SSI Weekly – Pitches for OMEX, PIRI.L, KTTA, ABIO, TYME, BKGM, BUKS, RADI

OMEX – Litigation – 10x-30x Upside

PIRI.L – Merger Arbitrage – 22% Upside

KTTA – Activist Campaign – 88% Upside

ABIO – Activist Campaign – 35% Upside

QUICK IDEA PITCHES

Odyssey Marine Exploration (OMEX)
OMEX is in the final stages of NAFTA litigation against Mexico. Odyssey Marine Exploration claims that Mexican regulators have illegally refused to grant the company an environmental permit for its world-class phosphate deposit. The claimant says the permit was denied with no reasonable grounds and the company is seeking a $2.7bn award (vs $6m market cap). A review of the court filings and several other aspects, as detailed by this VIC author and Green River Asset Management, suggests OMEX has a strong case. NAFTA trial was held in Jan’22. The timeline of the decision (3 judges) is not clear, but apparently, NAFTA’s decision is not appealable. Shares are currently trading 60% below the VIC write-up levels with an upside potential of 10-30x. The main risk is that without a successful litigation outcome, OMEX is basically worthless. Historically, the success of NAFTA litigation against Mexico has been quite low (5 out of 30) and those cases were many times smaller. Even if OMEX wins, extracting the award from Mexico can be problematic and time-consuming. The settlement seems unlikely – if Mexico wanted to settle, it probably would’ve done it already. There’s also significant uncertainty regarding the lawyer fees. Certain debt provisions are also quite messy – OMEX has apparently pledged all of its shares in the phosphate project for a loan with AHMSA (a Mexican steel firm). The debt has already been in default for quite a while and AHMSA has been involved in some shady dealings before. For now, the steel company has agreed for a cash repayment from OMEX after the environmental permit is granted, but it’s not clear whether the pledge/loan default won’t become an issue as soon as the permit is put on the table. Overall, this saga has been going on for several years now and probably many fund managers/lawyers have taken a look at it already. OMEX price is at all-time lows and 50% below levels of VIC write-up. Investors watching the situation from the cheap seats probably have no edge on this case.

Pires Investments (PIRI.L)
A tiny UK-based merger arbitrage – VC fund Pires Investments is getting acquired by a larger peer Tern plc. Consideration is all stock – 0.51613 TERN shares for each PIRI share. The spread is at 22%, most likely due to limited liquidity and borrow availability (17% annual fee). Other than that, the merger makes sense due to the synergistic investment portfolios and the need to scale up for both companies. The acquisition is supported by 19% of the target’s shareholders and 6% of the buyer’s shareholders. Closing is expected in Q3 2022.

Biopharma net-nets with strategic reviews
We’ve also taken a look at several biopharma net-nets. Recently, a number of them have either announced strategic alternatives or have been approached by an activist. The 3 most interesting situations are listed below. The general risk here is that the strategic review/activist campaigns will lead to nothing (no sale or liquidation) and the firms will either keep the status quo or decide to burn even more cash on some new drug developments. In this negative scenario, the potential downside could be material.

• Pasithea Therapeutics (KTTA) – a tiny clinical-stage biopharma that develops treatments for psychiatric and neurological disorders. IPO’ed in September’21 at $5 and shares are down 80% since. KTTA sports $26m market cap vs $49m net cash. Recently, an activist Camac Partners acquired a 6% stake and started a campaign pushing for the board change and for the halt of any capital allocations. Camac promised to go directly to KTTA shareholders if management doesn’t cooperate. Camac Partners is a rather small hedge fund ($150m AUM) and has been previously involved with the Cedar Realty Trust sale saga, where they were able to reach a settlement and appoint their independent directors. Cedar Realty Trust was later sold.
• ARCA Biopharma (ABIO) is targeted by an activist Cable Car Capital. The company trades at $2.36/share vs $3.19/share of net cash. The activist has reported its first 13D at the end of March (6.5% stake) and has been aggressively buying shares since then – currently owns nearly 18%. The activist is demanding ABIO to discontinue its clinical trials, minimize operating expenses, and start exploring strategic alternatives. Interestingly, ABIO has listened and announced a special committee to review strategic options. That might be just for the show – management has history of destroying value and is somewhat incentivized to keep the status quo (pretty big paychecks). Background on the activist is limited.
• Tyme Technologies (TYME) is another clinical-stage biopharma net-net that is exploring strategic alternatives. The company trades at $0.27/share vs $0.44/share in net cash. The interesting twist is that the company has voluntarily announced the suspension of its main/most advanced trial and then issued time-based options that are vested in a change of control scenario for management. This was done shortly after the strategic review announcement. Moreover, two founders and ex-board members (own 25% combined) have entered into an agreement to support any decision taken by the board. The sale/liquidation scenario could be very interesting here. In a less optimistic scenario (no buyer is found or the board decides to continue the development of other treatments/buy new drugs, etc.) the downside could be material.

Bank of Guam (BKGM)
Bank of Guam, a regional bank in a US territory, intends to propose a 1-500 reverse stock split in the upcoming annual meeting (June 27). Each fractional/odd-lot shareholder will get cashed out at $14.75 per pre-split share. Total potential upside is $300 for odd-lots. Shareholder approval seems guaranteed as 54% of shares (directors stake) are already in support. Liquidity is very limited but has somewhat increased in the last several days. Liquidity is the reason we think the split won’t get canceled due to a spike in odd-lot accounts that need to be cashed out (the primary reason why some of the previous reverse splits got canceled). The bank seems very cheap trading at 0.6x TBV and 5.5x PE, while generating 11% ROE and 0.4% ROA on 2021 earnings.

Butler National (BUKS)
An interesting highlight from the Alluvial Capital blog. Butler National is a $73m Mcap company with a weird combination of two businesses – casino and aerospace services for small personal aircraft. The company currently trades at 7.5x TTM earnings and 5.3x TTM EBITDA. The aerospace business has been performing well post-COVID with its rebuilt backlog. However, the visibility of the aerospace business is quite limited – revenues have been elevated recently vs pre-COVID and it is not clear what revenue levels are sustainable. On the casino side the company has cheaply bought out its previous investment partner and also acquired the building where the casino operates. Notably, the state of Kansas publishes monthly results for each casino, which acts as a leading indicator for the next quarter’s results. The recent numbers look good suggesting a solid upcoming quarter. Apparently, not all brokers allow trading in BUKS  stock (still possible on IB though).

Radius Global Infrastructure (RADI)
Wireless tower ground lease firm Radius Global Infrastructure is rumored to be exploring a sale – recent media reports say that the company is now in talks with Digital Bridge Group. The idea has recently been highlighted by Clark Street Value and Scrooge Capital. Valuation is a bit tricky and upside potential ultimately boils down to whether the land should be worth 5% cap rate (6% downside) or 4% (28% upside). Clark Street Value is playing it through the call options.