SSI WEEKLY NEWSLETTER
This weekly newsletter intends to share the most interesting event-driven situations I’ve looked at over the week as well as other updates and highlights from SSI.
Here is what you will find in this week’s newsletter.
- New Quick Pitches: EMBRAC-B:ST, FETM, TTEC, TIFS:L
- Portfolio Idea Updates: TBNK (closed), BOOM, VZIO
- Quick Pitch Updates: EQLS:L, AVAP:L, MMLP
Disclaimer: All content on Special Situation Investments site and in the newsletter is not and should not in any circumstances be considered as investment advice or trading recommendation. All information presented is strictly for illustrative and educational purposes only. Please carry out your own research and due diligence.
NEW QUICK PITCHES
In case you’ve missed it, 4 new quick/guest pitches have been recently posted on SSI:
Embracer Group (EMBRAC-B:ST)
This idea was shared by Daniel. Embracer Group owns rights to major franchises like Lord of the Rings and Tomb Raider. Company’s complex structure across various businesses has resulted in a wide 20%-50% conglomerate discount. This discount is likely to get eliminated with several short-term catalysts, including upcoming capital market days, spinoffs, and increased awareness of the LOTR franchise due to an upcoming cinematic release. EMBRAC-B:ST guest pitch.
TI Fluid Systems (TIFS:L)
This idea was shared by Giorgi. Tier 1 auto parts supplier TI Fluid Systems has been targeted by its private peer ABC Technologies, which is backed by Apollo. A few days ago, ABC/Apollo lobbed a non-binding £2/share cash offer. The gross spread stands at 13.5%. The transaction is subject to the finalization of due diligence and financing, with a PUSU deadline set for November 8. It’s highly probable we’ll see a definitive agreement soon, and once that happens, the spread should be largely eliminated. TIFS:L guest pitch.
Fentura Financial (FETM)
This is a rather standard community bank merger arbitrage with 8% remaining spread. Fentura Financial getting acquired by ChoiceOne Financial Services for 1.35 COFS shares per each FETM. There’s plenty of cheap borrow available for hedging. Merger is conditioned on shareholder approval from both sides and regulatory consents – neither are likely to pose significant risk to the completion of the transaction. The transaction is expected to close in Q1 2025. FETM’s daily trading volume averages c. $100-$200k, however there are usually only a few trades each day, so liquidity is quite limited. FETM quick pitch.
TTEC Holdings (TTEC) – Why I’m Not Involved
Call center operator TTEC Holdings has received a privatization offer from its Founder/CEO/Chairman, Kenneth Tuchman, who holds a 58% stake. The offer is $6.85/share and is contingent on financing, special committee recommendation, and minority shareholder approval. The spread is quite wide at 27%.
I’ve received a number of inquiries from subscribers about this setup. Although I’m not pursuing it myself, I’ve outlined my thoughts, covering both the bullish and bearish angles of this arb, in this write-up.
PORTFOLIO IDEA UPDATES
CLOSED: Territorial Bancorp (TBNK) +2% in 3 Weeks
ISS has reversed its stance and now recommends TBNK’s shareholders to vote in favor of the merger with HOPE. Glass Lewis, another major proxy firm, has joined in this recommendation. Meanwhile, Landon/Blue Hill has not addressed management’s concerns about their $12.5/share bid in a substantive way. Their only updates so far have been revealing identities of some of the backers and reducing the tender threshold from 70% to 51%. Both proxy firms agree with management that Landon’s proposal doesn’t offer enough security to justify breaking the deal with HOPE.
I think shareholders are now much more likely to support HOPE’s offer than in the beginning of October. I have closed my position in TBNK, fortunately, with a slight gain as HOPE’s share price (and thus HOPE’s offer in dollar terms) increased over the last three weeks.
The shareholder vote is set for November 6. TBNK is currently trading a few percentage points above HOPE’s offer, with a 20%+ spread to Landon’s bid. Full TBNK write-up.
DMC Global (BOOM) – negative update on the strategic review and business performance
The company has finally released an update – and it wasn’t pretty. The business is performing worse than expected, and the company will miss its guidance figures from just two months ago, driven by weaker-than-expected sales in the Arcadia Products and DynaEnergetics segments. Only NobelClad’s business seems to be performing in line with expectations and is set to “deliver another strong quarter,” although it is the smallest of the three segments.
As for the strategic review, the company announced that the process to sell DynaEnergetics and NobelClad concluded empty. From the way the update is phrased it seems that no reasonable offers have been received:
Given the challenges of the last several months for DMC, including macroeconomic factors such as weakness and volatility in the energy market, the Board believes that prioritizing stability, simplification and internal improvement will better serve DMC’s stockholders.
Concurrently, BOOM announced governance changes, with the company’s chairman stepping down. While the resignation/change of chairman might indicate disagreement between the board members relating to the concluded strategic review, I do not think it will have any impact, at least in the short term. Majority (7 out of 8) board members remained. Group wide CEO (Michael Kuta) is also the same.
BOOM’s share price dropped 20% following the update.
I am not putting any hopes in the offer from Steel Connect. The response from DCM’s board (Sep 19) clearly showed that it was Steel Connect (and not DMC’s management) that refused to move the discussions any forward. While I do not know what what the actual Steel Connect’s play book was, I would be quite surprised if they come back with another offer that has chances to turn into a binding agreement. However, Steel Connect might still drum up pressure on BOOM’s management.
So it kind of looks like the business-sale catalyst is out of the window for now and the special situation angle of this idea has evaporated. However, on normalized earnings of the three segments, BOOM is actually quite cheap.
For now, I am maintaining my bag-holder position in BOOM. Hopefully management will shed some more light on the situation during Q3 call (scheduled for November 4), allowing us to make a more informed decision.
The put/call option for the remaining 40% of Arcadia’s business becomes exercisable in a month and would cost the company $187m. While there’s already a credit facility in place for this, exercising the put now would meaningfully increase the company’s net leverage from <1x to about 2.6x.
Management desperately needs a clear plan to present to shareholders soon (though it likely won’t be addressed in the Q3 call). Without it, board members might face re-election challenges next year. Radoff, who already has one representative on the board (Simon Bates), could also push for additional changes within the company.
That’s pretty much my view on the recent update. SSI member writser offered a slightly more positive perspective, especially on STCN’s involvement and its sustained interest in BOOM. You can find it in this comment and the replies that follow.
VIZIO Holding (VZIO) – short interest skyrocketed
Short interest in VZIO has recently increased to 33%-39% of the float, despite no further updates on the $11.5/share offer from Walmart. This has sparked some discussion in the VZIO comments section on SSI. I personally think it’s hard to read anything more into the short interest spike than the trade simply getting more crowded. Theoretically, the risk of a short squeeze has went up. However, with $11.5/share offer as an anchor, I think the risk of any exuberant share price run-up is immaterial.
The spread to the offer price remains tight at 3.5%, with borrow still inexpensive at a 0.4% annual fee.
FDA’s decision could come out at any time, and any move by regulators to block the deal would likely lead to a sharp drop in VZIO’s share price.
QUICK PITCH UPDATES
Equals Group (EQLS:L) – spread increased ahead of the PUSU update
The spread to the £1.35/share proposal from the buyer consortium has widened to 24%. There’s been no specific news on the bid. With the PUSU date set for October 30, we’re likely just seeing some increased stock volatility ahead of what will hopefully be a positive final update on the buyout negotiations. As before, I believe that if the offer fell through, downside risk would likely be minimal. EQLS quick pitch.
Avation (AVAP:L) – stock is finally re-rating
AVAP’s share price has been on a tear lately – the stock is up 30% this month and is now 42% above write-up levels from mid-December. There hasn’t been any news that would explain this. The rally began around October 16, coinciding with the announcement of an Airbus A320 lease extension. That was just a standard/expected business update, unlikely to cause such a strong share price move. It’s great to see the stock finally re-rating and now trading close to TBV. However, the company still looks relatively undervalued on a book value basis, at 0.65x BV compared to peers AER (1.07x BV), 2588:HK (0.92x BV), and AL (0.68x BV). AVAP:L quick pitch.
Martin Midstream Partners (MMLP) – thoughts on continuing activism
MMLP is getting acquired by its GP (which owns 26% stake) at $4.02/share. I’ve previously closed this idea once the parties signed a definitive agreement. Now, the activist investors, which previously offered a competing bid at $4.5/share, are soliciting votes against the transaction. In theory, this could incentivize the GP to do another price bump. The stock is currently trading at $4/share.
I’m not too excited about this. The second largest shareholder, Invesco (owns 18%), holds the key here, and I’d assume the GP already had a conversation with it before proceeding with the binding offer. It’s unlikely Invesco will vote against GP’s bid. The activists have already squeezed a decent offer increase, and pushing the GP further comes with the risk that the buyer could just let the deal fall apart, leaving everyone stuck with the MLP shares again.
So it’s definitely not a risk-free bet. The risk-reward looks something like 12% upside if the GP raises the offer to $4.5/share, versus a potential 20%+ downside if the deal falls apart. It’s even worse for non-U.S. investors, who would be facing an additional 10% withholding tax.
By the way, the activists disclosed they hold 13% through cash-settled derivatives rather than common shares. This gives more clarity on their incentives and explains why we haven’t seen any 13Ds. MMLP quick pitch.