Pitches for URF.AX, IMRA, RPID, CRNT, CTEK, VIVO

URF.AX – Liquidation – 100% Upside

IMRA – Strategic Review – 100% Upside

RPID – Merger Arbitrage – 9%+ Upside

RAP.AX – Merger Arbitrage – 27% Upside

US Masters Residential Property Fund (URF.AX) – Liquidation – 100% Upside
US Masters Residential Property Fund (URF.AX) is an externally managed REIT listed in Australia with assets exclusively in NJ and NY. In March, URF’s management agreed to sell its portfolio to a consortium of investors on terrible terms for common unit holders. Basically, the deal ensured that preferred shareholders got paid at par ($100/share) and commons only got 22c per share or a 60% discount to the reported NAV. Jeremy from Raper Capital wrote an open letter to the management of URF urging them to cancel the transaction. He instead suggested converting the preferred units into common by Jan’23 (before coupon increases), pursuing a piecemeal liquidation of the portfolio and gradually returning capital as the assets get sold. At the end of May, the buyer decided to terminate the sale citing an uncertain market environment as a cause. Management has apparently taken the activists’ letter to heart and subsequently announced a gradual asset liquidation + buyback of up to 10% of the market cap. As the sale advances, all the proceeds will be piecemally distributed to shareholders. All preferred units will be converted to common in Jan’23. There is no date set on when the full liquidation is expected to be complete.

Currently, common units trade at A$0.26/share vs management’s post-tax NAV estimate of A$0.57/share as of July 22. Even with a slight haircut to NAV (giving increasing interest rates), the margin of safety seems quite sufficient. On top of that, URF’s financial performance seems to be improving – management guided to positive FFO in H2’22 and is focused on cutting costs. Management fees for H1’22  are down significantly YoY from A$1.7m to A$0.2m driven by a switch from co-CEO to a single CEO model – a nice step towards shareholder value preservation.

Two shareholders have acquired significant stakes in the company after the announcement of the liquidation. Samuel Terry Asset Management (7% stake) is a small boutique investment fund with an impeccable track record of 16.4% average annual return since inception in 2003. Mirabella Financial Services (5.4% stake) appears to be a register for hedge funds and fund managers. It seems reasonable to assume that investment funds that have acquired the stake in URF after the liquidation announcement are determined to keep the management in check and will guarantee that they will go through with the whole process in a shareholder-friendly manner.

Few days ago, the situation has also been covered on a newly launched Adrian Capital‘s blog.

Imara (IMRA) – Strategic Review – 100% Upside
Imara is a $30m market cap failed clinical-stage biopharma company at 50%+ discount to net cash. In April, IMRA announced an 83% reduction of its workforce (only 6 person team will remain), discontinued its treatment development pipeline, ceased all R&D expenditures, and launched a strategic review. Though the outcome of this review is not clear, the company now has $70m or $2.6/share in net cash vs $1.15/share price. Liquidation or full company sale would certainly be the preferred outcome here. Further cash burn has been minimized and the margin of safety seems quite wide – assuming 1 year’s worth of conservative cash burn, the cash should still remain at $1.9/share. PE firm BML Investment Partners seems optimistic about IMRA as well – it disclosed a 6.2% stake right after the strategic review announcement and has since increased it to 12% at around current price levels. BML Investment Partners is a value-oriented fund focused on small-caps and seems to have decent experience with pharma/biotech stocks. The main risk here is that IMRA’s management might decide to spend the funds on the acquisitions instead of returning capital to shareholders (IMRA has $250m of NOLs which it might try to utilize by acquiring some cash-generating operations). The incentives are somewhat mixed – management owns 40% of the company but is also used to getting very fat pay-checks.

Rapid Micro Biosystems (RPID) – Merger Arbitrage – 9%+ Upside
RPID is a $170m market cap life sciences company that provides products for the detection of microbial contamination in the manufacture of pharmaceuticals, medical devices, and personal care products. The company IPOed a year ago and its share price is down 80% since then. RPID has recently received a non-binding $5/share offer from the second-largest shareholder Kennedy Lewis Management (14% stake). Management (owns nearly 40% of the company) hasn’t responded yet. The spread fluctuates around 10%-20% (was actually at 20% on Tuesday when we started looking into this). The proposal looks kind of out of place as the bidder Kennedy Lewis Management mostly targets debt-related investments under its $10b AUM and this seems to be the first time it goes for a full acquisition of a small pharma-related company. The offer values RPID’s equity at $209m vs $161m net cash (cash less total liabilities). The company is growing fast (revenues +44% in 2021) and despite the weak two last quarters has guided for 25%-50% growth in 2022. Cash burn is quite substantial ($50m per year). The main risk here is if management declines the offer -the downside to pre-announcement prices is 20%.

ResApp Health Limited (RAP.AX) – Merger Arbitrage – 27% Upside
A quick update on ResApp Health’s acquisition by Pfizer – was highlighted in our earlier SSI Weekly. Pfizer made an offer to buy ResApp in April at around A$100m. Pfizer is interested in RAP’s technology that uses artificial intelligence algorithms to both diagnose and measure the severity of respiratory diseases (including COVID) and has since raised its bid to around A$127m or about A$0.146/share. The spread to the offer has recently widened to 27% without any material updates aside from the regulatory clearance (was expected). The scheme booklet was released with the shareholder meeting set for the 19th of August. With a high 75% shareholder approval threshold, the only hurdle that can possibly derail the transaction is the opposition from dissatisfied shareholders. There seems to be plenty of outraged retail shareholders on the Australian investor forum – Hotcopper saying the offer is unfair and lowball. If the deal mergers, RAP will need to imminently raise capital, so the potential downside might be significant.

Ceragon Networks (CRNT) – Merger Arbitrage – 7%+ Upside
Ceragon Networks, a networking equipment vendor for mobile operators, received $2.8/share non-binding cash offer from a close peer and 3rd largest shareholder Aviat Networks (owns 5%). Spread is at 7%. This bid follows the previous offer from the same bidders in Nov’21 at $3.25/share – since then the stocks of both companies have traded down due to an overall market sell-off. Both proposals were rejected. Management (10% stake) and CRNT’s largest shareholder (also 10% stake) said the offer prices were ridiculous – seems like they would be up for a sale at a proper price. The buyer also seems very keen on this acquisition and has been pursuing the company since May’21 (first approach). Aviat Networks claims the financing for the transaction is nearly ready. It has also called an EGM (due August 23) to change the board. CRNT shares have settled at around $2.6/share with the market seemingly expecting a higher bid or the bidders’ win at the EGM.

Cynergistek (CTEK) – Merger Arbitrage – 6% Upside
Cynergistek, a $15m market cap cybersecurity company, is being acquired by its peer Clearwater Compliance at $1.25/share cash. The transaction is expected to close in Q3 and offers a quick 6% return. Last month CTEK received interest from another strategic bidder (causing a temporary spike in the share price), however, the company decided to stick with the current offer. While I do not expect Clearwater Compliance to withdraw, the presence of another bidder implies some downside protection even if the current transaction fails (especially considering plenty of recent M&A deals in this industry). Shareholder vote is due on August 31 and is expected to pass. Management owns 8%. Regulatory approvals look like a formality. After the acquisition was announced, event-driven fund Beryl Capital Management disclosed a 10% position in CTEK.

Meridian Bioscience (VIVO) – Merger Arbitrage – 6% Upside
US diagnostic test kit maker Meridian Bioscience is getting acquired by a South Korean buyer consortium at $34/share (6% spread). The transaction seems highly synergistic – one of the buyers is SD Biosensor, the world’s largest COVID-19 test kit maker. SD Biosensor plans to expand its broad product portfolio into the US in vitro diagnostics (IVD) market where VIVO has an extensive distribution network and knowledge of domestic regulations. The merger is expected to close in Q4’22. Equity holder approval seems likely given that VIVO is majority-owned by institutional investors who are already sitting on 50%+ returns. Regulatory issues are unlikely as both companies are tiny in all of their geographical markets – the highest market share captured by SDB is 5% in Europe.

The merger is though subject to one other condition – absence of any “materially adverse outcomes” in the DOJ’s ongoing investigation into the VIVO’s blood lead tests which were reportedly used to produce inaccurate results. This seems to be the main uncertainty. Last year, several subpoenas to current/former employees were issued. Having said that, the company has so far addressed all of FDA’s concerns over its blood lead test products and even resumed production in Feb’22. I think this is a positive showing that the company continues to closely supervise its products to prevent any further issues. Moreover, the DOJ’s investigation has been ongoing since 2018 – it is not clear if any conclusions can arrive at before the merger closes.

Playtech (PTEC.L) – Potential Buyout Offer – TBD Upside
A new development on the recently closed PTEC merger arbitrage saga. In short, the original offer to acquire the company came from Aristocrat at 680p/share. Former racing driver Eddie Jordan was considering making a competing bid at a rumored price of 750p/share. At the same time, a consortium of Asian investors started accumulating shares in the company and managed to reach a blocking stake (around 30%). This led Eddie Jordan to withdraw his bid. The original Aristocrat bid was blocked (likely by the same consortium). The Asian consortium planned to make their own bid for a while, but have eventually withdrawn due to the changed market environment.

Recently, a new media report came out saying that Eddie Jordan is considering returning with a bid. The timing seems opportunistic now that PTEC’s share price has been destroyed by the prolonged series of failed M&A attempts. Asian consortium might be more accommodating now, when they clearly do not want to pursue the acquisition themselves (at least at current trading levels). The company looks cheap (trading at only 6x 2021 EBITDA in contrast to Aristocrat’s blocked offer at 15x 2021 EBITDA) and management recently provided positive guidance.

Frontera Energy (FEC.TO) – Tender Offer with Odd Lot Provision – partially played out
In our previous SSI weekly, we have highlighted tender offer opportunity by the Canadian O&G explorer Frontera Energy. At the time shares were trading at a lower limit of the C$11 to C$13 tender range, with reasonable arguments for upper limit pricing. Recently, the tender expiration date has been postponed to the 8th of August citing a certain transaction with its JV partner as the main cause for the delay. However, it is also quite possible that very low tender acceptance might’ve played a part in that as well. Shares are now at C$12.6/share, just slightly below the upper limit.