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 Pithes: SWTX, NATH
- Portfolio Idea Updates: LQDA, BOOM
- Quick Pitch Updates: DK, ASLI, PAC, DXLG, LOGC
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, a new Portfolio Idea was added to SSI this week:
SpringWorks Therapeutics (SWTX) — Potential Buyout
SWTX is in late-stage acquisition talks with Merck KGaA (Germany’s Merck, not to be confused with Merck & Co.). These discussions surfaced just a day before SpringWorks received FDA approval for one of its key drugs, creating intriguing dynamics that suggest an imminent buyout. The offer is likely to come at material premium to the current levels. My target price is $85/share (50%+ upside). If no deal materializes, the downside would likely be in the low double digits. Full SWTX write-up.
Also, a new Quick Pitch was posted:
Nathan’s Famous (NATH) – Potential Takeover
Rumors came out that a hot dog brand owner Nathan’s Famous is in talks for a potential sale. The details are limited, but it was mentioned that “major food manufacturers and PE firms” are among potential buyers. Such rumors do not seem to be completely out of the blue. NATH is run by a prominent New York businessman, who also owns 24% of the company. He’s 76 years old and appears to be in the process of planning his estate. It seems likely that the potential buyer could be NATH’s long-term business partner Smithfield Foods. It was probably the “major food manufacturer” that the media rumors referred to. Sum of the parts valuation indicates that the offer could come at around $148/share (45% upside). NATH quick pitch.
PORTFOLIO IDEA UPDATES
Liquidia (LQDA) — decision on the FDA case, commercialization on track, stock up +30% YTD
LQDA’s summary judgment against the FDA was denied – the judge ruled that the agency was within its rights to grant UTHR’s Tyvaso DPI a three-year exclusivity period. This means that the LQDA’s Yutrepia won’t hit the market until May 2025. A win against the FDA was always a very long shot, and the stock price barely reacted to the news. The commercial launch remains on track for May, and in the meantime, LQDA’s share price has already staged a nice recovery this year, up 30%. Liquidia now has a $1.3bn market cap, while its key competitor, UTHR, is at $14.5bn. Once commercialization starts this summer, I’d expect LQDA to re-rate further. Full LQDA write-up.
DMC Global (BOOM) — new earnings report came out
BOOM released its Q4 results, and they were right in line with management’s recent commentary. Both revenue and adjusted EBITDA beat prior guidance. It was again mentioned that BOOM’s businesses have stabilized. Management is sticking to the previous playbook of operational improvements and focus on FCF generation.
That said, any kind of meaningful business inflection is still far away. Revenue and earnings in Q4 were still down YoY, and the Q1’25 outlook suggests that sales will be flat sequentially but down ~10% YoY. Two out of BOOM’s three businesses are stuck in the low end of their cycle, and on the conference call, management hinted that normalization could take 1.5–2 years.
One interesting comment from the CEO was that he expects Arcadia’s normalized margins to be at mid-teens (compared to 3.7% in Q4). That doesn’t seem totally unrealistic – Arcadia hit 12.5% margins back in 2021. For Dyna, he sees low double-digit margins in a mid-to-high cycle, compared to 0.6% in Q4.
Overall, the situation hasn’t changed much since the last update. The odds of any immediate catalyst from STCN or other activists seem to be fading, but it’s interesting to see what’s the endgame is going to be after all this recent effort and escalation. Full BOOM write-up.
QUICK PITCH UPDATES
Pacific Current Group (PAC:AX) — earnings report came out
PAC released its H1 FY25 results. Fair value NAV was slightly lower than I expected – at A$13.96/share. If the tender is fully subscribed, pro-forma NAV would increase to A$16/share, implying a 25% discount at current prices.
The company also announced a A$0.15/share dividend, with a record date of March 5 and payment date of April 10. The record date is two days before the buyback ends, so shareholders who participate in the tender will still receive the distribution.
Management was quite vague on the path forward and how remaining capital will be used. They mentioned potential additional investments in existing boutiques and new investment opportunities but also noted that if the tender isn’t fully subscribed, they may consider returning the remaining capital through other means, such as on-market buybacks. So at this point, it’s hard to say what will happen after the tender. While the whole commentary doesn’t really suggest a move towards any kind of a gradual liquidation, during the conf. call, management sort of hinted that buyback results will heavily influence their approach going forward, so maybe they’re now in a wait and see mode.
Overall, the investment thesis remains unchanged – everything depends on the tender results. If participation is low and/or if major shareholders sit it out, it would be an interesting signal that something interesting still can happen here in the short term. PAC quick pitch.
ContextLogic (LOGC) – partnership with a big investment fund
LOGC has received a “strategic investment” from BC Partners Advisors, a big alternative investment manager with €40bn in AUM. BC Partners will inject $150m into LOGC through convertible preferred units, bringing LOGC’s total cash balance to $300m alongside $2.7bn in federal NOLs. Conversion terms haven’t been disclosed yet. Both parties will now explore strategic options together. It wouldn’t be surprising BC Partners already had a few potential reverse merger targets lined up.
This is a highly positive development for LOGC’s NOL monetization thesis. The stock has went up by 15% since the announcement and is now up 60% from the write-up levels. At this point, LOGC is trading at a big premium to net cash ($8.2/share vs. $5.7/share), with a significant portion of the federal NOLs value ($7/share) already priced in.
This recognition of NOL value also seems like a small but positive signal for ALLK, another NOL shell in a similar situation (covered on SSI here). LOGC quick pitch.
abrdn European Logistics Income (ASLI:L) — brief update
ASLI has announced the first capital return following recent property sales. The company will distribute €16.5m, around 6.5% of its market cap. Ex date is March 5. The liquidation is moving along, with due diligence underway for three of ASLI’s biggest assets – each worth around €45m (compared to a €250m market cap). Additional properties are also being prepared for sale. The stock trades at 59p compared to management’s estimated NAV of 74p, which includes disposal and liquidation costs. ASLI guest pitch.
Destination XL Group (DXLG) — spread continues to widen
The spread has doubled from the write-up levels (31% now vs. 15% previously). However, the downside probably isn’t zero, even though the stock is very close to pre-announcement prices. DXLG’s holiday sales update in mid-January wasn’t great (November revenues down 12%) and management was forced to engage in ‘strategic promotions’ to soften the decline. The results were labeled as “mostly in line” with expectations, but the full-year guidance was still trimmed, although slightly. So if there’s no takeover, DXLG might still fall below the pre-offer price of $2.2/share.
My key concern is whether Fund 1 Investments’ offer is genuine or whether it was made just to put the company in play. As I’ve previously noted in the write-up, the wording of the offer was a bit strange. A 30% spread usually signals that the market doesn’t believe that a deal will happen. It’s possible that something is already in the air, and the market is picking up on it before any official news are out. DXLG quick pitch.
Delek US (DK) — earnings update
DK posted another disappointing quarterly results (Q4’24). Crack spreads are weak, and refining industry remains firmly in the low-cycle. DK’s refining business burned through $70m in EBITDA last quarter, compared to management’s $546m mid-cycle annual EBITDA estimate for the segment.
Deconsolidation continues to move at a snail’s pace. DKL authorized a $150m buyback of its shares held by DK, to be executed through 2026. At current prices, this would reduce DK’s stake by 10%. I’m not sure if such tiny steps are a positive or just another sign that management is simply unable to find better solutions despite the two-year-long strategic review.
The market is clearly getting frustrated, as the sum-of-the-parts discount keeps widening. DK now trades at $16.3/share, while its DKL stake alone is worth $23.5/share. That gap won’t close until management lays out a real plan for deconsolidation. DK quick pitch.