Merger Arbitrage, 20%+ Upside
A few members have reached out to me regarding the BML Investment Partner’s offer to acquire Astrotech at $17.25/share (16% spread currently). I think the offer is likely to be rejected and this actually presents an interesting opportunity to short ASTC. Price gap to pre-announcement levels stands at 20% and the remaining timeline will likely be brief as it shouldn’t take long for the management to reject the bid. However, the idea comes with all of the related risks of shorting a nano-cap stock with limited liquidity and rather tight borrow ($500k availability, 7% fee on IB). Do your own due diligence before making any investment decisions.
Here are the puzzle pieces for the ASTC short thesis:
- There is basically no way this management will ever agree to sell ASTC. The company is run by Thomas B. Pickens III (owns 8.3% stake), who is a very long serving chair/CEO and has recently taken over the CTO role as well. Pickens has a terrible track record and has been running ASTC as his personal piggy bank. Over the last 10 years, since ASTC sold its last ‘real business’ in 2014, shareholder value has been completely decimated with the share price going down from $400 in 2014 to $11-$12/share before the buyout proposal. ASTC’s playbook over the last decade has been pretty simple – (1) announce a new product in a hot/trendy sector; (2) raise equity after the price spikes; and (3) slowly cash out via massive salaries. Pickens gets over $1m in annual compensation – quite hefty, considering ASTC’s $15m capitalization and no actual operating business over the last 10 years. The company is clearly run only for the benefit of the management and the sale is definitely not aligned with their incentives. At $17.25/share offer, Pickens’ 8.3% stake would be worth only 2 years of his annual salary.
- Poison pill provision is place, which significantly restricts any activism opportunities at ASTC. The provision entails a 15% ownership threshold and expires in Dec’23.
- The market has mistakenly interpreted ATM’s response to the buyout offer as a big positive. Here’s what happened – BML’s offer came just after ASTC’s recent announcement of a new ATM program, yet another attempt to launch a highly dilutive equity raise despite the company not even requiring additional liquidity at the moment. In the letter of interest, the activist has condemned the equity raise. ASTC quickly replied that they will review the bid and, interestingly, terminated the ATM program. While the sudden 180 from the management does look interesting, I don’t think it really alters the fact that they are unlikely to sell the company. The termination of the ATM program could also be easily interpreted as an attempt to soften impact of an eventual offer rejection.
- This whole buyout move from BML seems unusual. BML is definitely a reputable activist in the micro-cap space has been involved in a couple of successful cases covered by SSI, including MTCR (here and here) and IMRA. They are also the largest shareholder of Astrotech, holding a 13.7% stake. However, the activist has mostly been focusing on biopharma net nets and has never acquired any company or even made a buyout bid before. The fact that they’ve chosen ASTC as their first buyout target is puzzling as the setup just doesn’t look appealing – hostile and self-interested management that would never sell, poison pill provision, limited upside to net cash and ASTC’s operating business/technology seemingly having minimal/zero value, etc. The offer values ASTC at $29m and BML’s bid included a condition of ASTC retaining at least $35m net cash at closing. As of Mar’23, the company had $44m cash and is burning around $8m-$9m per year. Transaction costs and wind-down expenses would narrow the gap to net cash even further.
There are several risks involved with shorting ASTC:
- BML might have some kind of a gameplan for ASTC behind its sleeve. Worth noting that the activist has increased its stake from 10.8% to 13.7% this February, after the poison pill had already been implemented.
- Timeline is unclear and management might take a few weeks to reject the bid.
- In the meantime, borrow might disappear or the fee could skyrocket. Given ASTC’s liquidity, short squeeze risk is probably not completely out of the cards either.
ASTC’s is mainly a manufacturer of mass spectrometers. The business is segmented into three subsidiaries:
- 1st Detect – mass spectrometers for bomb/drug detection in airports. The company begun to develop the product in 2007 and was launched in 2019. Since then, annual revenues still haven’t climbed north of $1m. Travel recovery apparently had no positive impact on the business as the last 3 quarters were extremely weak for ASTC, all showing very significant drop of revenue YoY.
- AgLAB – mass spectrometers for use in hemp/cannabis market focusing on optimizing yields in the extraction and distillation processes. The venture was announced in 2019, taking advantage of the cannabis boom in the prior year. Manufacturing has started in Q1’23.
- BreathTech – in 2020, amid the COVID pandemic, ASTC announced development of another new product called BreathTech – a tool for testing COVID or other lung diseases through analyzing person’s breath. Did I mention it also involves AI? Here’s most recent update from FY Q3 (ended Mar 31):
We are continuing to collect additional diseased and blank breath samples so that the artificial intelligence system can learn to detect against diverse and challenging breath backgrounds with the ultimate objective of the detection algorithm being able to meet the criteria.