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 Pitches: EPIX, HLVX, PRKR
- Portfolio Idea Updates: BOOM, VZIO
- Quick Pitch Updates: WOW, AVAP:L, LOGC, LFCR, DK
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 PITCHES
In case you missed it, last week two new quick pitches and one special sit elsewhere were covered on SSI:
Essa Pharma (EPIX)
Essa Pharma is a “busted” biopharma that has recently halted its pipeline development and launched a strategic review. EPIX has a clean balance sheet and low cash burn. Management’s background and track record increase the likelihood of a favorable outcome for shareholders. Current prices offer 21% upside to NAV/liquidation value ($2.18/share), assuming the review process extends to mid-2025. EPIX quick pitch.
HilleVax (HLVX)
HilleVax is another broken biopharma undergoing a strategic review after its lead trial’s failure. This setup is somewhat riskier than previous biopharma plays covered on SSI, primarily because management might still opt to continue funding what’s left of the remaining pipeline. However, HLVX trades at a wide 47% discount to net cash, offering substantial upside if the setup pans out. Kevin Tang has recently acquired 9.5% stake. Two controlling shareholders are prominent biopharma players – Frazier Life Sciences (19.7% ownership) and Takeda Pharmaceuticals’ vaccine development arm (13.5%). HLVX quick pitch.
ParkerVision (PRKR)
1 Main Capital Partners has recently highlighted an interesting legal special situation with ParkerVision (PRKR). ParkerVision has been locked in a long legal battle with Qualcomm (QCOM) over alleged infringement of its proprietary radiofrequency technology. PRKR has recently won a key appeal regarding expert reports. It now seems likely that the case will finally go to trial in H1 2025. After fees and taxes, proceeds could amount to $8.2/share, about 9x the current stock price. PRKR idea elsewhere.
PORTFOLIO IDEA UPDATES
DMC Global (BOOM) — weak Q3 earnings, segment divestitures ruled out under current market conditions
BOOM’s Q3 earnings were as expected – weak, in line with the sentiment of the recent update. Q4 guidance looks similarly bleak, with expected 18% YoY revenue drop and a 70% decline in EBITDA.
Management has ruled out selling any divisions under current market conditions, opting instead to address operational issues and wait for a better time before considering value-maximizing moves. Unless the activists (Radoff, Voss Capital, and/or STCN) step in, the event-driven angle for this case is off the table.
The new chairman kind of subtly hinted that the sale could be reconsidered down the line. He kicked off the conference call by emphasizing his experience with selling Kaydon Corporation (industrials peer) and private equity background. He also added that he has engaged with shareholders extensively in recent months and he knows how they “think and feel right now”. This could indicate that activists are already engaging closely with the board, making additional immediate pressure less likely.
Fundamentally, BOOM remains attractively priced, trading at 5x 2024E EBITDA guidance. The current headwinds largely stem from macro and cyclical factors – higher interest rates and sluggish commercial construction impacting Arcadia, and declining well completions affecting DynaEnergetics. Management noted similar trends among peers and said that things might get a bit easier once the elections pass. There are also some legacy issues at Arcadia from its family-business days that have resulted in certain supply chain disruptions. The chairman said these issues are easily fixable, though it will take time. Overall, the new chairman seems pretty competent and had left a good impression from the call.
While the thesis shift is not ideal, I think that BOOM’s current valuation and recent context with activists involvement make it worthwhile to hold on for a couple more quarters to see how things unfold before re-evaluating. Full BOOM write-up.
VIZIO Holding (VZIO) — Q3 results released
VZIO reported Q3 earnings. The only note regarding FTC’s second request process was:
On April 29, 2024, VIZIO and Walmart each received a request for additional information and documentary material (the “Second Request”) from the FTC in connection with the FTC’s review of the Merger. VIZIO and Walmart expect to continue working cooperatively with the FTC as it conducts its review of the Merger.
The intentional vagueness here is notable, as companies typically provide more clarity on the review status or at least confirm whether the additional information has been submitted. However, it would be difficult to believe that Walmart and Vizio haven’t complied with the Second Request yet, given that over 6 months have already passed (versus the typical timeline of 1-2 months). What’s happening behind the scenes remains unclear and the only thing we know is that regulatory review is still ongoing.
M&A news service CTFN recently reported that merger parties target the deal to close in early December. It’s not clear how reliable these rumors are as just last month, the same source indicated the deal might close mid-November.
The spread to Walmart’s $11.50/share offer remains tight at 2%. Full VZIO write-up.
QUICK PITCH UPDATES
WideOpenWest (WOW) — Q3 results, buyout discussions ongoing
Idea Hive, the author of the guest pitch, shared an update on WOW’s Q3 report. The key takeaway from the earnings release is that the takeover process remains ongoing. This is a positive sign, considering that WOW’s recent announcement of a new $200m loan might have cast doubt on the buyout. Six months have now passed since the initial non-binding offer (similar to the timeline seen with CNSL’s takeover), so a definitive agreement could be imminent. Valuing WOW’s existing cash-generating assets at the current 5x TTM/2024E EBITDA multiple and adding the costs spent on yet-to-be-cash-generative fiber assets suggests a price target of c. $7/share, offering 25%+ upside. WOW quick pitch.
Avation (AVAP:L) — takeover rumors
UK media outlet Sky News reported that Oaktree-backed Azorra Aviation Holdings is preparing a takeover bid for AVAP. Several other aircraft leasing players are also rumored to be exploring potential offers. This comes amid a wave of consolidation in the industry, highlighted by the recent acquisition of Air Transport Services Group by PE firm Stonepeak. AVAP trades at 0.58x P/BV, substantially below peer multiples – AER (1.18x), 2588:HK (0.88x), and AL (0.69x). AVAP likely deserves some discount due to it’s lack of scale, however, there’s still headroom for an offer to come above current prices. AVAP:L quick pitch.
ContextLogic (LOGC) — discount to net cash persists, strategic review continues
Q3 results came out. The balance sheet is very clean now and there’s almost no ongoing cash burn. Cash stood at $150m or around $5.7/share versus current $6.43/share stock price. Management said it has made “encouraging progress” with the strategic review and will provide a more substantive update in the coming quarters. LOGC quick pitch.
Lifecore Biomedical (LFCR) — share price has been soaring
The stock is up 50% over the last 30 days, driven by typical volatility and news of peer Avid Bioservices being acquired by PE firms at a robust 6.3x NTM revenue multiple. With Avid Bioservices off the market, LFCR is now the last publicly traded CDMO. I don’t think the peer’s premium valuation will necessarily translate to LFCR, as Avid has always been the highest valued player due to its focus on the cell and gene space and rapid growth.
LFCR is still dealing with a lot of legacy and recent issues, and at current guidance, the stock isn’t particularly cheap (3x sales and 20x EBITDA). It will likely stay within the recent trading range until management shows they can growth the business and utilize additional capacity. I plan to hold LFCR at least through the November 21 investor day, hoping for an upward guidance revision or new insights into LFCR’s future prospects. LFCR quick pitch.
Delek US (DK) — weak Q3 earnings, management reiterated plans to deconsolidate DKL
Delek reported weak Q3 results, with operational performance impacted by the ongoing downturn in the refining industry. Benchmark crack spreads dropped 49% YoY. Refining margins are currently $5–$6 per barrel, way below mid-cycle levels of $15-$20 per barrel. Management expressed optimism for improvement, given some industry capacity expected to shut down soon and refined product inventories currently at low levels. The company has also provided a new mid-cycle valuation slide, estimating DK’s standalone (ex-DKL) mid-cycle EBITDA at $445m. In contrast, refining segment’s EBITDA (before overheads) in the latest Q3 was $10m. At mid-cycle earnings, management estimates DK’s standalone valuation at $29.8-$36.7/share. In the meantime, DK now trades at $18/share, way below its DKL stake value of $21.50/share, with no value attributed to the refining business.
On the conference call, management reaffirmed its commitment to deconsolide DKL, stating “We are actively pursuing that as a key component of our Sum of the Parts efforts”. However, considering the lack of tangible progress in recent years, it remains uncertain if this will translate into any actionable steps. DK quick pitch.