Quick Pitches For RFP, CBIO, ISO

RFP – CVR – 250% Upside

CBIO – Liquidation – 22% Upside

ISO – Merger Arbitrage – 6% Upside

 

NEW QUICK PITCHES

Resolute Forest Products (RFP) – CVR – 250%+ Upside on the CVR
A previously highlighted merger seems to be progressing well. Although the price has moved slightly upwards since the last note, I think the bet on CVR is still attractive as the situation appears to be fully derisked from the merger perspective. Resolute Forest Products is getting acquired by peer Paper Excellence at $20.5/share in cash + non-tradeable and non-expiring CVR with a potential of up to $6.5/share. The CVR payout will be driven by the refunds of US softwood import duties. Shareholder approval has been received back in October, consent from Canadian antitrust authorities was announced a few weeks ago, and the HSR waiting period has passed without any objections. The merger should close in the upcoming months. The market is pricing the CVR at only $0.77/share, or only 12% of the full value, while the recent precedents suggest this should be in the 40%+ range.

CVR will pay out any refunds received from the $500m of deposits on softwood lumber duties that RFP paid since 2017. These relate to anti-dumping and countervailing duties imposed by the US on imports of Canadian-produced softwood lumber. The dispute on softwood duties is a recurring theme and the countries have clashed over it a number of times over the last several decades. So the playbook is well known – after the haggling between the administrations, some kind of lumber trade agreement will eventually be reached and a large portion of the duty deposits will get refunded, i.e. the CVR is likely to payout eventually.

After the most recent 10-year-long lumber trade agreement expired in 2015, the US re-imposed duties on Canadian lumber imports from 2017 onwards. Canada has been challenging these duties with NAFTA, WTO, and USMCA. So in a way, the current trade agreement is already 5 years into making. I have no idea how long it might take, but in the previous cycle, the duties were imposed in 2002 and a new agreement was reached and duties refunded by 2006. The developments of the current dispute can be tracked here. The remaining timeline is uncertain and it might take another few years before this gets settled one way or another.

So what is the potential value of the CVR then? At the full $500m refund of duty deposits, it would be $6.50/share. Full recoveries are unlikely and the best-case scenario is probably somewhere around 75%, in line with the outcome of the previous US/Canada lumber dispute (2002-2006), where 81% of duty deposits were eventually repaid. There are also a couple of additional reference points – in 2019 Canadian lumber producer Conifex sold its claim to duty refunds for 42.5% of the full value, whereas in 2021 Eacom Timber was acquired by Interfor and the merger agreement valued duty refund interests at 55% of full value. In contrast, the market is valuing RFP duty refunds at only 12% of the full value. The percentage of duties that get eventually refunded might vary between the companies, but at the levels of Conifex and Eaccom Timber transactions, RFP CVR would be worth $2.7-$3.5/share or 250%-350% upside from the current prices.

Catalyst Biosciences (CBIO) – Liquidation +22% so far, further upside TBD
CBIO shares are up 22% since the last highlight two weeks ago and the liquidation thesis has partially played out. However, due to an interesting twist to the story, there is probably a material further short-term upside left. CBIO liquidation will be implemented as part of the recently announced reverse merger between CBIO and a subsidiary of a Japanese/Chinese biopharma company GNI Group. This eliminates any expenses required for the full liquidation of the company and significantly reduces the expected timeline. CBIO currently trades at $0.6/share or $19m market cap. I estimate total shareholder proceeds to be c. $23m or $0.73/share. This estimate largely relies on the $28m of CBIO net cash+receivables as of Q3’22. The eventual distribution will depend on how several of my assumptions pan out. Shareholders are set to receive the following in the reverse merger transaction:

• $7.5m – initial dividend payable on Jan 12 (ex-dividend date Jan 13).
• $11.5m – my estimated value of the non-tradeable CVR. The CVR will pay out any excess CBIO cash at the time of the closing of the merger. As of Q3 CBIO had around $28m net cash (including the $5m receivable from the previous asset sale due in May’23). Deducting the $7.5m dividend, $1m required cash retainer, and assuming $6m of cash burn (3 quarters at $2m each) and a further $2m of transaction-related expenses, leaves $11.5m for expected CVR distributions. On top of that CVR will pay out any funds associated with the potential monetization of the remaining small CBIO IP assets – I ascribe zero value to this part.
• $4m – my estimated value of CBIO’s 2.5% stake in the new company, which according to the reverse merger announcement is valued at $343m. The assets subject to the reverse merger agreement seem to account for a large part of GNI Group’s business, albeit my interpretation might be incorrect as GNI Group is listed in Tokyo and English language fillings provide only limited info. GNI stock trades at a market cap of c. $450m and thus the announced new-co valuation of $343m might actually be quite realistic. At these levels, 2.5% in new-co would be worth $8.6m or $0.27 per CBIO share. On the other hand, CBIO shareholders are getting this stake only for $1m of retained cash + value of the public listing. To stay on the conservative side I take a large 55% haircut on the management’s estimate and value the 2.5% stake in the new-co at $4m.

Management didn’t provide any estimates with regards to the expected reverse merger closing date but presumably, it should be sometime in H1’23. CBIO expects to pay one or more dividends to the CVR holders in 2023, my guess is sometime in mid’23 after the $5m receivable from the previous asset sale is paid.

IsoPlexis Corp (ISO) – Merger Arbitrage – 6% Upside
Merger in the life science instrument space with 6% spread and expected closing in Q1’23, implying a substantial IRR. The spread seems to be driven by micro-cap transaction size, still pending but highly likely shareholder approvals, and a large downside in case of failure. IsoPlexis is a $63m market cap company producing instruments, chip consumables, and software. Its products are used for capturing and analyzing cell protein data, with applications across cancer immunology, cell and gene therapy and infectious diseases. The company is getting acquired by its peer Berkeley Lights. Merger consideration is 0.612 BLI shares per each ISO. Borrow for hedging is widely available and cheap at 0.7% annual fee.

The merger requires approvals by shareholders on both sides, however, any pushback seems unlikely. 68% of ISO’s shareholders are already in support. On BLI’s side, equity holders representing 13% of outstanding shares have agreed to vote for the merger. Given the positive share price reaction to the announcement (BLI share popped +25%), I think the rest of the shareholders will be in favor as well.

Similarly to ISO, BLI produces instruments and chip consumables that are used in cell data capturing and analysis. The merger will allow BLI to diversify its customer base – the buyer has a strong position among large biopharma clients while ISO boasts a foothold in the academic segment. With this merger, BLI plans to launch its key instrument into the academic market at a lower price point by utilizing ISO’s lower-cost platform. While both companies are still small cash-burning businesses, the buyer’s management has been confident about the combined entity reaching profitability by 2024. This compares to BLI management’s expectations of positive operating cash flow by 2025 on a stand-alone basis. Companies expect $70m in annualized cost savings driven by R&D, G&A, and supply-chain/manufacturing synergies – quite sizable compared to the expected $150m 2024 revenues for the merged company.

 

PREVIOUS QUICK PITCHES PLAYING OUT

SeaSpine (SPNE) – Merger Arbitrage – Completed 21%
In December, we covered a merger of equals in the medical device manufacturing space – SeaSpine was getting acquired by its peer Orthofix (OFIX). The setup became attractive after the initially minimal spread suddenly widened to 21%. This was driven by OFIX itself receiving two takeover bids from the third parties and thus putting the originally contemplated OFIX/SPNE merger at risk. Nevertheless, OFIX’s management’s swiftly rejected the opportunistic bids and reiterated its commitment towards the strategic merger with SPNE. Eventually, shareholders approved the original transaction, and the 21% spread was gradually eliminated within 3 weeks of our pitch.