electric Power Development (EPD, electric utility in Japan) with an 8% stake, acquired in May’21 at A$0.20/share.

While I find it impossible to value renewable energy projects in development, here are some rough industry comps. In terms of $Am EV per installed MW capacity, renewable peers are trading at A$2-3m/MW, with NWF.NZ’s A$1.1m/MW, INE.TO’s A$2.3m/MW and NEOEN.PA’s A$2.7m/MW (also has a large development pipeline). Acquisitions in the space were also done at similar valuations, including Mercury NZ’s acquisition of TLT.NZ operations A$2.2m/MW installed capacity in Aug’21 and Iberdrola scooping up IFN.AX at A$3.1m/MW installed capacity in Jun’20. Most of GNX generation capacity is currently in development, with GNW’s installed capacity being only 3.5% of its total capacity vs 21%-100% portion for peers. The development pipeline clearly carries a lot of value – getting planning approvals for the projects is a long and difficult process in Australia. The main GNX solar project with 2GW planned capacity took 13 years to get regulatory consent (see this tweet). Valuing GNX installed capacity at $A2m/MW (or A$200m) leaves the remaining A$400m of the transaction value being paid for the to-be-developed 2.8GW pipeline projects. This translates to A$0.14m/MW. I am not able to tell whether this is an attractive price or not – these assets will take plenty of years and plenty of $Am to reach and the planned capex is not disclosed.

 

Sio Gene Therapies (SIOX) – Strategic Review – 50% Discount to Net Cash
A strategic review by a failed biopharma company. SIOX is a $22m market biopharma that trades with a 51% discount to its $45m net cash (cash less all liabilities). The company used to run three clinical programs. One was terminated in Jan’22, while in April SIOX announced the winddown of the remaining two trials, significant headcount/costs reduction, and launched a strategic review. The review is still ongoing. In the most recent quarter (ending June) cash burn stood at $8.4m, however, most of that was remnants of R&D expenses ($5.5m). The cash burn going forward should be much lower. Assuming $8m annual cash burn, the company still trades at 40% discount to Jun’23 pro-forma net cash. Sale or liquidation are definitely the preferred outcomes here. The company has a substantial amount of NOLs – $72m in US and $1.2bn in Switzerland and the board might decide to utilize these through the acquisition of further development assets or a reverse merger of sorts. Nonetheless, management is very well compensated and owns an insignificant amount of stock.  Without any activist involvement and no one pressuring the board, there is a significant risk of value-destructive strategic decision (e.g. similar to what happened in a similar SESN case after a strategic review culminated in merger with another pharma company – stock plunged by 40%).

 

Slate Office REIT (SOT-UN.TO) – Strategic review/Activist campaign – Upside TBD
Canadian and Irish office property owner that trades at 0.6x of its NAV and has been pressured by a prominent Canadian activist George Armoyan. The activist has amassed a 15% stake and has been privately pushing the board to create shareholder value since May’22. As negotiations were fruitless, the activist has recently released a public letter claiming SOT’s external manager has been ignoring shareholders and focused only on portfolio expansion to collect larger management fees. Following Armoyan’s letter and one more meeting with him, SOT promptly announced a strategic review. Armoyan appears to be a shrewd investor aiming to find beaten-down stocks with hard assets, get a majority stake and board seat, and then implement changes or sell the company, etc. A nice and long (but very old) piece on him was written here. On SSI we covered one of Armoyan’s plays in the Temple Hotels setup, where his aggressive share-buying foretold an eventual company sale.

The setup is interesting mainly due o Armoyan’s involvement. However, at a quick glance at comparable peers trade at similarly low valuation multiples and it is hard to see why Armoyan is interested specifically in this entity or why the gap to NAV should close.

• SOT trades at 0.59x NAV, 10x H1 run-rate AFFO and 8.5% dividend yield.
• D-UN is at 0.48x NAV, 10.2x FFO, and 6.2% yield. Worth nothing that D-UN has been buying has also been buying back shares aggressively in the open market and has repurchased more than half of its shares since Q4’16.
• AP-UN (much larger peer) trades at 0.57x NAV and 13x AFFO. 6% yield.
• TNT-UN trades at 1.02x NAV, 10x AFFO and 9.52% yield.

Also as highlighted here, SOT might have been overstating its AFFO numbers and still continues doing so.

 

Theravance Biopharma (TBPH) – Odd Lot Tender Offer – $75 Upside
Tender offer with shares trading at the lower limit – a risk-free pocket change upside for odd-lot positions. TBPH is a $660m market cap commercial-stage biopharma focusing on the development of respiratory medicines. Late September, the company announced a tender offer for up to $95m in TBPH’s stock (13-15% of total shares outstanding) with the price range set to $9.75-$10.5/share. The management (4.9% ownership stake) does not intend to participate. The tender expires on November 10. The offer comes as one of the final steps in the capital return program following a large royalty interest sale in July ($1.1bn). The company has recently repurchased 13% stake from its previous major shareholder GSK, which exited at $9.75/share (in line with lower limit of the tender price range). In parallel to the current tender, the company has also launched a 9% open market buyback program. With these three repurchase programs combined, TBPH will have its share capital reduced by 33% since mid-year.

 

PREVIOUS QUICK PITCHES PLAYING OUT

VNET Group (VNET) – Merger Arbitrage – 91% Upside Remains
The idea was highlighted a month ago. As a reminder, Chinese data center company VNET received two non-binding acquisition offers. The first came in April’22 from Chinese PE firm Hina Group at $8/ADS, while the second one was from VNET’s founder at $8.2/ADS or 90%+ spread to current prices. The founder also welcomed other parties, including Hina Group, to join and form a take-private consortium. A couple of positive updates have occurred since then. VNET has recently appointed an independent financial advisor and legal counsel to the special committee. Meanwhile, Bloomberg has reported that buyout firms CDH Investments and PAG are rumored to be considering bids for VNET. The situation continues to be affected by the broader sell-off in US-listed China companies driven by the political situation in the home country.

ADT (ADT) – Odd Lot Tender Offer – Completed
This was a pretty much risk-free opportunity to get some pocket change ($78) ADT’s odd-lot tender at $9/share. The company was buying back 15% of outstanding shares. The offer was expected to be oversubscribed and participants prorated due to major a shareholder tendering shares. However, the odd lot provision created an opportunity for a smaller play on the situation by avoiding proration on less than 100 share accounts. As expected the tender was heavily oversubscribed (18% proration).

Manning & Napier (MN) – Merger Arbitrage – Completed
The situation was highlighted at the end of September when the spread stood at 5% with seemingly no risks and only one month till closing. This was basically a done deal – shareholder approvals were in the pocket and regulatory approvals were expected to pass without any issues given a smallish $200m deal size. The buyer was unlikely to walk from the deal as it was an important strategic transaction and the buyout price seemed favorable to the acquirer. However, the market overreacted to admin delays in the merger process and the spread widened. The delays appeared to be caused simply by government agencies being understaffed and unable to approve requests at the expected timeline. As expected, regulatory approvals were eventually granted and the merger closed.