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.
- Portfolio Idea Updates: BHIL, MRL, BOOM, LQDA, CURN
- Quick Pitch Updates: WOW, DXLG, LUNA, EMBRAC, LTG, MON, RVNC
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.
PORTFOLIO IDEA UPDATES
CLOSED: Benson Hill (BHIL) — exited after +100% spike in share price
BHIL shares spiked up more than +100% after the release of their soybean trial results with Tyson Foods. I have used this opportunity to exit the position, unfortunately still at a 38% loss. Management has not provided any updates neither on the pending buyout proposal nor on the financial standing of the company (it is likely running out of cash). Retrospectively looking, this merger arb was way too risky to begin with when the company had no tangible value aside from the priorietory soybean technologies, which are pretty hard to quantity.
Regarding the trial with Tyson, I think it is important to understand, that this is just a press release of the study, not a contract with Tyson. Also BHIL is not a pharma company and these are not results of a clinical study. I think market overreacted to this or someone was simply pumping the stock.
Tyson study results have actually been published on BHIL’s website. With a $90/ton premium for BHIL’s soybeans, which I assume is extra that they want to charge, the cost advantage is actually minuscule. Total feeding coss sum up to $1.2 per 6.5lb bird, vs $1.22 for conventional diet (see table 8). Also if you look at tables 1.1 – 1.3, you can see that in BHIL’s diets soybeans are being partially replaced by higher amounts of corn. So this 2% difference in feed cost, could get easily eliminated depending of where soybean and corn trade relative to each other, or at what prices poultry producer is able to procure these commodities. TLDR: the advantage in feed costs by using BHIL’s soybeans is not as clear as might seem from the headline. Full BHIL write-up.
CLOSED: Marlowe (MRL:L) — in total +23% return in a year
I am closing my position in Marlowe. The key reason for this decision is that, contrary to my expectations, the ongoing open market buybacks have had no impact on the MRL share price. When Optima Health was spun off in September 2024, MRL still had £30m allocated for buybacks. To date, half of this allocation has been used, but it has had no effect on the share price. On some days, these buybacks have represented a significant portion of the total trading volume. As the buyback allocation gets exhausted over the coming months, I am concerned that, without the support of these buybacks, MRL shares may begin to decline.
While the company still appears undervalued based on management’s guidance (trading at 7.6x EBITDA versus peers in the teens), once the buyback program is fully utilized, the story will shift toward re-rating and margin improvement—which doesn’t particularly excite me. Additionally, my expectations that Oasis or Lord Ashcroft would push the company into action have not materialized.
Together with Optima Health spin-off (which I exited in Oct) and special dividend in Jun’24, this position delivered 23% return in a year. Full MRL write-up.
DMC Global (BOOM) — the brawl between Steel Connect and DMC’s board continues
Steel Connect issued a letter accusing DMC’s board for failing to engage, not running a real sales process, and destroying shareholder value. It also noted that: “we find it hard to believe that anyone, including Steel Connect, could make a bid for the Company as a whole or Arcadia based on a valuation significantly above the current stock price of $7.31 per share, especially given the Arcadia put/call obligation that remains outstanding”. At the same time Steel Connect reiterated its previous proposals to acquire DynaEnergetics and NobelClad $185-$200m (very low price) or/and purchase preferred stock from the Company so that it may acquire the remaining 40% portion of the Arcadia business.
DMC’s only issued a very brief response basically saying that Steel Connect is lying. On a separate note, a long time president of Arcadia has returned to run the business (he had previously retired in Jan’23). Full BOOM write-up.
Liquidia (LQDA) — the stock is up +20% during January
Liquidia shares have appreciated by 20% over the last couple of weeks. This coincided with LQDA’s participation in J.P.Morgan Healthcare conference. The company is finally set to commercially launch Yutrepia in May, and the market might be reacting in anticipation this.
Currency Exchange International (CURN) — annual results released
CURN reported annual results: on adjusted basis, i.e. excluding one-off items/non-cash charges for Canadian operations, it was business as usual, with payments business continuing to grow at a +20% clip. Exchange Bank of Canada operations are now under strategic review. Although management did not shed any further light on this during the call, my impression is that this business will be sold
The company remains cheap, trading just slightly above its net working capital levels – $99m market cap vs $74m net working capital. Adjusted EBITDA during each of the last two fiscal years stood at $19m and adjusted net income at $10m. If it were not for the issues with the Canadian operations during FY2024, I am guessing the market would put more trust in this earnings power of the business and the stock would be materially higher.
Very limited buybacks at these levels are frustrating. The company utilized only half of its 5% repurchase authorisation for FY2024. A similar size buyback program is now in place again. These are at least partially limited by the volume on the Toronto stock exchange. When pressed by analyst on why the company does not leave Toronto stock exchange, the CEO Randolph Pinna was evasive saying they have more important matters on their hands.
QUICK PITCH UPDATES
WideOpenWest (WOW) — trades materially below $4.8/share offer
It has been nine months since Crestview, the largest WOW shareholder with a 39% stake, made an offer of a $4.8/share. While the prolonged timeline is not encouraging, with shares at $4.25, the market now assigns a significant probability that the transaction will fall through. The company remains undervalued relative to its peers and recent industry transactions. Below are some thoughts from the pitch author on the probabilities the market is currently factoring in:
Using the pre-announcement level ($3.79/share) as the deal break price and assuming a potential price bump to $6/share, the implied successful closing probability is only 25%. Using instead the $4.80/share offer would imply a roughly 50% closing probability. The $3.79/share deal break price might be overly conservative, considering that the share prices of several of WOW’s peers, including CHTR and ATUS, are up more than 40% since the non-binding offer was made. While it would not be surprising to see the share price return to pre-announcement levels, such a move would likely be temporary. At current levels the downside seems to be well protected. WOW guest pitch.
Destination XL Group (DXLG) — Stock volatility
The stock of DXLG was volatile over the last week and popped above the $3/share buy-out offer from Fund 1 Investments. No new information has been released. The spread now returned to 10% levels. DXLG quick pitch.
Luna Innovations (LUNA) — update on business performance, to be deregistered from SEC
The promised updates on business performance were minimal, but positive. Revenue for 2024 is expected in the range of $110m and $115m, with H2 projected to be 30% stronger than H1. For context, the last guidance for 2023 (before the accounting issues) was $120m–$125m. So, while the business hasn’t been completely wrecked, it clearly took a hit and is now in recovery. No disclosures on the balance sheet items.
The company has also announced plans to deregister from the SEC. That’s not great and puts a dent in my thesis of eventual planned uplisting once the financial statements become current. I do not think the company would deregister from SEC if management intended to uplist the stock back to NASDAQ within a few months. Now it is not clear if these restated financials will ever be revealed to the public and investors might need to request this information directly from the company. LUNA quick pitch.
Embracer Group (EMBRAC-B:ST) — Good Q3 results, Asmodee spin-off will begin trading on Feb 7
Embracer released good Q3 results pushing the stock up +10%. Asmodee also posted solid organic growth of 13%, which is good news for the spin next week. Although the situation has already partially played out (29% return since posting), Asmodee spin might trade higher than was expected in the initial write-up and the RemainCo is also likely to rerate further post spin. EMBRAC guest pitch.
Learning Technologies Group (LTG:L) — Offer reaffirmed, spread at 8%, vote next week
General Atlantic reaffirmed its offer of £1/share. The current spread is at 8%. Court and shareholder meetings are scheduled for the 6th of February. This one seems to have minimal risks to close – in my eyes an easy 8% in short order. I am guessing the spread is due to the previous adjournments as some of the shareholders apparently considered the £1 offer to be too low. But as General Atlantic iterated in their letter, the offer looks way fairer in light of material negative effects on Affirmity’s business from Trump’s executive order. LTG guest pitch.
PLAYED OUT: Montero Mining and Exploration (MON:V) — likely shareholder distributions are inline with the market cap
The company released a statement indicating that the net proceeds from Tanzania litigation will be C$20.6m, which is less slightly less than previously expected. Almost half of the US$27m total settlement amount will go to litigation funder and to cover legal expenses. Assuming the company will retain C$5m for admin and other costs, shareholder distributions are likely to be only slightly above the current market cap. MON quick pitch.
PLAYED OUT: Revance Therapeutics (RVNC) — Teoxane withdrew from the bidding war, 11% return in two weeks
As expected Teoxane has withdrawn from the bidding war leaving Crowns $3.65/share offer standing. The transaction is expected to close over the coming weeks. 11% return over two weeks. RVNC quick pitch.