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 Guest Pitch: GLXZ
- Portfolio Idea Updates: OCI:AS, BHIL, BOOM, LQDA
- Quick Pitch Updates: GRFS, TIFS:L, EPIX, LFCR, EMBRAC-B:ST, PAC:AX, JRVR
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 GUEST PITCH
In case you missed it, a new guest pitch was featured on SSI last week:
Galaxy Gaming (GLXZ)
This idea was shared by Jeremy from Pluto Equity Research. Galaxy Gaming, a developer of casino gaming tables and technology, is being acquired by a large Swedish peer Evolution AB for $3.20/share in cash. Spread is at 17%. Shareholder approval is in the pocket. Risk of regulatory hurdles seem minimal given the transaction’s size of <$100m. Closing is expected in H1 2025. While the timeline seems a bit prolonged, that’s common in gaming mergers due to the bureaucracy involved. GLXZ guest pitch.
PORTFOLIO IDEA UPDATES
OCI N.V. (OCI:AS) — Q3 investor call with a high number of positives
The long awaited Q3 investor call happened, but instead of a promised clarification on the strategic direction going forward, investors got more of “we’re currently engaged in some thinking around the appropriate strategy” and “we will continue to keep you updated on any future strategic actions”.
That said, I think the update was mostly positive. A further $1bn (€4.5/share) of additional capital return to shareholders is planned for H1’25. That’s 40% of the current market cap. Management has also hinted at the possibility of even more distributions down the line.
Several other positive things have also been noted:
- Strategic review of the remaining European Nitrogen assets seems to be ongoing;
- Larger equity investments into the business are off the table, at least for the near term.
- Management anticipates beating its previously guided $30-40m run rate for corporate costs by 2025;
- Remaining capex on the Clean Ammonia plant was clarified to be $750m;
What came a bit as a surprise for me is that mid-cycle profitability of the remaining European business was now guided at $150m compared to previously implied $250m. The reason behind the discrepancy is not clear, and the company is still very far from reaching mid-cycle levels anyways (EBITDA during Q3 was negative).
It’s also worth noting that management seems reluctant to acknowledge that the four recent disposals haven’t generated shareholder value so far.
OCI remains undervalued, trading at a substantial discount to pro-forma net cash (€15.6/share), with no value attributed to the European Nitrogen operations. The potential catalysts – the $1bn in additional capital returns and closing of the Methanex sale – are still a few quarters away (H1 2025). The stock will probably continue to languish at the current levels for the time being. Full OCI write-up.
Benson Hill (BHIL) — spread widened to 60%
BHIL’s Q3 update spooked the market, initially widening the spread to $8.6/share buyout offer from 25% to 35%. Concerns likely stemmed from a new going concern note, liquidity issues, and vague hints about exploring other strategic alternatives (e.g., raising financing) alongside the ongoing buyout negotiations. However, I don’t think the update was that negative. Liquidity issues have been known for a long time, whereas new language in the 10-Q indicates that due diligence with the buyer group has been completed and discussions for a definitive agreement are underway. BHIL will run out of cash by year-end, so with only 1.5 months left and no capital raise plans announced, my bet is that negotiations are progressing well and a binding agreement will be announced shortly.
Surprisingly, the stock took a sharp nosedive on Friday (a few days after the Q3 update), with the spread widening even further to 60%. I haven’t seen any news that could explain the move. This is concerning and quite often in similar arbitrage cases might suggest that ‘somebody knows something’. However, BHIL’s liquidity is quite low, and someone exiting a $200k (or even smaller) position in a day could easily push the stock by this much. The wait is surely worrying, but buyout negotiations should be nearing the finish line. Fingers crossed we hear of a definitive takeover agreement soon. Full BHIL write-up.
DMC Global (BOOM) — CEO to retire, new letter from STCN
A couple of developments have taken place last week. BOOM’s CEO announced his retirement, set for late November. This wasn’t entirely unexpected, as he had previously attempted to depart back in 2022, but ultimately agreed to postpone it.
Steel Connect (owns 10% stake) fired off another public letter to the board. Lichtenstein is clearly still interested in BOOM at current prices. He’s demanding a rights offering and wants the poison pill removed, arguing it’s harming shareholders by facilitating the ongoing stock price decline. STCN has also offered to finance BOOM’s purchase of the remaining Arcadia stake through convertible preferred stock. However, there’s been no mention of a buyout offer this time around.
I think both developments are midly positive. Continued pressure on the management is good, even though a near-term catalyst seems less likely now. Meanwhile, the stock had another frustrating week and is very cheap at current levels (4.5x 2024E EBITDA). Full BOOM write-up.
Liquidia (LQDA) — Q3 update
LQDA provided a Q3 update and held a conference call. Here’s a summary of key takeaways, as shared by SSI member wguan:
- UTHR’s lawsuits related to three patents (’901, ‘066, and ‘793) have been fully rejected by court, with no possibility for further appeal. This paves the way for unencumbered launch of Yutrepia for PAH indication in May 2025.
- Remaining ‘327 patent lawsuit is regarding Yutrepia’s treatment of PH-ILD. The trial is scheduled for June 2025.
- LQDA’s lawsuit against the FDA will go to trial in early December. As a reminder, LQDA has sued the FDA, challenging the backdated three-year exclusivity granted to UTHR’s Tyvaso DPI until May 2025.
- Management also provided an update on L606, an inhaled, sustained-release formulation of treprostinil licensed from Pharmosa Biopharm. L606 is an improved version of YUTREPIA for the treatment of both PAH and PH-ILD, with the daily dosage reduced from 4 to 2 times a day. The company expects L606 to reach the market in 4 years.
Despite massive delays so far, I continue to like the setup. After Tyvaso DPI’s exclusivity expires in May 2025, FDA approval for Yutrepia’s PAH indication should be imminent. As LQDA transitions to commercialization and starts capturing market share, I expect the stock will re-rate. LQDA currently trades at $850m market cap compared to $17bn for its key competitor UTHR. Full LQDA write-up.
QUICK PITCH UPDATES
Essa Pharma (EPIX) — new prominent major shareholders
EPIX has attracted the interest of two biopharma activists: Kevin Tang, who has acquired a 9.7% stake and filed a 13D, and BML Investment Partners, with a 9.4% ownership (filed 13G). Tang was buying shares at prices up to $1.83 (compared to $1.72 last close). The involvement of these investors increases the likelihood of a positive outcome from EPIX’s ongoing strategic review. With an estimated mid-2025 NAV of $2.18/share, the current price offers a potential upside of 27%. EPIX quick pitch.
TI Fluid Systems (TIFS:L) — PUSU extension, shareholder support
The PUSU deadline for TIFS takeover by Apollo has been extended from November 8 to November 22. This brief two-week extension seems positive and suggests that a swift resolution is likely. Furthermore, CTFN (a reputable M&A news source) reported that TIFS’s largest shareholder had given support for the £2/share buyout. The spread is at 10%, and will likely narrow down to minimal levels once binding papers are signed. TIFS:L quick pitch.
Embracer Group (EMBRAC-B:ST) — asset divestiture announced, significant upside remains
Daniel, the author of the guest pitch, shared his thoughts on Embracer following the company’s recent earnings. The company has surprised investors by selling Easybrain studio (part of the Coffee Stain & Friends segment) for $1.2bn in cash. This represents a significant ROI, as Embracer acquired the studio for just $640m in 2021. The current deal values Easybrain at 9x EBIT, broadly in line with Daniel’s previous Coffee Stain segment valuation of 10x.
While the stock has went up 9% on the news, significant upside remains. Updated valuation suggests potential gain of 21% in the base case and 42% in the optimistic scenario. The setup remains catalyst-rich, with upcoming capital market days, spinoffs, and increased awareness of the Lord of the Rings franchise (due to an upcoming cinematic release) among the potential drivers. Potential buyout by Amazon has also become more likely following the recent US election results. EMBRAC-B:ST guest pitch.
Pacific Current Group (PAC) — shareholders support the planned buyback
PAC held a shareholder meeting last week, and the Chair’s address confirmed the planned buyback of “up to A$300m” (53% of the current market cap). It was also mentioned that major shareholders, who collectively own 45% of the shares, support this move. However, none have disclosed their intentions to participate in the buyback.
These major shareholders likely include at least two of PAC’s largest investors: River Capital (22.5%), Perpetual (15.4%), and Regal Funds (10.7%). Both River and Regal tried to acquire PAC last year, whereas River and Perpetual were actively buying PAC shares in the open market earlier this year. It’s possible that these shareholders could hold back in the tender offer, increasing their ownership and potentially setting the stage for another takeover bid in the future.
A new investor deck was also released. While most of the information was already known, management has hinted at the possibility of additional asset sales: “PAC doesn’t have visibility at this time, but going forward, there may be further liquidity events in the remaining boutiques.”
PAC continues to trade at a substantial discount to it’s fair value NAV (A$10.8/share vs A$13.47/share). PAC:AX quick pitch.
Grifols (GRFS) — buyout financing preparations continue, pushback from minority shareholder
Recent Bloomberg report suggests that BAM’s efforts to secure financing for GRFS’ debt refinancing are advancing, with banks set to submit their final proposals this week. The report stated that the debt refinancing deal could be finalized by the end of the month, paving the way for the total buyout financing to be secured later this year.
Mason Capital (holds a 2.1% stake in Grifols) has issued a public letter opposing the sale at the rumored €11-€12/share range. The activist argues that such price is way too low and instead values Grifols at over €20/share. The letter also criticizes Grifols’ board, particularly the family-affiliated directors, for conflicts of interest and poor capital allocation decisions, including debt-heavy acquisitions that haven’t boosted earnings. It notes that an independent board would help to unlock the company’s value.
Discount between Class B (GRFS or GRF-P:MC) and Class A (GRF:MC) shares remains at 18%. Class A shares are currently trading at €11.1/share, in line with the rumored takeover price range. GRFS quick pitch.
Lifecore Biomedical (LFCR) — refreshing the thesis
For a refresher on LFCR investment thesis, it’s worth looking into Greenhaven Road’s recent investor letter. It all boils down to several key points:
- There is shortage of CDMO fill/finish services. The new GLP-1 drugs (Ozempic, Wegovy) are adding incremental demand/pressure.
- LFCR’s capacity utilization is only at 35%. If management is able to improve the utilization, then margins/profitability will shoot up to industry levels. Management hinted at conversations with GLP-1 producers, which could potentially take-out the whole spare capacity.
- New CEO has turned around three previous CDMOs and seems to be well positioned to execute LFCR’s turnaround.
- Industry peers have been acquired at much higher multiples.
Greenhaven Road sees multi-bagger upside in LFCR, driven by a combination of 1) revenue growth; 2) margin expansion once company’s capacity gets filled; and 3) earnings multiple re-rating.
While LFCR has been a frustrating story of unmet expectations so far, I’m looking towards the investor day on November 21, which will hopefully provide more clarity into company’s future prospects. LFCR quick pitch.
FAILED: James River Group (JRVR) — strategic review concluded without a transaction
JRVR reported Q3 results last week. Instead of the company sale, the strategic review was wrapped up with the announcement of a partnership with the P&C insurance peer ESGR. This deal involves ESGR’s subsidiary purchasing $12.5m in newly issued JRVR shares at $6.40, a 30% dilution to the shares outstanding. While JRVR remains inexpensive at 0.5x TCBV as of Q3, the special situation angle is off the table and the thesis has now shifted into insurance company valuation/management execution. JRVR quick pitch.