Quick Pitches For CCRD, OYST, WGO.AX and 3 Tenders

CCRD – Potential Buyout

OYST – Merger Arb & CVR

WGO.AX – Potential Bidding War

ACQ.TO – Tender Offer

 

NEW QUICK PITCHES

CoreCard Corp (CCRD) – Potential Buyout
CCRD is a micro cap that provides software, consulting, and processing services for credit card issuers. Recently, WSJ reported that Goldman Sachs is circling CCRD among several other payment technology companies. Goldman Sacks (which manages Apple Card) has been the key customer of CCRD since 2018 accounting for 71% and 69% of CCRD’s revenues in 2021 and 2020. These rumors are, admittedly, very vague. However, aside from the already existing entrenched cooperation between the two companies, there are several other aspects suggesting that both GS and CCRD might be interested in the takeover.

• CCRD is covered in detail in this VIC article from Apr’22. CCRD appears to be cheap trading at 8.6x TTM EBITDA. However, this figure might not reflect the true earnings power of the business. CCRD’s revenues have grown at a rapid 35-119% annual pace since 2018 (with exception of weak 2020) and management expects growth to remain around 25% going forward. This growth is directly linked to the success of the Goldman Sachs partnership – the number of Apple Card customers has grown from 3.3m in 2020 to 6.7m as of early 2022. Apple Card is currently available in the US only and only captures only an insignificant US credit card market and Apple product users share. The TAM is likely to be north of 50m+ individuals, leaving plenty of growth runway ahead. Likewise, CCRD seems cheap on a revenue basis trading at 3x TTM revenues. In comparison, a similar private peer Galileo Financial Technologies was acquired by SoFi at $1.2bn or 6x revenues in 2020. Similarly to GS and CCRD, SoFi was already tightly integrated with Galileo prior to the acquisition.
• CCRD had previously attracted acquisition interest from the above-mentioned SoFI even before it bought Galileo. The deal fell through as CCRD reportedly did not have the required capacity to take on new projects after the GS/Apple deal. CCRD’s capacities have since then materially improved as the company expanded its workforce now employing over 1100 FTEs compared to 530 as of Mar’20.
• CCRD is controlled by long-time CEO and Chairman Leland Strange (18% stake). Even if he loves his job, at the age of 81, he might very well be considering a sale. Strange’s salary has stood at $700k-$750k in recent years – immaterial compared to the value of his ownership stake of $43m at current prices.

Customer concentration is a big risk for this company. In Apr’22, reports appeared that Apple was looking to develop its own payment processing software to reduce reliance on outside partners. CCRD stock fell 17% on the news. While the reports did not call out credit cards specifically, the potential loss of the largest customer serviced through Goldman Sachs would be a major blow to CCRD’s business.

 

Oyster Point Pharma (OYST) – Merger Arb & CVR
Pharma buyout with an unusual and very short-term CVR milestones based on Q4’22 sales figures. Pharma giant Viatris ($13bn mcap) is entering the ophthalmology market with the micro-cap acquisition of Oyster Point Pharma. OYST commercializes the first and only FDA-approved nasal spray TYRVAYA for dry eye disease and has a few other early-stage development programs in the pipeline. The merger consideration is $11/share in cash + up to $2/share from CVR. With shares at $11.14 and assuming zero risk of closing, investors are paying $0.14 for the CVR. Shareholder support is assured as 46% are already in favor. Closing is expected in Q1 2023.

The CVR conditions are quite peculiar – the payout depends on TYRVAYA’s performance in Q4 2022:

• $1 per share will be paid if in 2022 TYRVAYA sales reach $21.6m and total prescriptions amount to 131,822.
• An additional $1 (for a total of $2 per share) will be paid if TYRVAYA generates $24m in sales and 146,469 prescriptions this year.

Looking at TYRVAYA’s results in the first 9 months of 2022, it doesn’t look like meeting even the first $1/share CVR condition will be easy.

• Q1’22, $2.7m sales and 19k prescriptions;
• Q2’22, $4.7m and 30k;
• Q3’22, $5.6m and 34k;
• 9M total – $13m of sales and 83k prescriptions.

Q4 would need to show a substantial acceleration of growth reaching $8.6m of quarterly sales and 49k prescriptions in order for the CVR to payout the first $1/share. Moreover, in the Q3 report OYST management noted that since the launch in Nov’21 through the 21st of Oct’22 TYRVAYA prescriptions have amounted to 97k, meaning that during the period of October 1 – October 21 prescriptions totaled only 8.5k – hardly the pace needed to reach the Q4 CVR target (49k at least).

However, I still find the whole setup intriguing. Management owns around 17% of the company and this CVR appears material to them. The merger was announced at the beginning of November, and I would expect management to be roughly aware of where sales/prescriptions have been trending in Q4. There seems to be no point in adding this CVR to the merger agreement if no one thinks these targets have at least some chance to be reached. Thus my thinking – if the CVR was added with less than two months left till the quarter-end, then management believes the targets, at least for the first $1 payout, are somewhat reasonable. The only other explanation is that this CVR was agreed during the negotiations much earlier in the year (say Aug or Sep) and was just left there even though actual sales figures showed these targets to be unreachable. The release of proxy with some background info on the merger, should shed some more light on this.

Also, interestingly, one analyst on VTRS Q3 call seemed very positive about the OYST CVR getting paid out (although I do not see the obviousness of CVR getting paid out from the reported sales numbers):

And it looks like the CVR is in the bag because the TRx and the sales numbers that were pointed out, it looks like it’s trending towards that anyway. So we should assume that Oyster Point acquisition is $450 million valuation.

 

Warrego Energy (WGO.AX) – Potential Bidding War
Potential bidding war developing for Warrego Energy in Australia. WGO is a gas exploration company with onshore assets in Australia and Spain. The company’s primary asset is 50% JV interest in development-stage project West Erregula in Western Australia. The remaining 50% stake is held by ASX-listed Strike Energy (STX.AX). WGO is currently targeted by two bidders, one of them is the JV partner STX. The share price trades at c.10% above both latest offers as the market expects the bidding war to continue.

Last week, it was disclosed that STX is aiming to buyout WGO and has already made 3 stock-for-stock takeover bids. The latest offer comes at an exchange ratio 0.775x (A$0.20/share at current prices) + a CVR to receive sale proceeds from the sale of WGO’s Spanish assets if completed within 12 months (likely worth less than A$0.01 per WGO share). Previous bids came at exchange ratios of 0.7142x and 0.7521x. One day after WGO’s announcement, another bidder Beach Energy (BPT.AX) emerged, issuing a non-binding proposal to acquire WGO at A$0.2/share in cash + the identical CVR. WGO management did not issue any comments on numerous STX proposals and promptly entered into a definitive merger agreement with BPT. STX continues to argue its proposal is superior and is  “considering its available strategic options”. As part of the WGO-BPT merger agreement, BPT has the right to match any higher bid. This is a freshly announced transaction and some other bidders might still surface as WGO is now clearly in play.

The current offer from BPT will probably get rejected by WGO shareholders. The merger will require support from 75% of votes cast + 50% of voters participating. STX owns 8%, while Regal Funds Management – a shareholder of both STX and WGO – holds another 9%. In its presentation STX kind of hinted that a further additional 15% are affiliated with STX as well. That makes for a total of 32% WGO shares potentially blocking BPT’s bid.

However, STX appears highly interested in acquiring the remaining stake in the West Erregula project and might thus instead raise its offer once again instead of simply voting down a competing proposal. STX previously tried to acquire WGO’s West Erregula JV interest in 2020, issuing an all-stock offer valuing the target at an exchange ratio of 1.2x (A$0.15/share). The bid – which came right after COVID lockdowns began – was dismissed by WGO’s management as undervaluing the company. In 2021, rumors surfaced that STX might be heading for a full acquisition after it acquired an 8% stake in WGO during Apr-Jul 2021 at an average price of A$0.24/share – 20% above current offers from both STX and BPT.

BPT is a A$4bn market cap Australian oil and gas exploration company, with assets across Southern and Western Australia. The buyer intends to increase its supply of gas on the West Coast of Australia, complementing its existing Perth Basin asset portfolio. Scooping up WGO would be a relatively tiny acquisition for BPT.

 

3 Canadian Tender Offers
Several new Canadian tender offers have been announced during the past week. Paid-up capital is rather low for all of them, so these might be actionable for Canadian residents or other accounts non-liable to pay Canadian withholding taxes. From the ones listed below ACQ.TO seems particularly interesting – the company is cheap and the previous tender just 3 months ago ended up undersubscribed at the upper limit. However, I’m not familiar enough with the industry dynamics to have sufficient confidence in the outcome. The other two are trading in the middle of the tender range and I am just listing the transaction details – no opinion of where it might get priced eventually.

• AutoCanada (ACQ.TO) – Tender Offer – 8% Upside (if priced at the upper limit). New and used car dealerships operator AutoCanada launched a tender offer for C$50m or for 7-8% of outstanding shares. The tender range is C$25-C$28 and with shares currently sitting at $26. Paid-up capital is C$15.94/share. There is no odd lot provision. The offer expires on the 16th of Dec. Management owns 3% and is apparently not tendering.
  The company has already done a larger C$100m (15%-17% outs. shares) tender this year at the same price range and it ended materially undersubscribed at $28/share (32% filled). It was covered on SSI here. The initial offer was announced in June at C$22-C$25/share, but eventually had to be raised to C$25-C$28/share (fully in line with the pricing of the current tender). The company has two major shareholders – EdgePoint Investment Group (24% stake) and BloombergSen (11%) and it seems neither of them has participated in the previous tender. Given the outcome of the previous tender just 3 months ago as well as the identical tender range, can the same be expected for the current one? The current tender comes at a considerably higher premium to pre-announcement prices (C$21/share vs C$24/share for the previous one). The offer is also half as big. Investor sentiment might have also deteriorated over the last few months.
  ACQ is very cheap on trailing earnings – 4.5x EBITDA. However, other peers are also cheap as the industry is expected to see downward margin normalization as pandemic-driven used car prices are starting to revert. The auto dealership industry is also facing uncertainty due to the anticipated transition to EVs. Much larger US peers trade at similar levels – ABG at 5.6x and AN at 3.9x EBITDA. Worth mentioning, some bulls (e.g. this nice VIC write-up) argue that elevated auto dealership margins are here to stay for longer and that investor sentiment towards the industry is overly negative.
• Advantage Energy (AAV.TO) – Odd Lot Tender Offer – C$122 Upside. Canadian O&G explorer AAV recently launched a tender offer for up to C$100m or 4-5% of outstanding shares. Tender price range is C$11.20-C$12.90 with shares at C$11.34 currently. Paid-up capital is only C$2.64/share. Odd-lot priority is included. Expiration is on the 16th of Dec.
• Dye & Durham (DND.TO) – Odd Lot Tender Offer – C$108 Upside. Canadian software provider Dye & Durham has launched a tender offer for C$150m or 15%-18% of outstanding shares. The tender price range is C$12.5-C$15 with shares at C$13.8 currently. Paid-up capital stands at C$12.67/share. Odd lot provision is included. Expiration is on the 9th of Dec.

 

PREVIOUS QUICK PITCHES PLAYING OUT

Purple Innovation (PRPL) – Merger Arbitrage – Return so far +30%
An interesting development with the previously highlighted privatization offer for Purple Innovation. PRPL, a designer and manufacturer of premium/luxury mattresses and pillows, received a non-binding offer from its largest shareholder Coliseum Capital (owns 45%) at $4.35/share. The spread stood at 11%. The bid clearly looked opportunistic and was timed at historical share price lows. On top of this, 6 other large shareholders owned 34% of the stock with a cost basis way above the offer price. The chances of getting shareholder approval for this lowball offer seemed low. Just a week ago, the company reported better-than-expected Q3 results with improved margins across the board due to effective cost-cutting initiatives. PRPL has also materially raised its guidance for the current and the next year. As a result, the company’s share price skyrocketed by 60%+ and now trades 17% above Coliseum Capital’s offer. No updates from Coliseum Capital so far – not clear if it will still be interested in acquiring PRPL at much higher prices. The stock is up 30% since our initial highlight two months ago.

RealNetwork (RNWK) – Take private by the CEO – Completed +20%
RealNetwork was about to be taken private by the CEO/founder (38% stake). We pitched the setup here and here. The CEO made a non-binding offer at $0.67/share or 12% spread at the time. Right after the merger announcement, the second largest shareholder started to build up his position raising it from 7% to 12% – this signaled confidence in the success of the takeover bid. Eventually, the definitive agreement was reached at an improved price of $0.73/share. Although the risk of shareholder rejection was minimal, RNWK still traded at a 6% spread. The spread was finally eliminated after the announcement of the shareholder meeting on the 4th of Dec. The idea generated a 20% return in 3 months.

AGF Management Limited (AGF-B.TO) – Odd Lot Tender Offer – Completed +C$75
Last month we highlighted a straightforward odd lot tender offer for some pocket change cash (C$75). Asset manager AGF launched a tender offer to repurchase 10% of its non-voting B-class shares. Shares were trading at the lower limit. Before the tender expiration, AGF-B released strong Q3 results and the share price jumped up. The tender got undersubscribed and priced at the upper limit for a C$75 gain on odd-lot positions.