SSI Weekly – Pitches for WEN, HMTV, HLG, FCIT, BIFF.L, PMD

WEN – Takeover Interest – 40% Upside

HMTV – Merger Arbitrage – 6%+ Upside

HLG – Chinese Take-Private – 11% Upside

FCIT – Merger Arbitrage – 9% Upside

QUICK IDEA PITCHES

Wendy’s (WEN)
Wendy’s has received potential takeover interest from its major shareholder Trian Fund Management (which owns 19%). Shortly after, the company reaffirmed its 2022 guidance and postponed the investor’s day (which was due June 9). Trian Fund is founded by a prominent activist hedge fund manager Nelson Peltz. Nelson has a decades-long history with WEN and knows the business inside out. WEN currently trades at 17x TTM adj. EBITDA and even slightly cheaper on 2022 guidance. Peers like MCD and YUM trade above 20x TTM adj. EBITDA. Interestingly, all recent fast food industry acquisitions in 2021/2020 were done exactly at 20x adj. EBITDA (Leon, Firehouse, Global Franchise Group). The same multiple for WEN would imply a $25/share target price and 40% potential upside. Downside to the pre-announcement price is 10% and potentially more due to the recent sell-off. It kind of seems like an asymmetric bet, although the risk that Trian will walk away amidst the current market turbulence shouldn’t be ignored. WEN is a very popular mid-cap stack, so the chances are the market is pricing in the odds efficiently. Reportedly, Trian Fund has a history of walking back on takeover intentions – in 2018, it was rumored to be considering a bid for Papa John’s but a month later new rumors came out that the bid had been withdrawn.

Hemisphere Media Group (HMTV)
Hemisphere Media runs a broadcasting and cable network business for the Hispanic and Latin American markets. The company is getting acquired by insiders (45% economic interest) for $7/share. 6% spread is outstanding. Approval from the majority of disinterested shareholders is required. Edenbrook Capital, a major long-term shareholder, rejects the offer and says management has intentionally beaten down the share price and is now stealing the company away from shareholders. Edenbrook’s SOTP valuation puts a price target of $16-$23/share. The main issue is that, apparently, insider’s indirect affiliate owns enough of the “disinterested” voting power to determine the outcome of the vote. So in essence, this could be an easy play for a 6% spread with expected merger closure in Q3 and a tiny chance of an improved offer if management decides to play it nice. However, the massive 40%+ downside to pre-announcement levels (if the merger breaks completely) is a bit too unsettling.

Hailiang Education Group (HLG)
Chinese U.S.-listed privatization with a definitive offer signed. Consideration is $14.31/ADS in cash and an 11% spread is outstanding. Preliminary proxy was filed two weeks ago. The company is one of the survivors of the Chinese education reform that was introduced last year. The reform pretty much destroyed all after-school education providers, however, organizations that provide actual degree programs were spared. HLG also lost its K-9 private school and after-school tutoring businesses, however, still runs international degree programs business for grades ten to twelve. The programs focus on preparing students to study abroad. Due to the reform, HLG stock price has been decimated (previously traded at $50-$65/share range). However, the remaining business has been growing at 47% CAGR over the last 5 years. The offer now comes at 5x FY2021 PE (ending June), so it kind of looks like the management might be using the opportunity to cash out the minority shareholders at a cheap. It might be no longer relevant, but historically, the absolute majority of Chinese U.S.-listed privatizations with definitive offers signed used to close successfully. The risk is that this is still a Chinese ADR with limited visibility. Downside to pre-announcement is 15% but might be much larger due to the current market turbulence.

First Citrus Bancorporation (FCIT)
Another community bank acquisition by a credit union. Average daily liquidity stands at $60-$100k. Credit union DFCU Financial is buying First Citrus Bancorporation for $47.75/share in cash. 9% spread is outstanding. Other credit union acquisitions of community banks that were covered on SSI include HWIS, EGDW, HSBI, BFFI, and WEIN. All of them have worked out successfully except for HSBI transaction, which has just been terminated. FCIT merger is still quite fresh and not much information is yet available. However, the strange thing is that, unlike the previous cases, the press release of the FCIT takeover reads more like a normal takeover instead of a usual asset sale + wind down structure that credit union/community bank takeovers have. However, closing is expected only in Q4, which seems quite long for a tiny merger and suggests that it will most likely be an asset sale/wind-down structure after all. FCIT is a tiny bank with 6 branches. The offer comes at 2x TBV valuation, which should easily secure shareholder approval. Regulatory issues are unlikely, although HSBI (another similar takeover, which was terminated) had apparently received some regulatory concerns. However, HSBI was a 2x larger deal and the biggest credit union acquisition of a bank. FCIT shouldn’t receive the same level of scrutiny.

Biffa plc (BIFF.L)
Biffa is a £1.2b MCAP provider of waste management services in the United Kingdom. After a few rounds of private discussions, on the 7th of June BIFF announced a non-binding offer from Energy Capital Partners (PE firm). Consideration is 445p per share in cash. The spread is now at 15%. Downside to pre-announcement levels is 16%. For a while now BIFF has been facing a fine from UK’s tax regulators due to some aspects of its landfill tax compliance. An investigation is ongoing and it will take some time until a conclusion is reached. The potential liability is unknown and may range from £170k to £153m plus penalties and interest. Interestingly, because of this looming fine BIFF management said it is inclined to accept the takeover offer if the final price is not reduced and allowed due diligence. Put up or shut up date has been set for the 5th of July. Energy Capital Partners an investment firm that focuses on the energy, sustainability and environmental infrastructure sectors. Apparently, it has a bit of experience in the waste management sector as well. So the buyer is well-informed. The main risk is that the situation is still at a non-binding stage and the buyer might walk away easily if it finds any issues during the due diligence phase.

Psychemedics (PMD)
This idea was previously covered on SSI. Psychemedics provides drug testing services through the analysis of hair samples. The company used to have a fast-growing Brazil segment where it ran mandatory drug tests for truck driving license renewals. The segment was destroyed during COVID, as Brazil extended truck driving license expirations for 2 years (no drivers needed to take the test). A prominent investor/activist Peter Kamin has been pushing the board to start strategic alternatives saying he believes the company has many strategic buyers. Recently, Kamin has also started adding to his position and increased the stake from 8.4% to 11.1%. So last week, the board has finally yielded and not only nominated Kamin to the board of directors but also will add him to the strategic alternatives committee. So it finally seems things have started to move. However, the valuation of the business is tricky. Brazil’s revenues are still basically non-existent. Visibility into Brazil operations is also limited. Management has been silent about it and overall, it seems like recovery is no longer likely. The remaining domestic US business is barely growing and operates at breakeven. Of course, without overheads (assuming a large testing industry player like DGX or LH can buy this and eliminate overheads) PMD is quite cheap and trades at like 4-5x PE. However, if the sale doesn’t happen, the prospects for the share price are dim.