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.