Reverse Merger & Large NOL Assets
This setup was originally covered on VIC several months ago. Since then the asset sale has closed significantly reducing the risk/uncertainty. What remains is a cash/NOL shell. Despite that, the stock trades 16% below the write-up levels and below net cash. The situation presents a low risk bet on management finding an attractive acquisition target, which would allow the company to utilize the $12bn in net operating losses.
Last month ContextLogic completed the divestment of its operating business, e-commerce platform Wish.com (also changed the ticker from WISH to LOGC). The RemainCo is a shell with $161m in net cash ($6.03/share vs $5.13/share trading price) and massive net operating loss carryforwards totaling $11.7bn ($2.7bn federal and $9bn state). Management has been fully reshuffled post-sale, and is now trying to monetize these NOLs and is looking for a reverse merger target. If these efforts are unsuccessful, the company will simply return the cash to shareholders. The interest earned covers the administrative expenses so there is no value leak from the cash burn. From the conf. call:
This structure provides the opportunity to work with a financial sponsor in order to maximize the value of the NOL while consuming very little cash, if any, in the process. If the outcome of that process does not result in anything, we will promptly return cash to shareholders.
Assuming a reverse merger enables full utilization of the NOLs, their value should be equal to the created deferred tax asset. At 21% federal tax rate, the DTA from the federal NOLs would stand at $585m. Discounting it by 10% over 12 years, would result in the potential value of $7/share – more than double the current share price. Any value realized from the state NOLs would come on top of that. However, finding a target that both large/profitable enough and geographically compatible to utilize the state NOLs is very difficult. Therefore, management views the state NOLs more as “a potential bonus” and is focusing primarily on the federal assets. Nonetheless, in a blue sky scenario (at 8.84% tax rate in CA and 10% discount for 12 years), state NOLs could be worth another $9.5/share.
The amount of precedents of value creation through similar NOL shell mergers is sparse. The only example I’ve been able to find is WMIH/NSM merger in 2018 and it wasn’t exactly inspiring. WMIH was a $6bn NOLs shell, created from the bankruptcy, which followed the GFC. In 2014-2015, WMIH raised a lot of debt and started looking for a reverse merger target to monetized NOLs. The search extended for 3-4 years, during which management was raking very nice salaries, doing next to nothing. The stock price crashed (in part due to the corporate tax rate change in 2017, which lowered the value of NOLs), leaving shareholders and analysts furious. This call in Dec’17 has been probably one of the most heated conf. calls I’ve ever come across. WMIH finally found a target in 2018. Merger presentation showed the value of NOLs to be equal to deferred tax asset of $1.26bn ($6bn NOLs x 21%). The stock price jumped by 2x on the news, but was still trading substantially below the 2014-2015 levels.
There’s a risk that LOGC could end up moving along a similar trajectory with management spending years looking for the target, collecting salaries, or even deciding to raise expensive debt along the way. The facts that management owns pretty much no shares and has no meaningful track record doesn’t inspire confidence. The new chair/CEO Rishi Bajaj is the founder of ALTAI Capital Management, a PE firm with very limited available information. From the 13F-HR filings, it seems that ALTAI Capital is running an extremely concentrated portfolio – only 5 positions. Assets under management has stayed in a very similar range ($100-$300m) since the first 13F report in 2011. The concerning thing is that ALTAI hasn’t established any position in LOGC so far, despite Bajaj sitting on the board since Nov’23 and now having the best visibility into any potential NOL monetization prospects.
Nevertheless, several factors suggest that the outcome at LOGC might be more positive than with the above mentioned WMIH:
- Large cash position protects downside risk. This wasn’t the case for WHIM, which had very little cash except from the proceeds raised through debt/pref. stock.
- Management has been very upfront about its current plan and repeatedly reassured that LOGC will promptly return the cash if a merger target is not found.
- The chairman/CEO Rishi Bajaj has agreed to receive no salary (only $1/year), which somewhat reduces the risk of management dragging the process for years. However, the other senior execs are still getting paid handsomely – the CFO is getting $550k/year + $450k bonus. The 4 non-exec board members are getting $150k/year each, for largely nominal roles.
- Management’s clear communication around the potential deal rationale somewhat offsets the risk of a highly value-destructive merger. To effectively utilize NOLs and avoid potential lawsuits, management must secure a profitable business. I do not think there is a risk of seeing SPAC type cash burning target.
As my knowledge in NOL shells is limited, I would really appreciate any insights from more knowledgeable members, especially if you are aware of any successful or unsuccessful precedents involving NOL shells.
I assume any transaction would have to be shareholder approved? Logc barely got enough votes to approve the asset sale. There is an activist in here and event guys, assuming there is a vote cannot imagine anything self serving/subpar would get through.
I think so too – shareholder approval would be required. Nevertheless, there is a risk that the market reacts negatively to any proposed acquisition and the stock dives down.
Is there a reason that LOGC can’t distribute a significant amount of the cash now? Why do they have to wait to distribute the cash until they find a merger partner?
Management does not want to distribute this cash. Instead they are looking to spend this cash on buying a profitable operating business, which would allow to utilize NOLs.
So the expectation here is that value of the to-be-acquired-business + value of NOLs is more than the current cash on the balance sheet.
Outside of SPAC type mergers, is it normal for a reverse merger to be done in an (almost) all-stock format? To utilize more of the NOLs, is more cash or more stock the better route in a reverse merger?
The acquisition of operating business is more likely to be done for cash and then NOLs would be utilized from the profits that this business will generate over the coming years. That’s why the company is not distributing this cash to shareholders. If new stock is issued, it might trigger change of control clause which would in turn limit utilization of NOLs (albeit I do not know the exact details when NOLs can be utilized and when not, so might be wrong on this one)
Have management given any timeline at all? How long will they spend looking for a merger?
I do not think management gave a specific timeline, so it’s open to interpretation. My expectation is that the process might take around half a year – if by the end of 2024 now suitable acquisition target is found, the company will liquidate.
Instead of a reverse merger, couldn’t a profitable company purchase all of LOGC and use the NOL’s?
No. NOL’s have a lot of limitations and among them are severe restrictions on ownership changes. Simply said, if you take over the shell the NOL’s will expire. That’s why all these NOL’s shell go through a lot of hoops and take a lot of time to make a deal (if any).
How is it then that SPLP gets to use the massive NOL’a of STCN? SPLP owns ~85% of STCN.
Check out this VIC post to get an idea of how Steel Partners structures these trades.
https://www.valueinvestorsclub.com/idea/IGO_INC/0086519597
@ryans
It’s interesting that SPLP is also on the shareholder list of LOGC, and purchased additional 726k shares during 2024Q2 (vs. 74k toehold in Q1).
Now SPLP owns 3.3% of LOGC. Average cost may be around $5.7.
Can there be an NOL angle from SPLP’s involvement?
To me this would your ultimate downside. They propose crappy deal, gets voted down, but they stubbornly hold the cash while quibbling with shareholders for some extended period of time, maybe can see $4.5 then temporarily? Hard to see it much lower than that. Also love that this has legacy shorts from WISH, and probably in quite a bit of factor baskets that could really move well with IWM/Growth rotation.
Why would any shorts still be holding? There’s been plenty of time for them to cover and plenty of volume.
https://fintel.io/ss/us/logc
Makes no sense to me outside of this just being in quant short factor baskets.
They could be waiting for R2K rebalance perhaps ? Could see some selling pressure
To fully utilize the DTA they will have to take on quite a bit of dilution from their financial sponsor. Have you penciled out the potential math on that? How much of the DTA value do you think LOGC would capture in the pricing of a deal with their financial sponsor? Would it simply be their pro-rata ownership or do you think LOGC would capture more than their share of the DTA value via the deal pricing? Hopefully that makes sense. Thanks.
I do not really know what could be achieved in terms of structuring any deal in a ‘NOL-efficient’ way. The aim would obviously be to ensure that a large part of NOLs are utilized without triggering change of control clause.
Let’s say LOGC is only able to buy a small non-growing business at $150m or 10x pre-tax income. I.e. the business spits out $15m in pre-tax earning annually. Such acquisition would allow to utilize only small part of NOLs, resulting in federal tax savings of only $3m a year. At 10% discount rate that is incremental value of $30m on top of the current cash pile. I think that’s the minimum at what these NOLs should be worth.
$30 million doesn’t sound like a very large margin of safety, for a stock with current market cap of $130 million. And I would usually require a much higher discount rate than 10% for a small cap of this size.
I think we really need to know much more about how change of control impacts utilization of NOLs, because for further upside we must merge with a larger business and issue new shares.
They should supersize their balance sheet via debt and a big rights offering. Not sure why this isn’t considered as a reasonable path to full monetization as opposed to dilution via financial sponsor. Maybe a rights offering is logistically difficult given the NOL restrictions.
They could impair their NOLs if they did a large rights offering, if I understand it correctly even 5% shareholders increasing their ownership by 50% within a three year period could impair the NOLs. Google IRC Section 382 discussions.
I wondered if they could just buy short dated T-Bills to generate 5% returns, or $8M a year tax free, but that’s still only 30 cents/share annually and would take decades to build up a portfolio large enough to make a dent in the NOLs. They need to find a solid safe business that can generate at least $15M/year in pre-tax income, and that likely will take a while.
What is Rishi Bajaj’s incentive to create value quickly through the to-be-acquired business + value of NOLs? He has agreed to receive a salary of USD 1/year and the only Equity Incentive Plan I found on the 8-K is the following:
“He will receive an initial grant of 20,000 restricted stock units (“RSUs”) pursuant to the Company’s 2020 Equity Incentive Plan having an aggregate value of $105,200 based on the closing price of the Class A Common Stock on the date of grant, which vests with respect to 1/3rd of the total number of RSUs on each annual anniversary of the date of grant, as long as Mr. Bajaj continues to serve on the Board through such date.”
The fact that ALTAI has not a position here despite him being on the board since Nov 23 is not reassuring (or could this be seen as some sort of insider trading?)
Very weird.
Agree, hardly any clearly visible incentives for Rishi to pursue value accretive M&A. And that’s the risk/peculiarity I have already noted in the write-up.
There are some comments about Rishi being instrumental in the sale in some news releases (inferring that that’s why he’s now CEO), but… was he really useful in preserving shareholder value here? Or we do just have that perception because of how events unfolded? Sure, Rishi joined on Nov29 and the sale was announced on Feb12… But LOGC had already received an unsolicited first bid from Qoo10 on June28 2023 and was already reviewing alternative. Did Rishi actually drive anything here? Hard to know from the outside. Whole play by play on pages 33 to 49: “https://www.sec.gov/Archives/edgar/data/1822250/000121390024023118/ea0201011-02.htm”.
Wouldn’t this normally play out over 3+ years as a reverse merger so as to fully utilize the NOLs? I mean $161m in net cash are not going to move the needle with $12bn in net operating losses.
It will depend on what kind of company they will decide to merge with, but, yes, utilizing the NOLs will likely take a very long time. However, you don’t need to wait that long to win here. You only need LOGC to orchestrate a value-creating reverse merger, in which the NOL value would be properly recognized. That way LOGC would get a larger stake in a combined company than what its cash contribution alone would warrant.
Am I missing something or should this be trading higher? Even assuming lower rates increases burn and cash per share decreases to around $5.70 by EOY, that’s an 11% return or over 20% annualised. Is the market pricing a much longer timeline into next year?
LOGC’s net cash stood at $150m as of June, compared to $162m immediately after the closing of the Wish sale. Most of the value leakage was due to $13m in G&A expenses, $9m of which were related to the asset sale. Going forward, management expects interest income ($2m per quarter) to more than offset operating expenses. The projected net cash position by the end of the year stands at $155m. That’s $5.68/share versus the current price of $5.39/share.
In the earnings release, management reiterated that it is reviewing “strategic opportunities” regarding the potential monetization of NOLs ($12 billion) through a reverse merger:
“We have begun reviewing and identifying strategic opportunities with our advisors. These opportunities will potentially allow the Company to utilize the NOLs and certain other tax attributes which can generate substantial value for our shareholders. We look forward to updating you in the coming quarters regarding our progress.”
I think the problem is this “$5.70 by EOY” net cash may not be returned to shareholders if they [unsuccesfully] continue to look for ways to monetize NOLs. And then as (if) the Fed cuts rate, we likely see an increasing cash burn slowly eroding NAV. This being said, at $5/share entry point today, I agree that this feels like it has limited downside for quite some time:
starting cash ois-implied SOFR interest @ SOFR expenses net burn ending cash liabilities EOQ NAV/Share
24q3 157.00 5.40% 2.12 -4.00 -1.88 155.12 5 5.71
24q4 155.12 4.81% 1.87 -4.00 -2.13 152.98 5 5.63
25q1 152.98 4.11% 1.57 -4.00 -2.43 150.56 5 5.54
25q2 150.56 3.76% 1.42 -4.00 -2.58 147.97 5 5.44
25q3 147.97 3.59% 1.33 -4.00 -2.67 145.30 5 5.34
25q4 145.30 3.36% 1.22 -4.00 -2.78 142.52 5 5.23
26q1 142.52 3.00% 1.07 -4.00 -2.93 139.59 5 5.12
formatting issues:
24q3 : 157.00 starting cash @ 5.40% SOFR = 2.12 interest, -4mm overhead = -1.88 net burn => NAV 5.71/share net of 5mm liability
24q4 : 155.12 starting cash @ 4.81% SOFR = 1.87 interest, -4mm overhead = -2.13 net burn => NAV 5.63/share net of 5mm liability
25q1 : 152.98 starting cash @ 4.11% SOFR = 1.57 interest, -4mm overhead = -2.43 net burn => NAV 5.54/share net of 5mm liability
25q2 : 150.56 starting cash @ 3.76% SOFR = 1.42 interest, -4mm overhead = -2.58 net burn => NAV 5.44/share net of 5mm liability
25q3 : 147.97 starting cash @ 3.59% SOFR = 1.33 interest, -4mm overhead = -2.67 net burn => NAV 5.34/share net of 5mm liability
25q4 : 145.30 starting cash @ 3.36% SOFR = 1.22 interest, -4mm overhead = -2.78 net burn => NAV 5.23/share net of 5mm liability
26q1 : 142.52 starting cash @ 3.00% SOFR = 1.07 interest, -4mm overhead = -2.93 net burn => NAV 5.12/share net of 5mm liability
I get the point but I find it hard to believe shareholders wouldn’t just force a liquidation by Q2 2025 (at the latest). Market implying a search continuing on into 2026 seems unusual. If a deal is on the cards at that point surely some value will start to be applied to the NOLs.
What leverage do shareholders have to “force” a liquidation?
Among the largest shareholders (not sure I have the latest info), we have:
Blackrock (6.3%) index fund
Vanguard (4.9%) index fund
Formation8 Partners (4.1%) defunct VC firm
Notable Capital (3.5%) VC firm
Steel Partners (3.3%) activist
General Atlantic (2.5%) VC firm
Irenic Capital (2.2%) ex. Elliott special situation guy
LOGC’s Q3 results came out.
– Cash stood at around $150m or around $5.7/share vs current $6.43/share stock price. The company also had $8m in other current assets (mostly restricted cash) and $5m in WC liabilities. The balance sheet is very clean now.
– There’s almost no cash burn – the company spent $3m on G&A and earned $2m interest on the cash.
– Management said it has made “encouraging progress” with the strategic review and will provide a more substantive update in the coming quarters.
Quite the run-up in the last month on no news whatsoever I can see. Random walk? Expectation of more favorable federal treatment/flexibility on NOLs in a Trump admin?
I guess the whole market is up too, so if I squint I can kinda see “more profits means more companies looking for tax arbitrage, which means more juice for LOGC’s plan.”
No idea what the market is discounting in terms of NOLs and what has driven LOGC share price over the last month. Maybe that is related to Trump’s election and his promises of deregulation (i.e. more deal friendly environment).
The stock now trades at almost $2.5/share (or $62m) premium to cash on the balance sheet vs discount at the time of the write-up. At these higher prices the risk/reward is not as attractive, so I think it makes sense to take some/all chips off the table, especially since we do not have any further developments/news regarding NOL monetization.
“if I squint I can kinda see “more profits means more companies looking for tax arbitrage, which means more juice for LOGC’s plan.””
=> true, although I’m thinking we could also argue the other way: “a Trump administration likely to be easy on corp tax rate makes NOLs slightly less valuable”. But then again, the NOLs are so large, and the outcome so binary (find a target or no), that I guess “how likely NOLs are to be used” is more important for this trade than the tax % used to calculate PV itself. So maybe your squinting is the right way to see it.
In any case… I find that entering a cash shell at $5 at write-up and exiting at $8 on little/no development seems like a decent win, and r/r isn’t quite as compelling now. Future will tell if that was the right call.
up 15% after partnership with BC partners.
ContextLogic Inc. (NASDAQ: LOGC), (“ContextLogic” or the “Company”) and BC Partners, an alternative investment manager with c.€40 billion in assets under management, today announced that a fund advised by BC Partners Advisors L.P. will purchase up to $150 million of convertible preferred units (the “Preferred Units”) of ContextLogic Holdings, LLC, a newly-formed Delaware limited liability company (“Holdings”) and a wholly-owned subsidiary of the Company.
The investment and commitment by BC Partners, which is being led by BC Partners’ credit arm, together with cash on hand, provides ContextLogic with access to up to $300mm of cash and $2.7bn of cumulative net operating losses. Together BC Partners and the Company will review, identify, and evaluate strategic opportunities for the benefit of ContextLogic and its stockholders. The partnership follows successful initiatives by management to create a streamlined administrative and financial structure to achieve the Company’s strategic goals of acquiring and/or building one or more operating businesses.
LOGC is now trading at only $0.8$/share premium to net cash, valuing the NOLs at only 12% of dt’s estimation of Federal NOLs’ net present value ($7/share).
With the world in chaos right now, it may be much more difficult to find a profitable biz to merge into.
-15% vs last week from these news:
ContextLogic Inc. to Commence Trading on the OTC Markets and Delist from Nasdaq
https://ir.contextlogicinc.com/news-releases/news-release-details/contextlogic-inc-commence-trading-otc-markets-and-delist-nasdaq
Anyone has experience with the price and liquidity impact (apart from obvious short term -15% reaction here)?
Delisting sell-offs can sometimes be pretty interesting since they usually don’t reflect anything fundamental about the business. In these cases, the rebounds are fast, but that didn’t really happen here yet. I suppose that letting the delisting happen kind of sends the wrong message, and the market’s reading this as the deal not happening any time soon.
Will an OTC listing make LOGC less attractive in the eyes of potential merger targets? Or is LOGC’s main attraction its NOLs?
There was run-up in stock price before the delisting sell-off, so LOGC is actually not cheap right now, valuing the NOLs at >20% of dt’s estimation of Federal NOLs’ net present value ($7/share).
LOGC mentioned in Swen’s Weird Shit Conference
“ContextLogic (LOGC) is a net operating loss (NOL) shell with no operations and minimal cash burn. It trades for USD 6.7/share, but has USD 6.7/share in cash and USD 13.4/share in tax assets (assuming a 21% corporate tax rate). The stock is likely worth USD 10-15/share depending on how quickly management make an acquisition to monetise the tax assets. Management are highly incentivised: private equity firm BC Partners provided funding in February 2025 for an acquisiton and own 40% of the diluted share count and two board seats. The CEO is an activist who can make USD 12-50m if the stock goes to USD 10- 21/share. I believe an acquisition is a likely catalyst in the next six months.”
https://static1.squarespace.com/static/57eff176e58c621a298bfa61/t/6845be2521e0591e0a26b1b0/1749401125457/ContextLogic+Presentation+%282025.06.04%29.pdf
Net cash has increased to $6.7/share?? I thought it was $5.7/share.
Not sure where they got their numbers from. I see both the NAV, which is basically equal to net cash, at around $5.50/share.
Not as of today, but on a pro-forma basis. That figure provided in the presentation is somewhat misleading as it’s not the status quo, it assumes BC Partners injects additional USD 75m and converts their preferred into common. Should this not happen (e.g. if no target was identified) then BC Partners would ask for the already injected USD 75m back and current shareholders would only receive the remaining cash, which based on my calculations as of today is circa USD 5.50 per share.
Q3 gross cash at $218 m, a decrease of $1 m from last quarter.
Net equity at $141 m, or $5.3/share (assuming 26.68 m s/o).
Do I have it right that LOGC is now a PE backed holdco? In their presentation they communicated 1-2% dilution p/a from management comp. The US Salt deal also looks quite expensive compared to CMP.
Yes, that’s kind of been the case since the February 2025 partnership with BC Partners Advisors. In the recent US Salt acquisition announcement, they noted LOGC “will be focused on owning niche, competitively advantaged, long-duration businesses.” I believe the US Salt acquisition will allow LOGC to utilize its substantial NOLs.