Merger Arbitrage – 8% Upside
The idea has been shared by Luis.
The target’s market cap is just $20m, so the liquidity is not great although the average daily volume has improved to $200k lately. Environmental remediation services company Charah Solutions is getting acquired by SER Capital at $6/share. The spread stands at 8% with expected closing in Q3. The deal is likely to be completed without any major hurdles.
Here’s why CHRA looks like a low-risk arb opportunity:
- Shareholder support is pretty much guaranteed. The buyer has secured voting agreements from 48% of outstanding shares, including the largest shareholder Bernhard Capital Partners (which also owns all of CHRA’s pref stock that will get redeemed at par).
- Low regulatory risk as this is a tiny ~$200m EV deal for a financial buyer.
- No financing condition. Committed financing has been provided and waivers have been received by existing creditors.
- The acquirer, SER Capital, is a freshly formed PE firm focused on industrial, environmental waste & recycling, and renewable energy sectors. It has just raised $475m for its debut fund and CHRA is the first investment. So they obviously have the capital for the acquisition and are highly motivated not to screw up the first deal out of the fund. The partners of SER Capital have fairly reputable backgrounds, all
coming from partner/senior exec. positions in ECP ($16bn AUM energy investments focused fund) and Hannon Armstrong Sustainable Infrastructure Capital. - There are no unusual terms or conditions in the merger contract.
There are a couple of worrying nuances worth noting, yet neither of these poses a material risk to the merger.
Firstly, CHRA is not up to date with its financials since Q3’22. The company still hasn’t posted its annual results due to “limited resources of financial reporting and accounting personnel”. Q4 disclosure on revenues and net loss figure indicates quite bad Q4 results – increased loss were driven by supply chain/logistics issues and asset impairment charges. Nonetheless, the buyer must’ve known all of this before signing the definitive agreement and there should be no unexpected surprises till the merger closes.
The second titbit is the lack of clarity on why SER Capital considers CHRA to be a good acquisition target. CHRA is an extremely levered entity that is burning cash fast. The company has $140m of debt, $66m of preferred stock, and $77m of asset retirement obligations. All of that versus just a $20m market cap. The cash is running out and there’s limited visibility into the business dynamics. Company’s $140m worth of listed baby bonds (ticker: CHRB) trade at a 62% discount to par or 22% YTM, suggesting the debt is likely to be impaired in any restructuring scenario. Maybe SER Capital has a plan to recapitalize the balance sheet or get rid of this mountain of debt with some kind of financial engineering. The removal of public reporting costs would also bring the company closer to cash breakeven. Nevertheless, with the current leverage, it is hard to see why SER Capital would be willing to buy CHRA at a $200m+ EV valuation.
On a more positive note, SER Capital positions itself as renewable energy & environmental specialist. They should have a good understanding of CHRA’s environmental remediation business and perhaps see a path towards operational improvement.