SSI Weekly – December 22

NEW IDEAS

Hope everyone’s gearing up for a great holiday season! Before Christmas kicks in, here’s another interesting setup to check out.

D-Market Electronic Services & Trading (HEPS)
This is one of the quirkiest setups I’ve come across in a while. Admittedly, the situation is a bit too deep in the weeds for me, but it’s fascinating to follow, even if only for educational purposes. The situation was covered on VIC and subsequent commentary – the post is in public domain, but you need free guest account to access it. Below is my best efforts to summarize this complicated case.

D-Market Electronic Services & Trading (ticker HEPS) operates Hepsiburada, Turkey’s largest e-commerce brand. The founding Dogan family is selling their entire controlling stake in HEPS to Kaspi, a Kazakh super-app developer. The transaction is for 100% super-voting Class A shares and 61% of Class B shares, which trade on Nasdaq as ADRs. Class A shares are getting acquired at $7.57/share and Class B shares at $4.75/share (45% upside).

This deal constitutes a change of control and is expected to close in Q1 2025. Antitrust approval has already been received. Under Turkish law, a change of control (defined as the transfer of 50% or more of voting rights) typically triggers a mandatory takeover offer for all minority shares of the same class. This offer must be presented in cash to shareholders within six days of acquiring control. However, HEPS’ press release stated:

It is Hepsiburada’s current understanding that the Agreement does not contemplate a tender offer for the shares of minority stockholders in connection with the transaction.

How come?

The buyer is exploiting a regulatory loophole that exempts companies from Turkish Capital Market Laws unless they have more than 500 shareholders of record. From the annual report:

We are not a publicly held company for purposes of the Turkish Capital Markets Laws and Regulations unless and until the number of shareholders holding our shares amounts to 500 or more.

Since HEPS is only traded in the U.S. as ADRs, and all ADRs are held by a single custodian, the company effectively has just one shareholder of record. As a result, the mandatory takeover offer rule doesn’t apply.

So, can anything be done about this?

In order to force Kaspi to include minority shareholders in the offer, the number of HEPS’ shareholders of record has to be increased to 500.

The simplest solution would be for ADR holders to call their brokers and convert their shares into local Turkish shares. However, this option is blocked because the custodian, Bank of New York Mellon, is reportedly refusing to cooperate, leaving brokers unable to process conversions.

The VIC pitch author (Jeremy Raper or “puppyeh”) is now trying a more creative approach: finding 500 Turkish retail investors and giving each one a share, which could then be converted into local stock since Turkish residents should be able to hold local securities – no idea how successful such an effort can be. If this doesn’t work out, the author plans to go straight to the regulator to block the deal on fairness grounds.

There are a couple of possible scenarios of how this setup could play out:

• Activism fails and Kaspi simply proceeds with buying the controlling stake. In this case, the stock would likely remain substantially above pre-announcement ($2.2/share) levels. With a new majority owner that has an excellent track record and the potential for a buyout in the future, HEPS could be trading closer to $3/share. That would result in low-high teens downside.
• Activism efforts succeed and Kaspi is forced to extend the same offer to the minority HEPS shareholders (i.e. $4.75 for Class B shares), resulting in 45% upside.
• Kaspi decides it’s better to drop the transaction altogether than pay up for the minority owned class B shares. In this scenario, the stock would likely drop to around $2.5/share – based on the $2.2/share pre-announcement level plus appreciation of the main Turkish stock market index (BIST 100) since the transaction was announced.

HEPS quick pitch.

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In case you missed it, this week I’ve also posted another new Quick Pitch on SSI:

Aker Carbon Capture (ACC:OL)
Aker Carbon Capture has recently sold its operating business for NOK 4.12bn in cash and a 20% stake in newly formed JV. This left ACC almost as a cash shell with a super clean balance sheet. Despite that, the stock trades at c. 20% discount to net cash. No matter how you cut it, ACC’s NAV sits at a substantial premium to current stock price – ranging from +42% to +102%, based to my calculations. Management is currently deciding what to do with the cash and plans to update investors in Q1 2025. There are reasons to believe that most of it will be returned to shareholders. This week, another company controlled by the same family announced a capital return to shareholders. A similar announcement would likely serve as a hard catalyst for ACC’s stock price. ACC:OL quick pitch.

PORTFOLIO IDEA UPDATE

Ambase (ABCP) — schedule for summary judgment is set
A quick recap: Ambase is litigating against the developers of the 111 West 57th Street condominium tower in Manhattan. One of the two key lawsuits, the Sponsor Case, revolves around Ambase’s contractual Equity Put Right, which allows ABCP to sell its stake in the project to the sponsor for $150m if the project’s budget increases by more than 10% from one period to the next. Ambase claims that the developers artificially inflated the 2015 baseline costs to invalidate the Equity Put Right. There is evidence, including depositions from several former employees of the sponsor, which indeed indicates that developers manipulated the budget.

David, the author of the idea, has recently shared several important highlights from the depositions in this comment.

The court has finally set a schedule for summary judgement motions in the Sponsor case. Motions are due by February 11, with oppositions due by April 11 and replies by May 9. While there’s no guarantee the judge will side with ABCP, evidence against the developers is substantial. That said, the market remains skeptical, with the stock price now at $0.31/share. If the Equity Put Right is enforced, the share price could head toward $2.

 

QUICK PITCH UPDATES

PARTIALLY PLAYED OUT: Bel Fuse (BELFB) +12% in 3 Months
The price gap between the two common share classes of Bel Fuse – Class A (BELFA) and Class B (BELFB) – has narrowed from 28% to 12-13%. Borrow fees have remained at 5% annually, so over the last three months, hedging costs were only 1%. The idea has been working out as expected so far and has already delivered c. 12% return. With the spread now much closer to historical average levels, it seems like a good time to trim the position. BELFB quick pitch.

National World (NWOR:L) — definitive agreement announced
This arb played out faster than I expected. NWOR and Media Concierge reached a definitive agreement at 23p. NWOR’s currently trades at c. 22p. Liquidity is limited. The transaction still requires court sanction and shareholder approval. No issues are anticipated on either front, but completing this ‘paperwork’ will take some time. Management expects the merger to close in Q1 2025. NWOR:L quick pitch.

Embracer Group (EMBRAC-B:ST) — updated valuation
Daniel, the author of the guest pitch, shared updated valuation and price targets for EMBRAC in this comment. Following the recent stock price increase, the remaining upside ranges from 7% to 33%, depending on the scenario (base to optimistic). Daniel believes his base case is likely to be exceeded due to the conservative multiples used and improving leverage of the company. As the margin of safety has narrowed, the question now is whether to hold on for the next 6-12 months to capture more upside. The key catalyst will be Asmodee’s spin-off in Q1 2025. EMBRAC-B:ST guest pitch.

Avation (AVAP:L) — large share buyback
AVAP recently completed a significant stock repurchase, buying back 10.5% of outstanding shares at £1.50. I am somewhat puzzed by this buyback, as it appears to have been executed as a single trade of 7.8m shares, recorded as an off-market transaction. Interestingly, this transaction seems to offset the November warrant exercise by AVAP employees and executives (+3.7m shares), during which at least two directors sold 2m shares, also at £1.50/share. Trading volume on that day spiked to an unusually high 10.3m shares, which suggests this might have been the actual buyback date, with a large portion potentially filled by selling insiders.

While the buyback at a material discount to NAV is accretive, if the entire amount was used to cash out insiders, especially amid rumors of a potential bid for the company. it raises questions about management’s commitment to “maximizing shareholder value.”

The stock is currently trading at £1.53/share, roughly 0.5x BV, significantly below peers that trade at 0.7-1x BV. AVAP:L quick pitch.