PMCB – Strategic Review/Activist Pressure – 37% Upside
GFF – Strategic review – Upside TBD
NEW QUICK PITCHES
PharmaCyte Biotech (PMCB) – Strategic Review/Activist Pressure – 37% Upside
An interesting situation with potential company sale/liquidation in the near-term. PMCB – a clinical stage biopharma focusing on cellular therapies – became a target of the activist Iroquois Capital Management Fund late last year. The activist has 6.7% stake and was pushing for a strategic review. The campaign proved to be successful as in August’22 both parties reached a cooperation agreement, which ended with 5 out of 7 PMCB directors getting replaced with 2 activist nominees and 3 independent directors. In early October the new management team announced a strategic review, which includes the reassessment of current development programs as well as other assets, suggesting that asset disposals + liquidation are among the potential options. PMCB currently trades at $60m market cap with $82m in net cash (or $2.89 vs $3.96 on per share basis). That’s 37% upside to net cash position. Historical cash burn rate is relatively low – around $1m or $0.05/share per quarter.
The activist Iroquois Capital Management seems to be a small investment advisor with experience in biopharma sector.
PMCB focuses on developing live-cell encapsulation technology to treat cancer and other diseases, with the company’s primary drug currently in Phase 2b. Notably, since Nov’20 the treatment has been on FDA’s clinical hold as the regulator has requested additional information. In Jul’22 PMCB’s previous management team noted that the process to fulfill FDA’s request has been going well with 90% of it already completed. The final study that was required to lift the clinical hold started in Jul’22 – shortly before the activist’s board takeover. Additionally, PMCB owns an equity interest in encapsulated living cell-focused biopharma SG Austria. If these assets can be sold for anything, the upside might be far larger than the indicated 37%.
Griffon Corporation (GFF) – Strategic review – Upside TBD
Griffon Corporation is a $1.7bn market cap holding company, which used to own 3 businesses – outdoor consumer products (CPP), residential and commercial garage doors (HBP), and defense electronics. The company has been pressured by activist Voss Capital (value-oriented special situation fund) to break the company apart and free shareholders from the pain of having to deal with years of underperformance, egregious management, and large holdco discount. The activist argues that the most valuable garage door segment is worth the entire EV of GFF. Voss Capital won 1 out of 13 board seats and management has been playing along so far:
- Earlier this year GFF announced a sale of the defense electronics segment and used the proceeds to repay debt + payout a special dividend equal to around 7% of the market cap.
- In May GFF also announced a strategic review and hired Goldman Sacks.
- In August, Voss Capital raised its stake to just above 5% in hopes that the strategic review will create value for shareholders.
- Two weeks ago GFF promised an update on the strategic review by the end of November together with FY Q4’22 results.
- The company also adjourned the date of the next shareholder meeting from Feb’23 to Mar’23 in order for shareholders who are willing to present their nominees to have more time.
A bull thesis has also been published on VIC (similar line of arguments to Voss) arguing that at 12x adj. EBITDA multiple HBP segment would be worth the whole EV of GFF. Apparently, similar transactions have recently been done at around 12x adj. EBITDA valuation (see table below). The remaining consumer product business was valued at 6x adj. EBITDA for a total share price target of $61/share, or 100% upside from current levels.
While the setup seems interesting, the main issue here is estimating the normalized earnings of HBP. The segment is a market leader in garage doors sector in the US and during the pandemic/housing boom has been able to significantly elevate pricing. In FY19 HBP segment level EBITDA stood at $120m, in FY21 it jumped up to $181m and in the 9 months of FY22 it skyrocketed to $330m. The performance this year is apparently explained by 60% YoY price raise on its products. The company expects total FY22 group adj. EBITDA at $475m, which suggests $400m+ for the HBP segment. Clearly, these earnings are not likely to be sustainable. Assuming normalized earnings at $270m and applying 12x multiple, results in the remaining outdoor products segment being valued at around 6.4x TTM EBITDA, a seemingly fair valuation. So without a better understanding of the normalized earnings power of the garage door segment, I find it quite hard to argue for the upside from the current levels.
Another issue here is that GFF management is entrenched and might be unwilling to split or sell the company to create shareholder value. The current CEO is the son-in-law of the previous CEO, who was a son-in-law of the CEO before. Management is getting very fat checks with the annual CEO compensation at $20m. Even if they manage to sell HBP, it’s still questionable if they will payout the proceeds to shareholders instead of pursuing M&A deals. For context, earlier this year GFF did a substantial acquisition of a ceiling fans company at 9x adj. EBITDA. The activist has criticized it as a poor and way too expensive decision.
PREVIOUS QUICK PITCHES PLAYING OUT
Zovio (ZVO) – Liquidation – +40% from lucky timing
The case was highlighted in early October. Zovio, a former online education company, announced it will sell the last remaining asset – a coding bootcamp business – and liquidate afterwards. Management provided the expected liquidation guidance of $0 to $0.54/share depending of the value it manages to fetch for its remaining asset. It is a highly uncertain setup, albeit several factors suggest the upper distribution range is feasible and might even be conservative. This week, despite the lack of any company-related news, ZVO share price skyrocketed +100% on extremely high volume, reaching as much as $0.34/share before declining to $0.21/share – still 40% above the write-up levels. Seems like a pump-and-dump scheme on a $7m market cap company. Looks like a good opportunity to book short-term gains.
Cano Health (CANO) – Potential Takeover – Upside TBD
The situation was highlighted two weeks ago and the stock is down almost 50% since then. Senior primary care provider Cano Health is running a sale process with potential acquirers being HUM, UNH, and CVS. Multiple aspects, e.g. industry consolidation, solid strategic rationale of the potential merger with a health insurer as well as the involvement of two credible activists suggested (and probably still do) CANO would be acquired. One of the activists named a price target of $14/share (vs $4.5/share now). Shortly after our highlight, CVS reported it won’t be making a bid, which dropped the bottom for CANO share price causing it to tank by 46%. The market is now pricing in a nearly certain no-deal scenario although other interested parties are still involved. Andrew Walker from YAVB wrote an interesting piece on the situation outlining several arguments on why CANO could be a home-run from the current prices.
PMCB – While Iroquois Capital mentions repurchasing shares and a dividend in their letter to the Company, they have a terrible track record for activism if this website is accurate. https://utopiacap.com/iroquois-capital-management-llc/
I also spot checked some of these to see if there were special dividends and I didn’t find any. Also, the guy behind Iroquois (https://richardabbe.com/) has a website where he mentions this…
Richard Abbe is drawn to investing for a few reasons, one of them being his love of helping promising businesses in the early stage of their life grow. Excited by new beginnings, Richard likes being a part of a prospective new business to help supply the funds needed to seed a great idea.
This seems like a red flag combined with their track record. I am staying away for now.
Thanks so much for pointing this out!
What do you think Iroquois Capital’s game is? How do they benefit from taking a relatively large long position and then seeing the price tank?
Re: PMCB
1) What’s the dissolution value, the actual cash (baking in cash burn while the strategic alternatives are considered) that will go to shareholders if there is a liquidation or a reverse merger sale?
2) I don’t see this stock as cheap *relative* to where other cash burning biotech companies are currently trading. Sure there’s an activist angle, but unless the live-cell tech and SG Austria stake can be sold for a reasonable amount of cash – which is the due diligence required here – hard to handicap the upside.
Comments, thoughts….appreciated.
On February 2, 2023, the Board of Directors of this biotechnology company, approved a $10 million share repurchase program equal to 17.9% of its market cap at announcement.
PharmaCyte’s CEO Josh Silverman commented, “Based on our continued and very fortunate cash position, we believe it is essential that we continue to create additional shareholder value wherever and whenever possible. We believe this follow-on stock buyback program is an essential part of these activities and believe that it demonstrates our commitment to our shareholder base. To that end, we also continue to prudently manage our expenses to maintain our strong balance sheet. In the meantime, we continue our evaluation of our current programs while actively exploring the potential for other strategic opportunities.”
https://www.sec.gov/Archives/edgar/data/1157075/000168316823000500/pharmacyte_ex9901.htm
Taking a closer look at PMCB makes me think it’s even more compelling – cash burn appears much lower than $1mm/quarter estimate: BoD approved repo of 21% of mkt cap in June 2022 when PMCB was @ $2.10’s, another 18% in Feb 2023 (both $10mm); In June ’22 MC was $44mm with net cash of $86mm; Feb ’23 – MC $56mm w/net cash $76mm.
With just $10mm repos hitting cash and $1mm/quarter burn looking very conservative – Dalius/anyone have thoughts?
It does look interesting. However, I am a bit concerned about what the final play here will be. Iroquois has been sitting on the board for many months now and the strategic review has been ongoing for half a year already. The only thing announced so far is share buybacks. The whole setup is quite strange for a biopharma in strategic review and makes it a bit difficult to have confidence that liquidation will follow.
But maybe management is simply taking time to complete the remaining asset sale while doing accretive buybacks and then will liquidate the company in short order.
Interesting thoughts TheRick, and I’m curious too, but I can push you on some numbers for a moment?
— Where do you get current Feb ’23 COH of $76M? The latest I can find is the March 16 10Q showing $72.6M as of 1/31/23.
— Since the latest stock buyback is ongoing, is there any firm way to get a grip on the current number of shares outstanding, and thus back out what the “real” market cap and cash situation is post buyback activity? My understanding is that these details only come out with the Q, but hopefully I’m wrong.
— The Q shows “Director Fees” of $800k (!) for just the last quarter (!!), versus just $85k a year ago. Sweet gig.
— On the other hand, where are the expenditures for this “strategic review?” Investment bank advisors cost money — at the very least up-front or retainer fees, even if much of their comp comes out of the eventual deal. And specialized advisers to negotiate a pharma asset sale REALLY cost money. So why are “legal and professional” fees a paltry for $103k for last quarter — lower than usual?
Did Iroquois put themselves + friends on the Board to sit around and collect fat fees and do nothing?
I like the cash situation a lot but wish there was more clarity into these issues, as DT suggests below.
JESQ – looks like you’re right all around and I agree with your thoughts. I just checked the source on my own and agree with your #’s. Insidearbitrage was dated when I looked – they do post sharecount as of latest 10Q but I think they took cash from Oct 2022 10Q instead of latest. Looks updated now, I think.
https://www.insidearbitrage.com/symbol-metrics/PMCB/
PMCB – anything to make of this increase in authorized shares? 3/16 10Q
Increase to Authorized Shares
On March 14, 2023, pursuant to stockholder approval received at the Annual Meeting of Stockholders, the Company filed with the Secretary of State of the State of Nevada a Certificate of Change to its Articles of Incorporation, as amended, to increase the number of authorized shares of common stock from 33,333,334 to 133,333,334. The Certificate of Change had no impact on the number of authorized shares of preferred stock, which remains at 10,000,000.
In their own words (2022 proxy):
Our Board believes it continues to be in our best interest to have sufficient additional authorized but unissued shares of common stock available in order to provide flexibility for corporate action in the future. Management believes that the availability of additional authorized shares for issuance from time to time in our Board’s discretion in connection with future financings, stock splits or dividends or for other corporate purposes is desirable in order to avoid repeated separate amendments to the PharmaCyte Charter and the delay and expense incurred in holding special meetings of the stockholders to approve such amendments. We currently have no specific understandings, arrangements or agreements with respect to any future acquisitions that would require us to issue a material amount of new shares of our common stock. However, our Board believes that the currently available unissued shares do not provide sufficient flexibility for corporate action in the future.
PMCB tender seemed great until I saw the preferred offering….any thoughts on holding this position post tender? If tender is fully subscribed, breakeven looks like 2.97 if you buy here (3.1).
$2.7-2.8 post tender price likely….?
A pretty strange move to issue convertible preferreds when the company already has plenty of cash on the balance sheet. Why was this done?
If I am reading the docs correctly, this transaction (issuance of convertible preferreds/warrants + tender for common) is financial engineering to shift the full value of the remaining company from the hands of common shareholders to preferred holders. The company will start redeeming these preferreds already in Nov’23 and redemptions will be done in cash or company’s stock at “a 20% discount to the average of the three lowest closing prices of the Company’s common stock during the thirty trading day period”. If I understand correctly, the exercise price of warrants will be adjusted accordingly. What this means is that the buyers of preferreds will be able to acquire the company’s stock at a far lower price than the headline $4/share. It will be like a dilutive spiral and by the end of it, PMCB will be almost fully in the hands of the current preferred investors, who will then be able to liquidate the company and pocket all of the cash on the balance sheet.
The only thing that seems strange in this context, is that management is willing to cash out 46% of current common shareholders at $3.25/share and has already repurchased a significant amount of shares in the open market (c. $11m over the last few quarters). Why spend this cash on common shareholders if the company intends to screw them anyways?
This makes me think I am reading something incorrectly. Other opinions are welcome.
https://www.bamsec.com/filing/168316823003169/1?cik=1157075
what’s the legal obligation to a common holder on these prefs.. since it adversely affect the common shares should the offer have been made to them as well- if you wrote to the company would they have to give you prorata subscription rights?
The preferred placement is already a done deal, so there seems to be nothing common stockholders can do except to sell the stock in the open market or participate in the tender offer. The tender at 46% of the outstanding is pretty large, so there is a chance proration will be low. But I have no idea where will the stock trade post-tender.
Or file a lawsuit in Chancery!