SSI Weekly – December 8

 

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 Ideas: KRON, EQC
• Portfolio Idea Updates: MRL:L, LQDA, BOOM, VZIO
• Quick Pitch Updates: LOGC, GLXZ, LTG:L, HLVX, PAC:AX

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 IDEAS

In case you’ve missed it, two new ideas have been posted on SSI this week.

Portfolio Idea: Kronos Bio (KRON)
Kronos Bio is yet another busted biopharma that has launched a strategic review after discontinuing it’s key clinical trial. The company trades at a large discount to net cash. Two recent announcements make this situation particularly intriguing – 83% workforce reduction and resignation of the CEO, who negotiated to retain his $900k change-in-control bonus even after his departure. Seems like execs are positioning the company for the sale or reverse merger. Track record of execs and board members is impressive. My Q1’25 NAV estimate is $1.39/share – 36% above the current prices. Full KRON write-up.

Quick Pitch: Equity Commonwealth (EQC)
This is a late-stage liquidation that has already been approved by shareholders and is expected to be finalized in the coming months once the last real estate asset is sold. EQC paid $19/share dividend on Friday (December 6), but the stock will begin trading ex-dividend only on Monday. Pro-forma for this distribution, the stub trades at $1.39/share (already has went up a bit from the write-up levels). Based on management’s guidance, the final distribution for this stub will be between $1-$2/share and is expected to be paid out during Q1’25. EQC quick pitch.

 

PORTFOLIO IDEA UPDATES

Marlowe (MRL:L) – annual results released
MRL recently reported half-year results (ending September 30). This is the first report that is focusing solely on the remaining TIC segment, following the carve-out of OH segment in September. Results and the outlook were in line with expectations.

MRL now trades at 7.6x FY25 adjusted EBITDA, which seems cheap for this business. Peers trade at teen adj. EBITDA multiples and a number of industry transactions were previously completed above 14x EBITDA. If the company achieves its guidance and re-rates to 10-12x adjusted EBITDA, the potential upside could be 60-90%.

Even without any immediate catalysts, I continue to like MRL due to a combination of reasons: 1) undervalued and good business; 2) share buybacks; 3) involvement of Lord Ashcroft, who could eventually push for a sale; 4) and the recent entry of a prominent activist Oasis Management (5% stake), which could also ramp up pressure on the management.

Although share buybacks have been on hold since November 18, management has been very positive about them in recent annual results. So I think repurchases are likely to resume soon. With £24m (9% of the market cap) remaining in the current authorization, these buybacks could help to push up the share price. Full MRL write-up.

DMC Global (BOOM) – extension on the call option to buy Arcadia
BOOM secured a two-year extension on its call option to buy the remaining 40% stake in Arcadia. This is a positive development as it avoids immediate dilution during the currently low stock price levels. It also gives management seven additional quarters to stabilize the business before having to finance the acquisition. So $2.5m seems like a bargain for this extension.

The agreement also includes a change-in-control clause that automatically exercises the option for Arcadia if BOOM itself gets acquired. This suggests that Munera family (previous owner of Arcadia, who still retains 40% stake) sees a real possibility of BOOM getting sold in a few years timeframe.

BOOM remains cheap at current levels (4.5x 2024E EBITDA). Full BOOM write-up.

Liquidia (LQDA) – lawsuit against FDA looks weak, commercialization still on track
It seems the judge is skeptical of Liquidia’s claims in its lawsuit against the FDA regarding the retroactively granted exclusivity to UTHR. Lionel Hutz did a good overview in this tweet. In a nutshell: LQDA has a low chance (<10%) of winning a favorable summary judgment due to the case’s factual complexities and the court’s tendency to defer to the FDA on scientific matters. A preliminary injunction, which would allow Yutrepia to launch earlier, has a higher likelihood (~50/50), but the outcome remains uncertain.

However, commercialization in May remains on track. When LQDA finally starts capturing market share, I expect the stock will re-rate. The company currently trades at $930m market cap compared to $17bn for its key competitor UTHR.

By the way, check out this excellent investigative report by Hunterbrook, if you’re looking to get up to speed on Liquidia’s case. Full LQDA write-up.

Failed: VIZIO Holding (VZIO) -2% In 2.5 Months
It’s easy to see why shorting a merger can be an attractive proposition. Your downside is generally limited (capped by the offer price), while the upside if the deal breaks is often much larger. Most of the time, it’s a naturally assymetric bet. However, merger arb space, especially with larger names, is quite crowded and usually efficient. The recent outcome for VZIO illustrates this – latest rumors turned out to be correct and Walmart’s acquisition of Vizio closed this week. Nonetheless, several members have commented and messaged me, saying they still think that it was a good bet and would do it again under similar circumstances. I agree. As expected, the loss turned out to be minimal – 2% over 2.5 months. A quick hidden teaser – I’m preparing a pitch on a similar setup to be released on Monday. Stay tuned. Full VZIO write-up.

 

QUICK PITCH UPDATES

PLAYED OUT (partially): ContextLogic (LOGC) +57% In 6 Months
LOGC’s share price has soared by 30% over the last month, without any news. It’s difficult to say what has driven the move, but it could be related to Trump’s election and his promises of deregulation (i.e. more deal friendly environment).

The market is now valuing LOGC’s net operating losses at $2.30+/share (current price of $8/share less the $5.7/share in net cash as of Q3). This is already a significant portion of the company’s $7/share in federal NOLs. While the state NOLs are also significant, they would be much more difficult to utilize and are more of a “best-case scenario” bonus.

The current situation looks way less attractive than at the time of the write-up in May, when LOGC was trading at 15% discount to net cash. Reducing the position and locking in a 57% gain over six months seems like a prudent move at this point. Quick LOGC pitch.

PLAYED OUT: Learning Technologies Group (LTG:L) +10% In 1 Month
The idea has played out as expected. Binding papers have been signed – LTG is being acquired General Atlantic for £1/share. The spread has narrowed from 12% to 1.5% upon the announcement. The transaction should close in a couple of months, but the remaining spread is not worth the wait. LTG guest pitch.

Pacific Current Group (PAC:AX) – buybacks to be kickstarted shortly
PAC is expected to announce a substantial buyback soon for up to 50% of its market cap. I think it’s likely the buyback price will be set close to NAV, which was last reported at A$13.47/share. That’s 25% above the current A$11/share stock price.

SSI member Puppyeh has provided interesting insights on the setup in this comment. He estimates that the updated NAV (after adjusting for FX fluctuations, recent assets sales, etc.) should be A$14+/share. Even if the tender offer is announced at a lower price (A$11.5-A$12/share), the buyback should still result in significant accretion to NAV. If PAC exercises fully on the guided buyback size, the post-tender pro-forma NAV will be at A$17+/share. This would put the current stock price at an implied 40% discount to the pro-forma NAV, which seems too wide. Assuming the discount narrows to the current level of c. 20%, the stock price would re-rate to mid-A$13/share range.

The opportunity seems asymmetric, with limited downside risk. You’ll either tender shares at a premium in the buyback or benefit from the NAV accretion. A takeover by one of the major shareholders, who attempted to acquire the company last year, is not out of the cards either. PAC.AX write-up.

HilleVax (HLVX) – further reduction in workforce, updated NAV
Positive update from HLVX. The company announced another major round of layoffs – 70% of its current workforce (28 employees) will be let go by January 2025. This includes key executives such as the COO, Chief Medical Officer, and Chief Business Officer. The company estimates $6.1m in restructuring costs, with majority to be recognized in the current quarter. Ongoing cash burn should now decrease substantially.

The combination of significant layoffs, executive departures, and a small remaining team (12 employees left) suggests the strategic review is progressing toward a positive outcome. My updated net cash calculation for year-end puts the NAV at $2.91/share – 45% premium to current prices. HLVX quick pitch.

Galaxy Gaming (GLXZ) – chairman’s background adds confidence in the buyout
Galaxy Gaming is being acquired by Swedish gaming giant Evolution AB for $3.20/share. While shareholders have already approved the transaction, a 16% spread persists. This is partly due to the closing timeline (mid-2025) and regulatory review risk. However, this is a very tiny deal ($80m) that’s unlikely to attract significant attention from regulators.