SSI Weekly – Quick Pitches For TBRD.V, FNCH, TYR.AX

TBRD.V – Strategic Review – 33% Upside

FNCH – Strategic Review – Upside TBD

TYR.AX – Expected Higher Bid – 15% Upside

NEW QUICK PITCHES

Thunderbird Entertainment (TBRD.V) – Strategic Review – 33% Upside
At the beginning of December, we highlighted a potential sale of Canadian film and animation studio Thunderbird Entertainment. Activist Voss Capital (13.3% stake) was targeting all 6 board seats of TBRD with a clear intention of selling the company. The activist claimed that the fair value of TBRD will never be acknowledged by the public markets due to limited communication and guidance from management, which was constrained by non-disclosure agreements (these are standard practice in the content production business). Another large shareholder/activist Railroad Ranch (6.9% stake) vocally supported Voss Capital.

A settlement agreement was reached before the shareholder meeting and it seems the company is now officially up for sale. Voss will receive 3 out of 7 board seats (board size was increased) and management has agreed to form an advisory committee to explore strategic opportunities. Billionaire Frank Giustra will step down from Thunderbird’s board.  He is the founder of Lionsgate Entertainment and owns 12.8% stake in Thunderbird. Voss Capital has previously accused Giustra of being the core reason behind the company’s mismanagement and lack of independence. Voss also agreed to a rather short standstill agreement (will expire after the 2023 general shareholder meeting, sometime in H2’23), so the activist clearly expects the strategic review to be carried out expeditiously.

The lineup of possible buyers seems vast. A full-blown streaming war is ongoing. The demand for fresh content and hence production studios/IP is skyrocketing. Video gaming companies, media/streaming players, and larger production studios are all scooping up smaller studios, e.g. Nintendo/Dynamo Pictures (July 2022), Netflix/Animal Logic (July 2022), Sony/Pixomondo (Oct 2022), Superprod/The Co-Production Company (Sep 2022), Cyber Group Studios//Graphilm Entertainment (Feb 2022), Cinesite/Assemblage (Nov 2022), Mediawan/Plan B (Brad Pitt’s company, Dec 2022), etc. PE firms are riding the wave too and are pumping billions into content production assets (see here, here, and also here, here). Given such industry dynamics, it seems that a reputable content maker with a long track record such as Thunderbird Entertainment should have no problem finding a buyer.

The setup is intriguing, however, assessing the potential buyout price is quite tricky. Thunderbird’s business is split into two parts: (1) content production for third parties and (2) production/licensing of its own IP. The eventual valuation of the company will strongly depend on how a buyer will value TBRD’s own IP/content portfolio and its projects in development. However, the visibility into this business is very limited as the company doesn’t provide a detailed separation between its production studio and IP/licensing parts. TBRD does have over 40 film/TV show/animation assets in its current portfolio. However, its main legacy assets/previous ‘blockbusters’ have either been canceled (Kim’s Convenience, Last Kids On Earth) or are already old with 11 seasons in the making (Highway Thru Hell). TBRD also has 41 new projects in development. Yet, aside from several recently unveiled new launches, the visibility into the remaining project pipeline is basically zero, and a decent part of it is probably in a very early stage of development. While it’s difficult for an outsider to assess the potential value of Thunderbird’s IP/licensing business, fresh content is in high demand and a larger buyer might be willing to pay up to get it. Pure speculation on my side.

Despite this uncertainty around the IP/licensing business, a high-level comparative analysis with peers and industry transaction precedents suggests there’s a decent chance any buyout offers would come at a sizeable premium to the current trading prices. Thunderbird Entertainment trades at 7.7x TTM adj. EBITDA (including interim project financing as debt in EV calculation) vs. WildBrain trading at 12.5x and Boat Rocker Media at 6.2x. WildBrain is a larger company that has a bigger proprietary IP portfolio as well as a higher share of revenues coming from these IP assets. Boat Rocker Media seems to be quite comparable to TBRD in terms of size and revenue split between IP and production, however, the peer is significantly more levered than Thunderbird. As for industry acquisitions, a more levered/worse performing Canadian peer Wow Unlimited Media was acquired at 11x adj. EBITDA last year (the buyer might have overpaid as it had raised a lot of cash during the short squeeze of its stock earlier and needed to deploy it fast to continue its ‘growth story’ hype). Another, much larger peer eOne was acquired in 2019 by Hasbro for 15x EBITDA. Interestingly, Hasbro seems to have changed its mind and put eOne back on sale a few months ago.

A 10x EBITDA multiple for Thunderbird Entertainment leads to a C$5/share target, or 33% upside from current prices.

Voss Capital is a value-oriented hedge fund, which rarely does any public proxy fights. Voss acquired most of its stake in Thunderbird Entertainment in Sept’21 when the company was trading at around C$4.8/share. So far Voss Capital is sitting on a sizeable loss.

One nuance that’s worth pointing out is that Canada is very supportive of content production companies and issues various subsidies/tax credits. These, according to this VIC pitch, typically fund around 75% of production costs prior to staffing a show leading to minimal capital outlays upfront. However, there are certain requirements that must be met in order to receive those grants, including that the company must stay controlled by a Canadian entity. Hence, international buyouts are a bit trickier and might require certain pre-restructuring of operations. While this could be a hassle to some potential buyers, it seems that so far all similar/international buyouts closed successfully – Wow Unlimited Media/Genius Brands (write up on SSI), Hasbro/eOne, and Rainbow/Bardel.

More background on the company and its businesses can be found in these VIC pitches from 2021 and 2022. TBRD’s third-party content production and IP business are mixed in with its two studios. TBRD’s animation studio Atomic Cartoons makes animated TV shows and films (Last Kids on Earth, Marvel’s Spidey and His Amazing Friends, Lego Star Wars: Terrifying Tales, etc.). The factual division makes unscripted TV shows (Highway Through Hell, Gut Job, Deadman’s Curse, etc.) and has also recently started making scripted shows as well. A bigger revenue share and growth at the moment are coming from the production work for the third parties.

 

Finch Therapeutics Group (FNCH) – Strategic Review – Upside TBD
This idea was hinted to me by a member AFPond. Finch Therapeutics is a $24m market cap failed biopharma that trades at $0.5/share vs my estimate of $0.73/share in net cash today. On top of that the company has IP portfolio that management is looking to sell. Liquidation of the company might be in the cards (my humble opinion only). FNCH has recently discontinued the development of its key Phase 3 program CP101, repaid its debt, announced plans to lay off 95% of the workforce, and is currently reviewing options to create shareholder value. Management owns 45% of the company, so incentives seem to be much better aligned than in most of the other failed biopharma strategic review cases. The management has noted plans to retain a tiny staff until May’23 “to support the Company’s new focus and continued evaluation of opportunities to create value for shareholders”. This could imply that a strategic review outcome is expected to be reached by then.

FNCH had $88m of cash at the end of Q3’22. Deducting $13.8m for current liabilities, $14.6 for loan payable, and a further $25m for cash burn since the end of Q3’22 ($20m usual quarterly cash burn + $5m for January and lay-off expenses), should leave the company with c. $35m of net cash, or $0.73/share, today. Going forward, the quarterly cash burn should drop significantly, somewhere closer to $2m-$3m or $0.04-$0.06/share. With a couple more quarters till the end of the strategic review, the net cash will probably be reduced to $0.6/share, still above current prices and still leaving a $5m cushion for any liquidation expenses. However, there might be a significant additional upside in FNCH’s IP portfolio that management is now looking to sell:

  • CP101 drug development program used in treatment for recurrent Clostridioides Difficile Infection (CDI). The disease has approximately 200k cases annually in the US. Phase 2 trials of CP101 met its primary endpoints with 75-80% of patients achieving a sustained clinical cure. Phase 3 trial was discontinued due to difficulties in securing additional capital and slower than anticipated patient enrollment, rather than changed prospects of the program itself (at least that is how management positioned the situation). In the latest Q3 report FNCH this asset was carried at $33m valuation, or $0.69/share (‘In-process research and development’ or ‘IPR&D’). It was also noted that the fair value of CP101 development program is higher than this figure and therefore no impairment is required. The fair value was allegedly calculated based on DCF with management’s projections of post-commercialization cashflows and remaining costs of development. While it is impossible to assert how realistic/accurate these estimates are, even a fraction of it would lead to a material incremental upside (similar to what happened with IMRA last year – see here and here).
  • A collection of pre-clinical microbiome assets. FNCH boasts a portfolio of 70+ US and foreign patents (though this includes CP101-related assets).

 

Tyro Payments (TYR.AX) – Expected Higher Offer – 15% Upside
This is an interesting buyout setup of a small-cap Australian fintech/neobank. Tyro Payments is a A$772m market cap merchant acquirer and provider of other payment processing and banking services to SMBs in Australia. Buyer consortium has already made two offers to acquire the company. Tyro Payments currently trades in line with the last offer of $1.6/share and a material increase in the offer is expected.

Here is a quick recap of the developments leading to today. Since Sep’22, the company has been targeted by a buyer consortium (16% ownership) led by PE firm Potentia. The initial non-binding offer came at A$1.27/share. The largest shareholder Grok Ventures (13%) agreed to support the bid unless a much higher competing offer (at least $1.52/share) appears. The bid was promptly rejected by management as undervaluing the company. Then the consortium improved the bid to A$1.60/share in Dec’22, but this offer got rejected again. The second rejection triggered a backlash from the largest shareholders, including Grok, Wilson Asset Management, QVG Capital, and Harvest Lane (these four shareholders own 20%). In an interesting turn of events, last week management finally yielded to the pressure and announced plans to grant the Potentia-led consortium a four-week due diligence period, explicitly stating that a significantly improved proposal from Potentia is expected. Potentia, in turn, noted it would aim to complete due diligence in an expedited timeframe. AFR speculates that a new bid might come in at A$1.85/share (15% upside).

What makes an improved offer even more likely is that a few weeks ago Tyro reported exceptionally strong H1’FY23 (ending Dec’22) results, with a 45% YoY jump in revenue and EBITDA increasing from A$3m to A$20m. The company raised its EBITDA guidance for FY2023 (ends June) from A$31m to A$39m. Notably, the management has stated that this improved guidance is conservative and accounts for the softening of consumer trading conditions. Given these positive developments, there seems to be plenty of scope for a higher offer.

Valuation wise the setup is quite tricky as Tyro Payments is a fast-growing fintech (22% CAGR in FY18-FY22) that’s still burning cash. TYR is the 5th largest merchant acquirer in Australia and mainly competes with Australia’s four largest banks. The company currently trades at 2x TTM revenues and 20x FY23 EBITDA guidance. The potential A$1.85 acquisition offer would put the company at 2.3x multiple – a large discount to historical revenue multiples of 4.9x during the 2019 IPO and c. 2.9x during 2021. Growth rates today appear to be higher than during earlier periods. This also compares to 2.1x and 3.4x multiples for larger but similar-growth merchant acquirer businesses in other countries – Brazilian player STNE ($3.4bn market cap) and US peer FOUR ($5.3bn).

Potentia is a private equity firm with around A$1bn in AUM focusing on technology and software businesses. The firm seems to have a decent track-record in acquiring and scaling software businesses, including Ascender (Potentia exited in 2021), Micromine (2022) and MYOB (2011). Potentia tried to acquire Nitro Software (covered on SSI here and here) and made three acquisition offers in an ongoing bidding war. Other consortium members seem quite reputable, including HarbourVest (PE firm with $98bn in AUM), MLC Private Equity ($4bn in AUM), and Cbus (superannuation fund managing over $70bn).

The downside to the pre-announcement price of A$0.99/share (as of Sep’22) is 35%. However, it will probably be much lower given the recent strong earnings report and improved guidance. The company has also received acquisition inquiries from strategic buyers, including Australia’s banking giant Westpac, which eventually walked away after due diligence in Dec’22. While Westpac’s decision not to proceed with the merger is concerning, AFR noted that the main sticking point might’ve been Tyro’s contracts with two of Westpac’s competitors – Bendigo and Adelaide Bank – and potentially tight antitrust scrutiny.

26 Comments

26 thoughts on “SSI Weekly – Quick Pitches For TBRD.V, FNCH, TYR.AX”

  1. Re Finch: I think it is worth pointing out that the company is involved in a legal dispute about patents: see footnote 11 of the latest quarterly, or the docket on Pacer: https://ecf.ded.uscourts.gov/cgi-bin/DktRpt.pl?77279 . Imho that’s a really big negative in these microcap liquidations. These legal proceedings often take ages which is very bad given the run rate expenses. And they are costly. I’d be wary of buying this unless you have some sort of opinion on these proceedings.

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  2. Any comment on the “Operating lease liabilities”? – they seem more than material, and while they can, presumably, be terminated early is there usually a early termination penalty to be paid? If so that would need to be taken into account to get a conservative view of the likely remaining cash too wouldn’t it?

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  3. The Hood Park lease is the big portion of the operating lease liabilities. Since there isn’t an early termination clause on the agreement, I’m roughly estimating the penalty to be around 6months~1year of rent, so up to around $5m. Applying similar logic on HQ gets me ~$1.5m, so ~$6.5m in total.

    As writser rightfully pointed out, the outcome of their patent trial set for May 2024 is impossible to predict and is a big negative.

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    • A similar TBRD pitch was posted on another blog and that seems to be moving the stock today. No new takeaways, the thesis unchanged from what Dalius posted above.

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  4. Re: FNCH: Does anyone have any visibility at all into Ferring’s sales of Rebyota? They are a private company and I couldn’t find any info in any FNCH/Seres analyst reports, but that data point is crucial to estimating the value of any litigation-forced license.

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    • Thanks for flagging this FNCH filling.

      I am not sure what to make of it. The stepping down of CEO and COO kind of hints that the company is on track for liquidation. However, the newly appointed external CEO gets $0.4m salary plus a generous bonus and severance package. Also, who would want to step into this role if the company is about to liquidate?

      The newly appointed CEO, Matthew Blischak, is a seasoned lawyer with extensive experience in pharmaceutical IP, having previously worked at Teva Pharmaceuticals and Sunovio Pharmaceuticals. Might be that he has been hand-picked to monetize FNCH intellectual property.

      So all in all I think this makes short term liquidation of FNHC less likely.

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  5. I agree. Given the new CEO’s background, and the strong language throughout the last 10-K and accompanying press release, the co seems to be focused on licensing out (or possibly enforcing) its IP. I like the set-up myself, and have a long position, although the cash burn on the Ferring lit concerns me.

    Also note today is FDA decision day for the product that would have been CP101’s main competitor: Seres’ SER-109. If they win FDA approval, does FNCH go up because the tech and concept is validated? Or down because now CP101 is hopelessly behind and worth less to a competitor? If FDA is thumbs down, does FNCH go down because it’s a red flag for the space, or up because FNCH owns a potentially viable drug that may be only a year out?

    Or is the FNCH market too illiquid and inefficient at this point to come to a “right” answer anytime soon?

    Or could the SER-109 FDA decision be a catalyst for Seres or Ferring looking seriously at buying out or substantially licensing the FNCH IP?

    Between the CEO transition, the SER-109 decision, the fact that the FNCH “transition” was supposed to be completed by end of May, and the post-Markman posture of the Ferring lit (a decent time for parties to talk settlement), I like FNCH a lot in the short-term — basically to see what they make of things by summer, and with the cash hoard offering some downside protection.

    I’m a lot less sold on it as a long-term position (I assume many SSI people feel similarly), basically because I don’t have a good way to value the IP as a monetizable asset.

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  6. FNCH has reported some good news on the leases, which de-risks this investment quite a bit, I think.

    They had previously reported some $35-$40M in present value of future lease obligations, but they seem to have knocked them almost all out on good terms:

    — Cherry Street Lease: now expired per 10Q
    — Inner Belt Road (HQ): was costing $1.2M a year, but per 8K just filed today, landlord seems to have found a new tenant and will let FNCH walk if landlord can finalize the deal
    — Hood Lease: the biggie, was costing $5.6M a year, now FULLY subleased for $4.4M a year in revenue (at least through 2025) (per recent 10Q), for a much more manageable roughly $1.2M a year “loss.”

    This seems like good news.

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  7. Also note FNCH is now touching on all-time lows of 34 cents / $16M market cap, albeit on tiny volume, against roughly $35M value as of 3/31/23. (I get that number from: Cash + Prepaids – Accounts Payable – Accrued Expenses). That’s close to, and maybe a little ahead of, DT’s calculation above in his original post of $35M as of early February.

    I continue to like FNCH at these levels and am accumulating, in expectation of (potential) positive IP announcements in the next few months.

    The concern, as noted above, continues to be legal bills for its offensive case against Ferring, with “professional fees” now up to $4.4M / quarter.

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    • Do you have a view on the value of the IP, or more of a “trust aligned insiders, very cheap balance sheet” play?

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  8. A bit of both. I like the breadth of the IP estate (including beyond what is asserted against Ferring), and the progress that’s been made in the Ferring lit, but I don’t know how to value the IP in part because I don’t know how to value this market. As I said in my 4/17/23 comment above, as far as anyone can find, there’s no visibility into product revenues for Ferring (private) or Seres (just approved, not on market yet).

    Like, if one assumes FNCH can extract a 2-5% royalty on Rebyota revenues from Ferring in a settlement, what is that worth??

    But the stock is otherwise so cheap, I like it, and assume they can get SOMETHING for all their troubles…and not just biglaw bills. (Bringing in a CEO with in-house IP experience also assures me a bit that they’re not going to just get fleeced by their lawyers.)

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  9. Thanks for your reflections. I agree and have a small position myself, but not really able to get true conviction as this very much feels like “sidecar investing”, and hoping management isn’t idiots (which often is a speculative bet in these small co’s..)

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  10. Anything worthwhile about TBRD’s nosedive since Mid-August? Earnings premarket Oct 5, call later.

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    • I have not seen anything aside from the update on the strategic review. The shares of peers have also declined by a comparable magnitude (see BRMI.TO and WILD.TO). And of course you have writers’ strike still ongoing, which probably will have an impact on TBRD as well.

      The TBRD update itself was hardly an update – company reiterated the same things as it had 9 months ago. But it kind of conveyed a feeling that they did not management to find a buyer so far and it is now considering buybacks instead. The wording in the PR seemed a lot like a “FOR SALE” sign. But maybe I am reading too much between the lines:

      “To maximize shareholder value, the Company’s key focus is on several exciting IP and service productions on the horizon. Thunderbird is committed to enhancing shareholder value and is looking at a variety of opportunities, including potentially initiating a share buyback program. Thunderbird remains open to pursuing a liquidity event and the Company’s Board and Management team remain dedicated to capitalizing on opportunities for all stakeholders.”

      https://www.businesswire.com/news/home/20230921136356/en/Thunderbird-Entertainment-Group-Announces-Updates-From-Strategic-Review

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    • I believe it’s the latter. Liquidation appears to be clearly out of the picture, while the company continues to burn cash at a high rate. Based on my back-of-the-envelope calculation, considering the current cash burn rate, there is no upside to the liquidation value left either. Not even considering the implications of the patent dispute the company is involved in.

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  11. I agree this has turned into a litigation play, not a liquidation, though it may be interesting given a now-market cap of just over $6M.

    By my rough calculations, they have roughly $25-$30M in cash left, against a legal burn rate of about $10-12M a year. (Biglaw is expensive). They have mostly neutralized the lease obligations with subleases, and are down to just a handful of employees. Their new CEO is a lawyer with background in patent monetization and enforcement.

    The litigation against Ferring is proceeding through discovery.

    The main issues I see are:

    — What is the lit against Ferring really worth? As I noted above, there’s little visibility into Rebyota sales, and thus what a license fee deal might really be worth.

    — There was talk of finding another partner for their lead clinical asset, CP101, but it’s now been several months and no news. If it was a valuable asset with market potential, you’d think someone would have partnered with them by now.

    — They boast of a large patent estate and talk big about enforcement, but we’ve seen no new licenses or lawsuits in the time since the new CEO came on-board. Is that because they are deep in negotiations? Or that was all talk? Or they don’t dare file new suits until they squeeze something out of Ferring, at the risk of blowing their runway on too many suits?

    And does this mean they have institutional/shareholder confidence in the lit strategy, given that no shareholder or activist has come out publicly to say, “enough, cut the losses, cut the lawsuits, cash the shareholders out” — or is shareholder ownership too dispersed to retail at this point for anyone to really bother?

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  12. The new 10Q is out for FNCH and it is interesting: They still have $29M in cash, and have cut the spend a bit.

    — They’ve managed to cut the delta on their lease liability v. sublease income to $446k a quarter, although that could change with sublease terms.

    — Net of interest on the cash, they got the spend down to about $3.5M a quarter, although that includes just $750k of legal fees, which strikes me as anomalously low, given that discovery in the Ferring case has been robust this quarter.

    Bottom line: At today’s closing price, this is a $6M market cap company sitting on $29M in cash, which could be liquidated and distributed to shareholders imminently if FNCH simply gave up and surrendered their legal claims against Ferring. (And that’s assuming the IP is worth zero).

    Isn’t this what activists are supposed to seize on?

    Anyone want to be an activist with me?

    And while I of course know of and follow activist campaigns, including several on the busted biotechs featured here, I actually don’t know (because I’ve had no occasion to think about) the actual *mechanics* of mounting one. Like:

    — Is the next step to nominate new directors for election at the next shareholder meeting? How do I do that?
    — I see activists post letters on EDGAR. Can any significant shareholder do that?
    — Unfortunately, I see precious few institutional holders remaining, so I guess it’s a retail base? How do you reach them?
    — Would it make sense to reach out to *professional* activists in this space to tempt them to getting involved?
    — If I can line up cash or financing, can I launch a tender offer? Really?

    It just strikes me as odd that, right now, for $3M you could buy 51% of the company and begin a 3-4x-return liquidation….but the practical and legal impediments seem insurmountable. (Yeah yeah, I appreciate that the act of purchasing that many shares would substantially raise the share price; the buyout premium and all, but you know what I mean).

    Anyone want to team up and work through this?

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    • I’m not the right person to help here but I commend your attitude and intension.

      Maybe Jeremy Raper might be able to guide you (wouldn’t surprise me if he became the next King Icahn).

      What about contacting funds like BML (?) or Tang Capital to see if they want to work together?

      I noticed people on twitter like @proxycontests who might be the right people to get in touch with.

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      • Much appreciated, will reach out to some of these folks.

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    • I have no idea how to run an activist campaign. If you look at the ownership, insiders own close to 50%, doubt an activist can do anything here.

      Thanks,
      Vincent

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  13. Take it from Ms Pelosi, who is on the board and what does mgmt pay themselves. My husband says that’s all that matters. Oh but also imagine if you started a company with a dream, and you have a bunch of cash, do you want to give it up to your shareholders or do you want to make them 100-5000x what they invested in you!

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