Ideas Elsewhere: Target Hospitality (TH)

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Potential Higher Offer

This is an interesting bet on a higher offer from a controlling shareholder. The situation has recently been covered on the Yet Another Value Podcast. Target Hospitality is a $1.2bn market cap company that provides temporary rental accommodations, focusing on housing for migrants and energy exploration industry workers. In late March, TH received a non-binding takeover bid from its majority shareholder, TDR Capital (owns 65%), at $10.80/share. TH shares are currently trading 8% above the offer level. Several aspects suggest that a higher bid might be in the cards. TDR’s bid comes at a modest 21% premium to pre-announcement levels and values the company at an undemanding c. 5.5x FY24 EBITDA. Shortly after the offer announcement, the second-largest minority shareholder, Conversant Capital, raised its stake in the company from 4.7% to 5%, indicating an intention to evaluate the offer. Given that the transaction would likely require approval from TH’s minority equity holders, the presence of the large minority shareholder seems to increase the chances of a higher bid from TDR Capital. There is also a possibility that other interested parties will emerge. TDR previously tried to acquire TH in 2020 and stated at the time that it was not interested in any alternative transactions. This time, however, the offer announcement did not include similar language. This, coupled with the fact that TDR is a Europe-focused PE firm with no other US-based companies in its portfolio, suggests that the controlling shareholder might be open to a sale to third parties. While there are no close publicly-listed peers, valuing TH at a blended 7.5x EV/EBITDA multiple of its comps CVEO (trades at 5x EBITDA) and VVX (8.5x) would imply a price target of $14.5/share (25% upside). Even if the ongoing sale process does not result in a transaction, the downside seems to be protected by TH’s low valuation.

Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring the attention of SSI subscribers. I might not actively follow the developments of these ideas, so there might be limited updates or follow-ups in the comments section.

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11 thoughts on “Ideas Elsewhere: Target Hospitality (TH)”

    • no but close, from the latest earnings report: ” We continue to benefit from this expanded presence with 72% of 2023 revenue being derived from committed contracts backed by the US government.”

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  4. So what’s the updated take here? TH has experienced a roughly 15% decrease in revenues and potentially a 15%-20% reduction in EBITDA. The stock is now trading at 5x pro-forma adj. EBITDA, aligning with historical levels. Additionally, the stock has fallen 17% from its pre-offer levels, which corresponds to the proportion of earnings lost. Tempted to think that the buyout optionality is effectively free. However, it seems too difficult to handicap all the political and contract stability risks involved with the Pecos operations (probably around 50% of TH’s EBITDA).

    The contract is due for termination or extension in November. Considering the election turmoil, decreasing immigration levels of unaccompanied children (which is Pecos’ focus), and Biden’s recent executive order, it is difficult to predict whether TDR will still be interested in buying. Notably, the buyer previously retracted a non-binding offer in 2020/2021.

    I’m also not sure about the implications of Biden’s recent executive order. While it does not directly involve unaccompanied children, it could affect immigration patterns for families. And as I understand, unaccompanied children often arrive at the border with families, and then the get sent ahead. Thus, this order could still potentially impact the immigration of unaccompanied children and further reduce the demand for facilities like Pecos.

    Assuming TDR would lower the bid to 6x adj. EBITDA (same mult as the initial offer), that would result in $9/share or 20% upside. Downside is probably somewhere around 20% as well? After the recent developments, it’s not impossible to argue this business is worth <5x adj. EBITDA. In 2021-2023, when it was trading at 4x-5x multiple, the outlook seemed much better than now. At the time, the company had potential to win 3 government contracts. It has lost the 1st one and won the 2nd, but at substantially inferior economics than anticipated. The outlook regarding the 3rd contract is much dimmer now than before. Meanwhile, the HFS (oil & gas) related business is very cyclical and deserves low multiple.

    So I guess this situation is just overly complex for casual observers like myself, but I am eager to hear more informed opinions.

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  5. TH just disbanded its special committee that was supposed to evaluate Arrow Holdings/TDR Capital’s takeover offer. Turns out, “Arrow didn’t reaffirm the TDR offer” after the company lost a major contract. The whole announcement reads pretty weird, especially after 4 months of total silence from the board. Were they just sitting around waiting for Arrow to say something? Gotta love that “great” shareholder communication. But honestly, not a shocking outcome. The bulls are now saying the company is super cheap, but I’m not so convinced given all the political risk involved, uncertainty around 3rd contract, and weakening oil, etc. Might reassess after the election.

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