SIOX – Liquidation – 25%+ Upside
OIIM – Chinese Privatisation – 10% Upside
QUICK PITCHES
Sio Gene Therapies (SIOX) – Liquidation +43% so far and a further 25%+ potential upside remains
The situation was previously highlighted in late October. A failed microcap biopharma, that was trading at a 51% discount to net cash, launched a strategic review and started the wind-down of the two remaining clinical trials. Sale/liquidation seemed like the most probable outcome. Last week, the strategic review concluded with a proposed liquidation of the company. Shareholder meeting to vote on liquidation is expected in Q1’23. While shares skyrocketed post-announcement (+43% since our highlight), some upside still remains. The company has c. $46m in net cash vs $32m market cap, or a 43% spread. On top of that, the company has a CVR with a further $7m of potential milestone payments related to the previous asset sale. Part of this cash buffer will be burned till the full liquidation. The timing and size of the eventual liquidating distributions are uncertain. Few points worth considering:
- The liquidation announcement suggests that once the proposal is approved, SIOX will delist from Nasdaq and will be non-tradeable going forward.
- The most likely scenario is that investors will get a large initial distribution, while the remaining proceeds will take much longer to reach shareholders as management will wait for the CVR milestone payments (a few years?).
- The cashburn going forward is expected to be minimal – at this point, most staff has been laid off and office leases have already been terminated. However, there are unspecified remaining final payments to vendors as part of SIOX’s terminated licensing agreements and also one remaining pre-clinical development program (likely very small but not sure why management hasn’t suspended it yet). On the balance sheet there is already a $4.8m liability for payables and accrued expenses and it is not clear if the above-mentioned payments are incremental to this amount.
- SIOX has a right to receive up to $7m in various milestone payments related to a major asset sale in Jan’21 (see page 14 page of the most recent quarterly report). It’s uncertain if or when the CVR will pay out, however, it will probably prolong the final liquidation date quite significantly. Assuming the CVR gets paid in full, it would add $7m (or about $0.095/share) to potential distribution proceeds.
Roughly assuming $6m of further cash burn till full liquidation (I think that is overly excessive) and zero recovery on the CVR, leaves $40m in distributable cash or 25% upside to the current market cap. I would expect the initial distribution to shareholders to follow promptly after the liquidation approval (promptly meaning within 6 months). The size of the initial distribution would probably be somewhere around the current market prices, with any further upside coming risk-free to shareholders, even if it means holding non-listed security for a prolonged period. Also, this would still leave $14m of net cash with the company, which seems plentiful for any liquidation-related expenses and to cover any of the liabilities not yet on the balance sheet. Losing capital at current share price levels seems unlikely.
O2Micro International (OIIM) – Chinese Privatisation +10% so far and a further 10% upside remains
I covered this setup at the end of September, just after the Chinese chipmaker O2Micro International announced a definitive privatization agreement at $5/share ($4.93/share after fees). The spread stood at 25% and multiple arguments suggested that the buyer consortium is serious and the transaction is likely to close. Since then the spread has narrowed to 10%-12% levels, and last week OIIM has finally announced shareholder meeting for January 31. The approval should not be an issue here given that management owns around 18% of OIIM shares and the offer comes at a material premium to pre-announcement prices amidst struggles in the semiconductor industry. At this point, the setup seems quite attractive and provides an opportunity to realize substantial IRR assuming the merger closes in early Feb’23.
PREVIOUS QUICK PITCHES PLAYING OUT
Warrego Energy (WGO-AX) – Bidding War +48%
This situation was initially highlighted a month ago and then updated here. Australian O&G exploration company Warrego Energy found itself at the center of a quickly escalating bidding war. The buyers’ lineup included WGO’s JV partner Strike Energy (STX.AX), Beach Energy (BPT.AX), and Hancock Energy. At the time of my previous update a couple of weeks ago, Hancock’s offer was at A$0.28/share vs BTP’s A$0.25/share and STX’s 0.775x stock-for-stock bid worth A$0.29/share. Since then, BPT withdrew from the bidding war refusing to increase the price again. Meanwhile, STX raised its scrip offer to 1 for 1 share exchange (currently worth A$0.325/share, but there is no borrow available for hedging). 12.7% of WGO shareholders agreed to support STX proposal, which together with the buyers’ 20% stake aggregates nearly 33% of outstanding WGO shares. The target’s stock currently trades at A$0.31/share. Hancock Energy continues to argue that its A$0.28/share cash offer is superior and that the competing bid only appears to be higher due to the recent STX share price spike. In the latest turn of events, Hancock Energy declared its offer unconditional and it seems like at least 16% of shareholders will sell their shares to Hancock. Although it remains unclear which of the bidders will eventually gain control of WGO, I think there is limited scope for further bid price increases and we might be close to the finale.
Hi dt:
for SIOX, I have a few queries:
1) Are you assuming $6m will be used for liquidation expensed (including CEO and board’s salary)?
2) How did you estimated $6m ?
3) Why should it take long for SIOX to liquidate when almost all the assets are cash (in the bank) ? Why not have shareholder approval in January versus giving the timeline for the full quarter. I think I am missing something here.
You’re not missing anything.
1&2) $6mm is fair, my estimate is closer to $4-5mm, largely composed of SVB fees (~$1mm) and Severance Estimates (~$2.4mm) + Other (~$1.6mm). Once liquidation approved, they’ll hand over to a third party to administer, which shouldn’t be expensive. They’ll also have to hold back any estimated liabilities for 10 years, that shouldn’t be much either. We’ll see the estimates for liquidation when the initial proxy statement is filed, I would expect in the next two weeks or so.
3) A Prelim proxy has to be filed (I’d expect in the next 2 wks). The SEC has to review to get to a definitive (10 business days). A vote has to be scheduled (~1 month). A Delaware judge has to approve the liquidation scheme (~1-2 weeks), then you get your first large distribution. Maybe worth trying to sell the CVR to Arvelle @ a discount to get cash in hand. If I was their lawyer, I’d go with Q1 too.
Thank you rd128 for the response. The $6m liquidation expenses – on my side this is mostly an educated guess but have no hard facts to support it. The breakdown of these expenses shared by rd128 makes sense. As for the delay, I am assuming the full liquidation holdout will mostly be due to the pending CVR payout as well as general requirements for liquidating entities.
Thanks rdl. This is helpful.
What can go wrong here? To lose, you have to believe that they expense more than $10mm (difference of market price and $net cash)?
In addition to the expenses you mentioned, it seems they still have the entire board, CEO, HR person on staff and any employees.
Curious how did you get to $2.4mm severance?
Sorry, I didn’t understand your comment ” If I was their lawyer, I’d go with Q1 too.”
I think the key thing that might derail this case is the initial liquidation distribution being far below the current market cap. As explained by rd128, additional details should be revealed in the proxy. I expect most of C-suite and board to be gone soon after the liquidation approval and the remaining cash buffer is more than sufficient to cover the ongoing expenses as well as any severance.
In the end, there is quite a bit of guesswork on how this will play out, what the initial distribution will be and how much cash will be reserved for future expenses – but that’s why the opportunity exists.
dt I agree with you very much on your point. By now the company might have a net cash value of 46m, 53 (assets)-4 (total liabilities) -3.1(approximate cash burn this past quarter), and if you consider the liquidation process might take another several month to fully close, 46m – 6m(management salaries + bonus + stock options) – 4m (reserve for potential future liabilities) – 3m(liquidation expenses) = 33m , more or less equals to current mc 33.5m, this doesnt count potential contractual liabilites with other collaboration partners. Of course all my numbers are estimate and might be too conservative, but if you take this into account, there is not much value left. And management might even think of other expenses to benefit themselves during the process. So seems downside risks is more than potential limited gain. So no play for me but great respect to your great call on initial 43% upside.
Regarding OIIM:
I think this is also a really solid company with international operations and easy to verify, very different to shady GSMG where I don’t have any trust in the underlying business as I find almost no information. When do you expect the closing / do you have a statistic about average time of closing for Chinese ADS between shareholder approval & closing? I think for Hailiang Education it was only one or two days after shareholder approval, so if this will close on third February, the absolute yield will be 9,5% or annualized > 110% which seem to be very attractive, but even if it will take until end of March still almost 50% annualized yield.
What is the risk that many simply don’t bother to vote? Ownership does not seem very concentrated. Or is there not a minimum vote threshold.
The approval will be based on 2/3rds of votes cast and not of all outstanding shares. So those who simply ‘don’t bother to vote’ will actually have a positive effect on the final result as it increases the % of management’s votes.
Regarding OIIM: In the SSI article is written $4.93/share after fees. Could you please confirm, as I don’t find the source for 0.07 USD/ADS cancellation fee. Today is the Extraordinary Shareholder Meeting and expecting they will release the results latest tomorrow before market opening, the price will likely move upwards if approved. It’s important to know the fee to decide to wait to get full 5 USD or sell at 4.93 USD.
Re: OIIM:
Is there any action required by shareholders? I couldn’t find any proxy materials sent by Interactive Brokers.
IB usually adds corporate action to their systems when there is a week or two left till the vote.
The latest proxy is here: https://www.bamsec.com/filing/117184322008083/2?cik=1095348
Regarding OIIM, why isn’t CFIUS a concern, especially with tensions between China & the U.S. so high (re: semis). This from a recent pitch on VIC:
“Cfius has become increasingly focused on semiconductors, whether for military or consumer electronics applications. Further, Chinese buyers would likely receive the highest amount of scrutiny in any transaction. So on the surface it may look like O2Micro, with 564 patents issued in the United States and 18 more applications pending, as well as a facility in California with 17 staff, and Chinese capital being part of the buyer group, may be at risk. Cfius has also been increasing its jurisdiction, especially after the implementation of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), where “but only to the extent of its activities in interstate commerce” was removed from the definition of “U.S. business”. The block of the attempted 2021 acquisition by Chinese private equity of Magnachip Semiconductor, a Korean semiconductor company with hardly any nexus to the US, demonstrated the increasingly long reach of Cfius. There is some concern about O2Micro being subjected to the same.”
I do not think CFIUS will object to this transaction simply because more than 3 months have already passed since the initial announcement in September and CFIUS has been silent so far. Usually, the agency is more timely. Also, OIIM has almost zero revenues in US, majority of the staff is located in China and Taiwan – so hard to see on what basis could CFIUS object. So I think this is a non-issue and that is why CFIUS approval is not one of the transaction conditions.
The independent proxy advisors recommend to vote “FOR” Going Private Transaction:
https://www.sec.gov/Archives/edgar/data/1095348/000117184323000323/exh_991.htm
I got the mail to vote already a few weeks ago, as record day for voting right was already in December.
Yes, the final distribution after fees should be $4.93/ADS. The $0.07/ADS fee consists of two parts, one is the ADS cancellation fee equal to $0.05/ADS and the remaining $0.02/ADS is the cash distribution fee.
You can see the breakdown in the proxy statement:
https://www.bamsec.com/filing/117184322006879/2?cik=1095348
OIIM: 99+% voted, 99+% voted yes. Price up only 1%+ to 4.75 (after run up the last 1+ weeks from $4.50. Still a 3.8% spread to $4.93.
Opinion: an almost sure deal closing soon.
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230201:nGNXbRp0fX&default-theme=true
RE: OIIM
5.1% is still on the table for a deal that looks like it should close any day now. What are the remaining closing conditions preventing the close? Thanks.
I hope it will close latest end of march as originally timetable to finish all paperwork and maybe currency conversion to pay in USD, as I see no critical conditions open (see page 84)
https://ir.o2micro.com/static-files/0c6c499f-e88c-4ea7-b3b3-beb2d15a5f63
maybe also done faster in a few days or week as I don’t find any critical closing conditions and no information about regulatory delay. Even big almost safe mergers like twitter after Musk finally agreed to avoid judge decision or Tenneco after getting all critical approvals have been still traded with significant spread due to fear that unexpected developments might derail the deals, so I think this 5,1% spread is nothing unusual, but I will not sell before 4,93 USD.
RE: OIIM
I hear that a delisting notice given (http://nasdaqtrader.com/TraderNews.aspx?id=ECA2023-95), hence the pop yesterday.
$4.88 now, still 5c in a week+!
OIIM dropped to $4.6/share again today and the spread widened to 8%. The reason seems to be that the last trading/effective dates, previously set for Feb 24/Feb 27, have been suddenly changed to TBA on Nasdaq. Difficult to say how serious this is and OIIM hasn’t provided any updates yet. After the disaster with GSMG investors surely panicked (in GSMG’s case all communication from the company simply stopped and the take-private is still kind of pending).
Any other insights into this?
I think that sums it up pretty well dt. These China M&A arbs are a vacuum of information sometimes, which is partially why they tend to trade wide and volatile. vs. normal U.S. arbs. There is some speculation of a sudden CFIUS review, but it seems like they would have put out an 8-k for that.
OIIM: per nasdaqtrader.com “The transaction is tentatively scheduled to become effective on a date to be announced (NOT February 24, 2023).” On face value, this means just a delay. Thus, I’d still hold the stock, but I don’t have any special knowledge.
Did GSMG appear in a similar nasdaqtrader alert like OIIM?
OIIM: how is the current valuation and related downside if deal fails?
As far I now GSMG did not appear in a similar alert, very strange… for other Chinese companies listed on Nasdaq with merger last year, they usually appear in a similar alert, e.g., JOBS, BLCT or HLG, and although it’s a surprise why first a concrete date appear and updated, I still see no signs that the OIIM-going private transaction will not close, it is still inside expectation to close until end of Q1 but I hope sooner. Even for big american companies like Tenneco last year we have seen big spreads on almost safe deals in poor general market conditions, just because some weeks of delay vs. inofficial market expectation. It’s difficult to make rational calculations about low-probability but high impact events.
Thanks, Bernd. If indeed GSMG did not have such alert, then this makes me less worried about OIIM.
Wonder if nasdaqtrader ever issued such an alert (a transaction scheduled to be effective, and trading suspended), and the transaction still failed. If so, I’d GUESS this is very rare. Hopefully the only reason is that an OIIM employee got a cold and could not finish the paperwork.
Did Nasdaq Trader previously list a specific date of 24 February?
If Nasdaq previously did list 24 February, perhaps that was a mistake by Nasdaq?
If it previously did not state 24 February, why would they explicitly state that is not the date?
Yes. It said last trading day = Feb 24, and effective date for suspension = Feb 27 (the next business day).
Volume still low as of 2-21, 12.44pm. Lots of buyers in the last 3 days (after nasdaq alert) are under water.
Date Open High Low Close* Adj Close** Volume
Feb 21, 2023 4.7500 4.7650 4.5350 4.5400 4.5400 401,658
Feb 17, 2023 4.9000 4.9000 4.8700 4.8700 4.8700 1,792,500
Feb 16, 2023 4.8800 4.9000 4.8700 4.9000 4.9000 1,023,000
Feb 15, 2023 4.5600 4.8900 4.4700 4.8700 4.8700 1,464,200
Feb 14, 2023 4.5900 4.5900 4.5100 4.5600 4.5600 78,600
Feb 13, 2023 4.6100 4.6400 4.5700 4.5800 4.5800 115,300
See most China arb stocks getting smacked today, not in massive volumes though, perhaps someone liquidating, who knows…
OIIM back to $4.85 at 2:30pm. Sell quick!! or Buy quick!! (depending on your risk profile)
At a special meeting held on January 31, 2023, the shareholders of O2Micro International Limited (OIIM) approved a going private transaction with Right Dynamic Investments Limited. The transaction is tentatively scheduled to become effective on March 3, 2023. The suspension details are as follows:
Company Name/Issue: O2Micro International Limited American Depositary Shares
CUSIP#: 67107W100
Symbol: OIIM
Anticipated Last Trading Date: March 3, 2023
Anticipated Marketplace Effective Date for Suspension: March 4, 2023
Merger Consideration: $5.00 for each ADS held.
OIIM: 2c left! Bid/ask $4.90/4.91.
Trading halt moved earlier to today, 3-2-23 after after-market-hours 8pm.
Nasdaqtrader.com copied below as of 11:30am today.
Wednesday, February 15, 2023
Equity Corporate Actions Alert #2023 – 95
(UPDATED: Add’l revision to timing) Information Regarding the Going Private Transaction for O2Micro International Limited (OIIM)
Category:
Industry Announcement
Markets Impacted:
The Nasdaq Stock Market
Contact Information:
Nasdaq Corporate Data Operations at
+1 877 308 0523
Nasdaq Trading Services at
+1 212 231 5100
Resources:
Press Release
At a special meeting held on January 31, 2023, the shareholders of O2Micro International Limited (OIIM) approved a going private transaction with Right Dynamic Investments Limited. The merger is tentatively scheduled to close prior to the market open on March 3, 2023. In anticipation of the closing, the stock will be halted immediately following the after-hours session at 8 p.m. on March 2, 2023. If the merger closes as anticipated, the stock will remain halted on the day of closing (March 3rd) and will be suspended effective March 6, 2023. The suspension details are as follows:
Company Name/Issue: O2Micro International Limited American Depositary Shares
CUSIP#: 67107W100
Symbol: OIIM
Anticipated Last Trading Date: March 2, 2023
Anticipated Marketplace Effective Date for Suspension: March 6, 2023
OIIM Merger completed today, well done!