Below you will find a number of special situation examples that have been published on the site. Some of these were covered by me, others were shared by the members. For a full track record, you can browse through all past ideas on the site.
Low & Bonar (LWB.L) +35% in 1.5 months
Freudenberg signed an agreement to acquire technical textiles manufacturer Low & Bonar PLC for £0.155/share in cash. Approval from the target company shareholders had already been received, while consent from the EU regulators seemed likely to be given due to a small size of the transaction. Spread stood at 40% at the time of the write-up and widened even more (to 200%+) during market sell-off. The main risk was that Freudenberg could've used the COVID-19 situation (and its impact on LWB's business) to renegotiate the terms or walk away from the transaction. Nonetheless, EU regulators gave their consent earlier than expected, which has likely limited the possibilities for Freudenberg's to walk away and the merger closed shortly after that.
Zyla Life (ZCOR) +26% in one month
Zyla Life agreed to be acquired by Assertio Pharma for 2.5 ASRT per each ZCOR share (two nano-cap specialty pharma companies). Approval was required from shareholders of both parties, while the support of 51% of ZCOR shareholders was already in the pocket. The main uncertainty lied around the ASRT shareholders vote, although 6 major Assertio shareholders (owned 40%) seemed quite likely to vote in favor. Shareholders' voting went as expected and the transaction was finalized shortly after.
Tallgrass Energy (TGE) +40% in one month
Oil & gas pipeline company Tallgrass Energy was due to be acquired by Blackstone for $22.45/share in cash. Shareholder approval seemed almost guaranteed as buyers already owned 44% of TGE, while the condition of minority shareholder approval was waived. Spread widened from 2% post announcement to 40% at the time of the write-up. The main risk was Blackstone terminating the merger or asking to change the terms given sell-off in the energy industry. However, Blackstone seemed like a credible buyer, which owned 44% of TGE and had already intended to buy it out fully a number of times before. Eventually, shareholder approval was received and the transaction got finalized quickly after that.
Li & Fung (0494.HK) +13% in one month
Chinese supply chain management firm Li & Fung announced privatization by management and Singaporean private equity company GLP Group. The risk of buyers walking away seemed minimal, however, the main issue lied with shareholder approval condition - only 6.67% of votes are required to break the transaction. Nonetheless, given multi-year underperformance by LF, COVID impact on the business, and the offer price being above pre-COVID levels, shareholders were expected to be in favor of getting cashed-out. Eventually, shareholders approved the transaction and the scheme closed successfully.
McKesson (MCK) +$1200 in one month
Another standard split-off transaction whereby McKesson distributed its remaining stake in Change Healthcare. Every $100 of MCK shares accepted in the tender were converted into $107.53 of CHNG shares, subject to an upper limit of 11.4086. Due to odd-lot priority provision, owners of less than 100 shares had an option to earn almost risk-free $1200, while the rest of the market was in a downfall.
Temple Hotels (TPH.TO) +21% in 5 months
Temple Hotels was an over-levered Canadian hotel REIT with two largest shareholders actively acquiring shares (combined ownership of almost 90%). This seemed to indicate that the company might be moving towards privatization or sale. Although it took slightly longer than expected, eventually TPH asset manager offered to take the company private at a premium to market prices. Overall, 21% return in 5 months.
Osram Licht (OSR.DE) +17% in one month
Osram Licht, a €3.5bn German lighting systems and Opto-semiconductors provider received two all-cash takeover offers - €35/share from private equity group Bain & Carlyle and €38.5/share from Apple sensor supplier AMS AG. At the time of the write-up, Osram shares traded at 11% spread to AMS offer as the acquisition seemed expensive, had high shareholder acceptance requirements, and faced potential antitrust issues. Any overbid by Bain & Carlyle seemed rather unlikely, but with two offers on the table, downside appeared rather well protected. Surprisingly, when rumors spread about Bain making another 'materially higher' bid with Advent instead of Carlyle, AMS rushed forward and preemptively increased its own offer to €41/share. The story is not over yet and an announcement from Bain & Advent might still be pending. However, due to already high Osram valuation and risks of shareholder and regular approvals, today's price of €40+/share provides lucrative exit opportunity - overall +17% in a month.
TheStreet (TST) +15% in 2 months
TST was trading below cash balance following the sale of their B2B business and promised to distribute a substantial portion of this cash to shareholders. I expected the eventual distribution would serve as a catalyst to lift the share price upwards - if not before then after the event. TST shareholder base was very concentrated and downside seemed to be protected by the balance sheet - remaining B2C operations were estimated to add another 25%-50% value to the cash. The actual distribution ended up being surprisingly large - 80% of their cash in a form of dividend and as expected gave pushed the share price upwards. Easy money on this deal has already been made and although the stub still trades at a material discount to cash + expected value of B2C operations, there is no catalyst in sight and it may take time till B2C business is sold or profitability is improved.
Trez Capital Mortgage (TZZ) +27% in seven months
Trez Capital Mortgage was in orderly liquidation and traded 20% below NAV. Only a few mortgages were remaining on the portfolio and liquidation was expected to be finished within a year. A large discount to NAV was likely caused by a couple of problematic assets on the balance sheet. However, a more detailed investigation of the fillings indicated that problematic loans are getting resolved and underlying collateral is in the final stages of being sold. The stated NAV was likely a conservative estimate of the expected proceeds from liquidation. The spread was almost eliminated after Q2'18 results were released and two separate parties offered to buy out the company at NAV. Following Q3'18 distribution (which was equivalent to my initial investment), the spread widened again providing multiple trading opportunities. Finally, with the release of annual results company announced incremental recovery from the previously defaulted loan which pushed NAV and the share price even further upwards. I closed the position with 27% gain in seven months. The latest news release just a couple of days ago shows that TZZ will make another distribution of C$0.47 and then delist from the exchange. Shares dropped 15% upon the announcement and might provide a good entry point to those comfortable holding unlisted securities. However, neither timing nor amount of eventual recoveries is certain at this point.
OncoMed (OMED) +46% in two months
This was an all-stock micro-cap cross-border pharma merger. The liquidity of both stocks was low and borrow was non-existent. However, the spread stood at 63% (+ additional upside from CVRs) and seemed worth the risk even without hedging. Mereo (the buyer) seemed credible, had acquired similar drug development programs in the past, and appeared unlikely to walk away. OncoMed shareholder approval was likely due to 11% ownership by management and another 35% by affiliated entities and large pharma. Share price volatility unhedged Mereo was the highest risk in this arbitrage. Within two months the spread had narrowed due to 46% run-up in OMED share price. This appeared to be a timely exit opportunity as following the closing of the merger Mereo's price has dropped eliminating any gains from this arbitrage. CVRs remain outstanding and might result in multi-bagger if milestones are triggered.
Xenith IP (XIP.AX) +10% in two weeks
Merger fight within Australia's IP and trademark service industry that has been ongoing for almost half a year. Xenith received competing offers from the largest (IPH) and second-largest (Qantm) players in the industry. Merger with Qantm would have created a new market leader and therefore IPH was very eager to snatch Xenith from Qantm's hands. At the time of the write-up both offers had received antitrust approval and IPH was expected to sweeten its bid further, however, Xenith shares were still trading below the previous IPH offer. Just a week later IPH came forward with a better offer and Xenith shares jumped 10%.
American Midstream (AMID) +35% in two months
After a period of poor performance, Oil & Gas MLP American Midstream received an offer from their GP - ArcLight Capital Partners. The initial $6.1/share offer made in September 2018 was cut to $4.5/share in January and as a result, received a lot of noise from AMID shareholders. ArcLight controlled over 50% of the vote, thus only the approval from the independent committee was required for the buyout. With shares trading at a discount to ArcLight's revised lower offer and other shareholders arguing that the offer is too low, the risk/reward seemed asymmetric. After one and a half months of silence (and after the self-imposed deadline expired) ArcLight came back with a higher offer of $5.25/share resulting in a 35% return over two months holding period.
Eli Lilly (LLY) Risk-Free $900
Eli Lilly was fully divesting its animal healthcare business in a split-off transaction. Every $100 of Eli Lilly were converted into $107.53 of Elanco Animal Health stock. Due to odd-lot priority provision, owners of less than 100 shares had an option to earn almost risk-free $900. In line with other recent split-offs unhedged transactions resulted in higher returns.
Radisson Hospitality (RADH.ST) +20% in 3 months
This situation was triggered by the Chinese hotel management group Jing Jiang’s acquisition of a major stake (70%) in European hotel operator Radisson Hospitality. Jing Jiang was required by law to make an offer for the minority holders at least at 35SEK/share. With shares trading at the same level, it was a risk-free gamble that Jing Jiang will bid above the minimum requirement in order to reach the 90% ownership threshold needed to take the company private. The first offer came in at 40SEK/share and was quickly upsized to the final offer of 42.5SEK/share. RADH board rejected both and encouraged shareholders not to tender. I do not believe 42.5SEK/share offer will be sufficient to reach 90% ownership as Radisson keeps on reporting improved operating performance and the hotel chain is likely worth significantly more. However, Jing Jiang will need to wait at least 6 months before making another bid (bid above the minimum requirement clearly showed their intentions to take the company private). So it is definitely a situation worth tracking further.
AGT Food and Ingredients (AGT.TO) +15% in one month
An opportunistic privatization offer by management led the buyer group (28% ownership) during cyclical low for the agricultural business. Market reaction was positive initially and shares traded close or even above the offer price - an activist opposed the transaction arguing that price is too low and shareholders probably expected a better offer. Involvement and financing by Fairfax gave confidence that the buyer won’t walk away. A few months later in became clear that the buyer group will not improve their bid and shares have sold-off on a number of occasions providing a nice entry point with double-digit arbitrage spread. Despite the opposition from the activist, shareholders have eventually approved the deal by a narrow margin.
Dell Technologies (DVMT) +15% in a month
In a nutshell, DVMT was supposed to be almost 1 for 1 tracking stock of VMW. However, it traded at 35% discount due to corporate governance issues and investors expecting Michael Dell to screw them. And eventually, he did that by giving low ball offer to cashout/exchange DVMT holders into new Dell stock. A number of activists (including Carl Icahn) were encouraged investors to vote against the unfair proposal and demanded a better deal. The main special situation thesis was that Dell will bow to investor pressure and sweeten the deal for DVMT holders. And one month later that happened, causing 15% jump in the share price.
Trez Capital Mortgage (TZZ) +25% in two weeks
Trez Capital Mortgage was in orderly liquidation and traded 20% below NAV. Only a few mortgages were remaining on the portfolio and liquidation was expected to be finished within a year. A large discount to NAV was likely caused by a couple of problematic assets on the balance sheet. However, a more detailed investigation of the company's filings indicated that problematic loans are getting resolved and underlying collateral is in the final stages of being sold. The stated NAV was likely a conservative estimate of the expected proceeds. I reasoned that management will likely provide further updates clarifying these issues together with Q2 results. And that is exactly what happened. Q2 results indicated that all previous problematic loans have been resolved and the material portion of provision has been reversed with further distributions for shareholders. On top of that TZZ received two offers to by acquired at NAV. Spread to NAV promptly closed. (further info here).
Boardwalk Pipeline Partners (BWP) +18% in two weeks
General Partner (Lewis) announced intentions to buy out all limited partners and eliminate MLP structure. Cash-out price and timing were uncertain. I argued that by extending the timeline Lewis is risking litigation and therefore any announcement is imminent. The cash-out price would be equal to the 180 days the weighted average share price before the announcement, which likely suggested 15%-20% upside depending on the exact timing. Two weeks later unit buyout announcement was released and shares jumped accordingly (further info here).
Lithium X Energy (LIX) +20% in one day
This timely idea was shared by one of the members. Lithium was in the final stages to be acquired by NextView New Energy. Share price suddenly dropped likely in reaction to news that there is a slight delay in arranging to finance for the deal. Lithium management publicly confirmed that the deal is still due to close in the coming days and that they will be buying shares themselves in the open market to profit from this M&A spread. One day later financing was confirmed and the spread closed promptly (further info here).
Rent-A-Center (RCII) +85% in half a year
This was a merger arbitrage, turn-around, and activist proxy fight situation in one. The market seems to have given up on a year-long activists’ efforts to sell the company despite interest from a number of parties, still continuing discussions with one buyer (with a specified acquisition price) and management's confirmation that company sale is still on the table. I argued that new experienced management is in place, the board’s interests are fully aligned with shareholders, acquisition offer at 60% premium still seems to be standing and significant cost-saving initiatives are underway. I expected the company to be sold shortly. Six months later negotiations with the buyer ended at a significant premium to the initially indicated sale price (further info here).
CBS Corp (CBS) - risk free $450 in a month
This was a rather straightforward split-off transaction with an odd-lot provision. CBS Corp was divesting its radio business, which was merged with ETM. Existing CBS shareholders had an option to convert $1 of CBS stock into $1.08 of ETM stock. Holders of less than 100 shares of CBS were converted on a priority basis without proration (further info here).
Greenhill & Co (GHL) +75% in 9 months
GHL has launched tender for 40% of the outstanding stock. The shares of the company were trading at all-time lows and management indicated that they will not participate in the tender. On top of that chairman and CEO both pledge to invest an additional $10m into newly issued shares at the same price as the tender. I reasoned that the tender is very likely to be under-subscribed and as a result of that the share price might jump after the tender results are announced. This is exactly what happened. Even before the expiration shares traded above the tender price. The tender was only 30% subscribed and right after this was announced GHL shares jumped 10% resulting in a 12% return over a two-week holding period. Another tender was launched at a higher price, which also ended up under-subscribed. In the coming months, management was trying to fulfill the buyback amount through open market purchases, which continues to drive the share upwards (further info here).
Destination Maternity (DEST) +90% in 3 months
The technical sell-off after the failed merger made DEST very cheap even for a struggling retailer. Bankruptcy was clearly not on the table and the company was priced as if the bankruptcy is imminent. Despite declining sales and store closures over the last year company managed to produce positive FCF and reduce debt balance. My expectation was that DEST stock was under strong selling pressure from arbitrageurs unwinding their pre-merger positions rather than an actual reflection of the company's valuation. A couple of months later DEST reported somewhat positive results with a slower decline in sales, continued cash generation, and debt pay-down. Also, it turned out that the acquirer from the failed merger still seemed to be interested in the company or it's parts and started carrying out proxy fight. With this background, DEST share price recovered resulting in a 90% gain over 3 months (further info here).
Advanced Emissions Solutions (ADES) +23% in 5 months
ADES is quite a complicated micro-cap where the main value (and cash) is generated from tax credits of refined coal (RC) facilities. I argued that contractual cash payments from the tax credits part of the business are significantly higher than the current market cap. Management estimated these payments alone (almost fully FCF) to be worth $13/share undiscounted vs $9.8 share price. A big part of this cash flow was planned to be distributed to shareholders, including already-announced tender offer, planned recurring dividend as well as any additional or incremental dividends. Further significant upside remained from unleased RC facilities and other parts of the business. Thus we had a situation with strong downside protection as well as material upside optionality. As expected management initiated recurring dividends, returned cash through a tender offer, and announced new leases for RC facilities. Within 5 months share price approached my target generating 23% return (further info here).
OCB Bancorp (OJCB) +10% in 3 months
OCB Bancorp was due to be acquired by BSRR - a far larger banking institution in Southern California - at $14/share. OJCB was at the time trading at $12.75, implying 10% spread. I attributed the wide spread mostly low liquidity, low visibility, and nano-cap nature of the deal. I saw limited risks of this deal falling apart - it made sense from a business economics perspective and both sides seemed to be winning if the deal happens as planned. The largest question mark was OJCB shareholder approval, but with insiders owning 25% of the stock getting 1/3 of the remaining votes to approve the deal seemed very likely. As expected OJCB shareholder approved the transaction and as a result of that the share price shot up to more than $14, generating a nice 10% return in 3 months (further info here).
Ferronordic (FNMA-PREF.ST) +10% in 2.5 months
Ferronordic was a non-listed company with a publicly traded preferred stock. Recently the company has initiated the process of launching an IPO, which would allow the preferred shares to get converted to common at 1300 SEK price. At the same time, preferred shares could be redeemed by the company at 1200 SEK. The preferreds were trading at 1070 SEK at the time of write-up, offering 12% upside to redemption price and even higher upside to the conversion price. The company successfully launched an IPO in Oct and preferred shareholders who opted for conversion will receive ordinary shares at 1300SEK valuation. Currently, Ferronordic is trading 15% above its IPO price, for a combined return of 40% (further info here).
Tropicana Entertainment (TPCA) +5.5% in a month
Carl Icahn launched a dutch tender offer to acquire TPCA at $38-$45 per share (likely a step towards taking the company fully private). Shares were trading at $42.5 at the time. A number of factors pointed out that the tender has a very high likelihood of being under-subscribed and therefore priced at $45/share. As expected, tendered shares were accepted for $45/share, resulting in a 5.5% return in a month. Subsequently, TPCA share price shot up to $47+ in expectation of higher upcoming offer from IEP Thus non-tendering shareholders received an even higher return of 10.5% (further info here)
China Digital TV (STVVY) +27% in 2 weeks
China Digital TV has sold its core business and announced a special dividend of $1.5/share. Due to confusion on the ex-dividend date the shares have traded below this special dividend level on a number of occasions (as low as $1.33/share). I reasoned that after the dividend distribution the remaining stub would still have c. $0.55/share in cash. On top of that, the remaining business which has shown very high growth rates in the past and operated around break-even in the latest quarter should also have some residual value. With all of that, I assumed that the stub is unlikely to trade below $0.35/share (same discount to cash as before the distribution announcement). $1.5 dividend has been paid out 2 weeks later (with no withholding taxes) and the stub traded in the range of $0.3-$0.4/share by the end of the ex-dividend day. Any investors that held out the position till the dividend payment realized a generous 27% return in two weeks. (further info here)
AP Alternative Assets (AAA) +5% in 3 weeks
AP Alternative Assets (AAA) is a partnership vehicle established by Appolo. Its only remaining asset is the investment in Athene (ATH) – health insurer that IPOed in Dec 2016. AAA was (and still is) gradually liquidating its investment and already had made two distributions of ATH shares to unitholders. Partnership's management communicated that it will distribute all of the ATH shares by March 2018 (or earlier) and then liquidate. At the time when I looked at this, AAA was trading at an 8% discount to its NAV, all of which was comprised of ATH shares. I considered this to be close to risk-free arbitrage opportunity - investors had an option to buy AAA shares, short corresponding amount of ATH shares and pocket the 8% spread. The spread narrowed materially in 3 weeks resulting in a 5% gain for the hedged position and then fully closed (8% gain) during the upcoming month when another distribution was announced. (further info here)
PennTex Midstream (PTXP) +32% in 4 months
Back in Oct 2016 Energy Transfer Partners acquired 65% of PTXP and hinted its intention to buy-out the remaining public shareholders. Despite this PTXP was still trading significantly below the value at which ETP made the purchase and also at discount to its fair valuation. At the time when I published this idea (Feb 2017) ETP was pre-occupied with the merger of Sunoco Logistics and I reasoned that as soon as this merger is completed, the announcement will be made regarding the remaining public equity stub of PTXP. That is exactly what happened - SXL/ETP merger was completed at the end of April and just yesterday ETP announced a buyout of the remaining PTXP shares at $20/share. (further info here)
Tangoe (TNGO) +25% in 1 month
Tangoe was a company in a bit of a turmoil - financials were non-current, previously filled financials had to be restated, there was a pending class-action lawsuit as well as ongoing SEC investigation. Despite this couple parties have expressed the interest to acquire Tangoe and shares were trading with a narrow spread relative to the expected acquisition price. However, in March TNGO delisted from NASDAQ, and forced selling caused shares to drop 20%. This created a great buying opportunity. I reasoned that TNGO acquisition offer is still on the table as one of the potential acquirers expressed their full awareness of financial mess TNGO was in and suggested that this situation did not reduce their interest. At the same activist investors were pressing the company to sell itself. Just few weeks later, it was announced that Marlin Equity Partners have agreed to acquire TNGO at $6.5/share (further info here).
Wingstop (WING) +10% in two weeks
Wingstop share price jumped +14% to all-time highs after the release of Q1 earnings due to good looking headline revenue and EPS numbers. However, the headline figures were misleading and were driven purely by non-cash accounting changes and a one-time revenue item. In reality, Q1 earnings showed hardly any positives with the first-ever decline in same-store sales and continued deterioration in growth. I reasoned that such exuberant trading was likely caused by algorithmic robot trading or completely superficial retail investors who misread the headline numbers for a huge improvement in operational performance. And due to that, I shorted WING expecting fast share price correction at least towards pre-release numbers. WING shares started dropping the next day and now stand close to the levels before the earnings release. All worked out exactly as expected with a short position generating 10% in 2 weeks (option buyers generated multi-bagger 4x) (further info here).
Lockheed Martin (LMT) - risk-free $2700 in a month
LMT was divesting its IT Servicing business to Leidos in a split-off transaction. Every MLT shareholder could tender his/her shares and in return receive $1.11 of Leidos shares for every $1 of LMT shares tendered. Most importantly, tendering shareholders who own less than 100 shares were accepted on a priority basis (i.e. their shares were not prorated). Thus the trade was straightforward - buying 99 shares of LMT and submitting these to tender. Market risk is eliminated by shorting Leidos. Every invested dollar returned $1.11 after the tender, which resulted in $2700 of risk-free gains in a month. Those that did not hedge out the market risk by shorting Leidos, realized even large gains of $7300 (further info here).
Procter & Gamble (PG) - risk-free $650 in a month
PG was divesting their cosmetics and fragrance assets to Coty in a split-off transaction. Every PG shareholder could tender his/her shares and in return receive $1.075 of Coty shares for every $1 of PG shares tendered. Most importantly, tendering shareholders who own less than 100 shares were accepted on a priority basis (i.e. their shares were not prorated). Thus the trade was straightforward - buying 99 shares of PG and submitting these to tender. Market risk is eliminated by shorting Coty. Every invested dollar returned $1.075 after the tender, which resulted in $650 of risk-free gains in a month (further info here).