Quick Pitches For BBXIA, SPNE, UNVR, AAV.TO

BBXIA – Price Pullback Post Tender Offer – 8% Upside

SPNE – Merger Arbitrage – 21% Upside

UNVR – Potential Buyout – 31% Upside

 

NEW QUICK PITCHES

BBX Capital (BBXIA) – Price Pullback After Tender Offer – 8% Upside
This is a rather speculative situation that involves shorting the stock during an ongoing tender offer. BBX Capital, a holding company with cash, a note from parent, some real estate and a couple smaller businesses on the balance sheet, announced a tender offer for 8.2% outstanding class A shares at $10/share. Shares currently trade at $9.34. The tender will expire on December 21. There are a couple arguments suggesting that the offer might end up materially oversubscribed and the share price will fall back to $7.5/share pre-announcement levels post-expiration. Plenty of shares to borrow are available on IB at 2.5% fee.

The main aspect that caught my eye here was that the Chairman and CEO said they would be willing to underwrite the tender for a maximum of 25% of the total size. The fact that the controlling family signaled they are ready to sell a substantial portion of stock at $10/share puts a serious hit on the prevailing discount-to-NAV thesis for BBXIA stock. BBXIA is a vehicle of Levan family – notorious value destructors, you can find more color here. The family owns 30% of class A shares and 46% economic interest. Ever since the company was spun off from BXX in 2020, BBXIA has been trading at a vast discount to BV (currently at 55%) with investors hoping that management would use company’s sizeable cash war chest to narrow the gap through share buybacks. While some sporadic share repurchases were done over the last two years, these were too small or too cheap (e.g. last year’s failed tender offer) to make any real impact and outweigh the ‘Levan discount’. This year, the buybacks dried down almost completely till the current tender offer. Coming from this setup I don’t see how the current combination of a relatively small announced tender and Levans being willing sellers at $10/share could be positive for BBXIA share price.

BBXIA operates several businesses – candy retailer IT’Sugar, door systems manufacturer Renin, while the main business is real estate acquisition, development, and construction in Florida. Inflationary and macro pressures are continuing to put weight on the candy and especially door businesses this year. IT’Sugar is barely breakeven at the segment operating income level, while Renin has already fallen into loss-making territory. Real estate business is keeping everything together, but if Florida’s real estate market starts cooling off, investors might start to realize that the 55% discount to BV is not nearly low enough to stay in bed with Levans, who pay themselves $25m in annual compensation vs $150m BBXIA market cap. Partial exit at the current tender with +33% premium to pre-announcement prices might not be a bad alternative.

The shorting trade here will mostly depend on two things – 1) how many of your borrowed shares are tendered and get accepted; 2) at what price BBXIA shares will settle after the offer expiration. I think assuming 30% of shares accepted in the tender + $8/share post-tender price is reasonable and maybe even conservative. It implies that 36% of the minority (ex-insiders) shareholders will tender and all of your borrowed shares will happen to be included in that portion. With these assumptions, the base case return here is 8% in a month. As you can see in the sensitivity table below, the potential downside is limited to 7%, although I think the chance of reaching it is very low. There is also a Black Swan negative scenario where shares shoot up past $10+ post tender expiration, however, this does not seem to be a realistic scenario at the moment.

More background on BBXIA can be found here.

If I am missing some important risk that comes with shorting shares during the ongoing tender offer, drop me a line or comment below.

SeaSpine (SPNE) – Merger Arbitrage – 21% Upside
An interesting merger arb where the spread has recently widened from the minimal post-initial-announcement levels. The setup, however, is highly complex with numerous moving parts. The spread seems to have widened after the buyer itself received a takeover offer from third parties and it became even less clear if the buyer’s shareholders will support the originally contemplated transaction.

In October, spinal implant and bone growth therapy device producer SPNE entered into a strategic merger of equals with peer OFIX. Merger consideration of 0.4163 shares of OFIX per each SPNE. The merger will require shareholder approval on both sides, with OFIX shareholder meeting set for January 4. Transaction closing is expected in Q1’23 and the spread hovered at only 1-2%.

However, in November a consortium of two private equity firms filed a non-binding $23/share offer to acquire OFIX from a consortium of two private equity firms. The offer was rather promptly rejected by OFIX’s management. PE buyers swiftly followed up with another bid at $24/share (16% premium to current levels), however, OFIX’s management did not budge and reiterating initial SPNE merger plans. It has not been specified if the PE buyout proposal is conditioned on OFIX abandoning SPNE merger. While there is a risk that PE buyers will not back away, OFIX’s management is seemingly highly unwilling to sell the business at a depressed share price – close to a 10+ year low impacted by recent macroeconomic headwinds (-38% YTD).

A related risk is OFIX’s shareholder approval. Upon the announcement of the merger with SPNE, OFIX share price dropped 19%. Now, this is further complicated by the pending offer from PE firms. Having said that, thus far none of OFIX shareholders have publicly voiced opposition to the merger.

Strategically, the merger would allow OFIX – which has failed to reach profitability on EBIT level since 2019 – to gain scale in the increasingly competitive orthopedic healthcare space. Given the expected synergies stemming from the complementary businesses of both companies, shareholders might opt to support the combination. During the latest quarterly call, OFIX’s management reiterated confidence in the benefits of the merger with SPNE and successful closing.

I won’t be able to shed much light on SPNE’s valuation or why specifically the market saw this merger as value destructive. SPNE is unprofitable and trades at 1.1x TTM revenues – below lower growth spinal implant-focused peer NUVA valued at 2.2x. Prior to agreeing to the ongoing merger SPNE attracted other acquisition interests. Merger proxy notes that in Sep’22 SPNE received another all-stock transaction proposal from an undisclosed company valuing SPNE at $8.60/share (vs $7 current price). Meanwhile, since September US medical device market has remained stable (IHI ETF has gone up by 3%), suggesting the previous suitor might still be interested. This could potentially limit the downside in case the merger with OFIX breaks.

Univar Solutions (UNVR) – Potential Buyout – 31% Upside
UNVR is the world’s second-largest chemical distributor of commodity and specialty chemicals/ingredients, with a market-leading position in US (63% of company’s revenues). In late November, Univar Solutions has been approached by #1 chemical distributor globally Brenntag. UNVR has since confirmed the talks. Recent reports suggest both sides might reach an agreement within a couple of months. I would expect UNVR share price to pop when/if the agreement is announced. The downside to pre-rumor levels stands at 8%.

Shortly after these rumors, activist Engine Capital (1% stake in UNVR) sent an open letter, noting that UNVR is undervalued and might be a “highly attractive acquisition target”. The activist is pushing for a full-fledged formal sales process. The activist says UNVR might be worth between $38/share and $44/share in a competitive bidding process or a 13%-31% upside from current levels. Engine Capital is basing its targets on valuation multiples in similar industry transactions which the activist had highlighted in its October’s letter to UNVR’s board. Engine notes that generally such acquisitions have been performed in the 8x to 10x EBITDA valuation range. Among other transactions, Engine highlights AVNT’s recent divestiture of its distribution segment to H.I.G. Capital in Aug’22 (10x LTM EBITDA) and UNVR’s acquisition of Nexeo in 2018 (9.4x EBITDA). Meanwhile, UNVR currently trades on 7.2x TTM EBITDA. The buyer BNR is valued at 6.5x, however, the multiple seems suppressed due to numerous recent acquisitions which are not yet integrated.

The merger with UNVR would allow BNR to increase diversify away from the seemingly problematic European markets. Continent’s chemical producers – whose products BNR distributes – have been materially impacted by soaring gas prices. The transaction would thus allow the buyer to shift its exposure from EMEA region (41% of BNR’s gross profits) to the significantly less impacted US market where UNVR is the leading player. Moreover, BNR’s net debt-to-EBITDA is at 1.3x which is below 2x+ for peers, allowing the company to finance the potential acquisition by debt without raising the market’s eyebrows over increased leverage. Brenntag has been on an M&A spree over the recent years – including this year’s acquisitions in the US, UK, and Australia/New Zealand. UNVR would be Brenntag’s largest transaction to date.

The potential merger would require antitrust approvals in numerous jurisdictions, primarily EU and the US. In EMEA and North America, the combined market shares would stand at 10% and 23% respectively. These markets, however, are highly fragmented beyond the largest four players which hold 13% and 27% combined market share in these regions. Moreover, in 2018 UNVR successfully acquired Nexeo, in a deal that combined #1 and #3 NA industry players at the time. The transaction closed in 7 months. Given the larger merger size the regulatory risk would likely be more prominent and the closing might take longer.

Engine Capital is a value-oriented investment firm launched in Jul’13. As stated in the activist’s letter to UNVR’s board (sent in October), Engine has thus far negotiated either board nominees or settlements in 22 publicly-listed companies. The activist has held numerous positions in distribution companies, including Wesco Aircraft (sold to Platinum Equity), Ferguson, SIG and Nexeo Solutions (before its sale to UNVR).

Advantage Energy (AAV.TO) – Odd Lot Tender Offer – C$181 Upside
A quick note on Advantage Energy’s tender offer that was previously highlighted here. Over the recent week, AAV share price dropped to C$11.07 – below the tender range of C$11.20-C$12.90/share and now provides a risk-free optionality for odd lots. The expiration date is set for December 16. The idea is actionable only to accounts that are not liable to pay Canadian withholding taxes.

 

PREVIOUS QUICK PITCHES PLAYING OUT

Warrego Energy (WGO.AX) – Bidding War Continues +39% So Far
A couple of weeks ago, we highlighted a quickly developing bidding war around an Oil & Gas exploration company, Warrego Energy. At the time of the initial pitch, the company was targeted by two bidders, one of them was Strike Energy (STX.AX), a 50/50 partner on WGO’s primary joint-venture project and also one of the largest shareholders of Warrego. STX made 3 consequitive stock-for-stock bids for WGO with the latest one at 0.775x (worth A$0.20/share at the time) + tiny CVR likely worth $0.01/share. Soon after, another bidder Beach Energy (BPT.AX) offered A$0.20/share in cash + identical CVR. WGO promptly entered into a definitive agreement with BPT. Last week, a 3rd bidder Hancock Energy joined the scene with a A$0.23/share cash offer. BPT swiftly countered with A$0.25/share cash + CVR offer only for Hancock to raise the bid further to A$0.28/share. BPT has until Dec 12 to respond.

In the meantime, STX has raised its stake in WGO from 8% to 20% by entering into 1 for 1 share swaps with certain WGO shareholders. Strike Energy now pretty much has a blocking stake and due to soaring STX share price, its last 0.775x share offer is now worth A$0.29 per WGO share. Interestingly, STX noted that it has not formed any intention regarding WGO and is considering all available strategic options. WGO now trades at A$0.305/share (up +39% since our highlight) as the market expects the bidding war to continue.

CarLotz (LOTZ) – Merger Arbitrage – Completed +30%
This was a merger arb in the used vehicle commerce space previously highlighted in our newsletter here. CarLotz was getting acquired by one of its peers Sift Technologies (SFT) in an all-stock transaction with an exchange ratio of 0.69. Both companies were interested in getting this transaction done – both lacked scale individually. Additionally, the acquisition was akin to equity raise for SFT as it was buying LOTZ at 26% discount to its net cash. LOTZ shareholder approval was guaranteed given the initial support from the two largest shareholders with combined 25% stake. The main reason for the wide spread was expensive borrow for hedging – fees stood at 42% per annum at the time of our note, but gradually declined to c 15%. Shareholder approval was received a few days ago and the merger is now expected to close on December 9. The idea returned around 30% in 3.5 months net of borrow fees.

Akuous (AKUS) – Merger Arbitrage & CVR – Completed
This situation was originally highlighted here. Akouos, a clinical-stage biopharma, was getting acquired by pharma giant Eli Lilly. Consideration stood at $12.50/share cash + non-tradeable CVR that consisted of three parts worth $1 each ($3/share total). It seemed likely that at least the first two dollars of the CVR would eventually be paid out as they were conditioned on the start/progression of early-stage trials as opposed to drug approvals by FDA or sales milestones. At the time of our initial pitch, investors were paying $0.65/share for a potential $2-$3/share return on the CVR. The merger has now closed and CVR payouts will be determined by Dec’24 and Dec’26.