Pitches for RFP, RBCN, BHVN, FEC.TO, GSMG

RBCN – Cash Shell with a Tender Offer – 18x Upside

RFP – Merger Arbitrage with CVR – 32% Upside

FEC.TO – Odd Lot Tender Offer – 18% Upside

GSMG – Chinese Take-Private – 15% Upside

QUICK IDEA PITCHES

Resolute Forest Products (RFP) – Merger Arbitrage with CVR
Merger in pulp/wood/paper products industry. Resolute Forest Products is getting acquired by peer Paper Excellence at $20.5/share in cash + non-tradeable and non-expiring CVR with a potential of $6.5/share payout. The payout will be driven by the receipt of refunds of duties charged on US softwood imports from Canada. Shares are currently at $20.15 – offering +1.7% upside to base consideration and +32% to full CVR payout. Closing is expected by H1’23. Shareholder approval is already in the pocket – Fairfax with 40% stake supports the transaction. The CVR payout is far from certain and there might also be some regulatory risk.

Let’ start with regulatory risk. In order to please antitrust regulators, Paper Excellence intends to pre-emptively dispose of some assets. Management claims there is little geographical overlap aside from the two to-be-divested facilities in Ontario. Both RFP and Paper Excellence operate in highly competitive and commoditized industries across their various segments, therefore the combination of the companies is unlikely to cause antitrust concerns except for localized geographies. Planned Ontario divestitures seem to take care of that. This is the second large acquisition for Paper Excellence over the last year – in May’21 it launched a similarly-sized acquisition of peer Domtar and the company was asked by regulators to dispose of one of the to-be-acquired assets due to competition concerns in British Columbia (again localized competitive concerns only). Domtar shares traded at a minimal 1% spread throughout 6 months of the acquisition period. Assuming the current merger is a done deal and ignoring opportunity costs, investors get a free spin on the CVR payout.

CVR will pay out any refunds received from the $500m of deposits on softwood lumber duties that RFP paid from 2017 till Jun’22. These relate to anti-dumping and countervailing duties imposed on US imports of Canadian-produced softwood lumber. This is an industry-wide issue and the imposition of the duties has been appealed to NAFTA and USMCA. While appeals are ongoing the funds paid are sitting as deposits on the balance sheet, and not regarded as actual duty expenses. This is also getting addressed at a broader political/international trade levels. In the last lumber dispute (back in 2006) US government agreed to give back 81% of anti-dumping and countervailing duties collected on Canadian softwood lumber imports. The outcome and timing of the current situation is uncertain, but assuming a similar resolution, CVR could eventually payout $5.2/share, bringing total merger consideration to $25.7/share.

Rubicon Technology (RBCN) – NOL/Cash Shell with a Tender Offer
An interesting note from Clark Street Value on Rubicon Technology buyout/going dark situation. The company is basically a cash/NOL shell with a small industrial Saphire business on the side. It has been trading around its cash value for years. Recently, Janel Corp (JANL) swept in and agreed to buy 45% of RBCN shares via tender at $20/share, or a double to where it used to trade. Subsequent to the tender, RBCN will distribute the cash balance of $11/share and then go dark. This seems a bizarre transaction to me, and I will get to why in a bit, but first the potential trade from Clark  Street blog. The idea here is that by buying RBCN at $15.5/share you promptly receive back $9/share from JANL tender ($20/share * 45%) and a further $6.05/share from cash distribution ($11 * remaining 55% of shares). Tender is set to close on the 12th of Aug with capital distribution (likely untaxed) promptly after that. So after a month you are left with $0.5/share investment in a dark and probably untradeable stub. At the same time, JANL is willing to pay $9/share ($20 tender less $11 distribution) to have 45% stake in the same stub. In 3+ years a second step of the transaction might happen – JANL tendering for the rest of the shares in order to be able to utilize the NOLs on RBCN’s balance sheet (specific rules on waiting period do not allow to do this sooner). If the rest of the shares are also tendered close to $9, you make a killing on this trade with 18x return in 3 years.

And now to the bizarre part – I do not see why JANL would be paying $9/share for the stub. The whole transaction is seemingly aimed at the acquisition of RBCN’s NOLs, which in the best-case scenario would start to be utilized only after 3 years. RBCN has $189m of already expiring federal NOLs that are valued on the balance sheet at $39m (or $16/share) and another $6.7m ($3/share) capital loss carryforwards. The balance sheet valuation of NOLs seems to be simple multiplication by the 21% federal tax rate without taking into account the time it will take to utilize these. Federal NOLs are already expiring (full schedule not revealed) and it will take at least another 3 years before JANL can start utilizing them. Based on the quarterly run-rate JANL is paying under $2m in income taxes annually – albeit the latest revenue growth is at 200%+, so maybe the future tax bill will be materially higher. Given all this, I do not see the present value of NOLs reaching $9/share. Aside from NOLs, RBCN has some real estate (potentially $1.25/share) and the break-even operating business, which likely has limited additional value – an activist campaign back in Apr’22 only stressed the value of NOLs and cash and also offered to cashout RBCN management shares at only $10 (vs $20 tender by JANL).

Is the current transaction likely to close? Probably, as it is a fantastic deal for RBCN shareholders. However, the $0.5/share stub investment might be stuck forever with the second step of the transaction never materializing.

Frontera Energy (FEC.TO) – Tender Offer with Odd Lot Provision
Canadian O&G Frontera Energy launched tender for 6% of the company at C$11-C$13/share. Shares currently trade at the lower limit and there is a reasonable chance the offer gets priced above current levels. The key factor in that thinking is that the largest shareholders with 49% stake in FEC will not tender – Catalyst Capital Group, with 37% ownership and chairman’s position since 2016, as well as Gramercy Fund, with 11.5% ownership. This not only gives confidence in undervaluation but also right away raises the tender portion to 12% of the remaining shares. The company has also been aggressively repurchasing shares in the open market – since mid-Mar ’22 already repurchased 2m shares out of 4.8m authorization at an average price of C$14/share. Under previous ’21-’22 authorization, it has repurchased 4.2m shares at C$7.4 average price. In total that’s 6% share count reduction over the last year excluding current tender and the remaining buyback authorization.

While I am not in a position to opine on FEC’s financials and prospects, it looks cheap on management’s guidance. At $90 oil it is set to generate c. $600m in 2022 EBITDA vs the current EV of $1050m, thus trading at 1.75xEBITDA. Even with $70 oil the company is cheap at 2.6x 2022 EBITDA. On a resource-basis FEC trades at 35% discount to after-tax NPV10 of net-proved resources. 40% of 2022 production is hedged through $70/boe puts leaving full upside exposure. Not hard to see why the main shareholders would be interested in buying out minorities.

The outcome of this tender might also depend on where oil will trade at the time of expiration. Gramercy Fund indited that they might change the non-tendering position depending on market conditions. The offer is set to expire o the 29th of July. Paid-up capital is at C$9.96/share – non-Canadian investors will be liable to pay taxes on the difference to the final tender price unless trade is made in a tax-exempt account.

Glory Star New Media Group (GSMG) – Chinese Take-Private
The spread on this one narrowed quickly from 35%+ on Monday to around 15% currently. So we are three days late with this note. However, I think this transaction has high chances of closing due to (1) US hedge fund rolling its 10% stake, (2) already increased offer price, and (3) a definitive agreement in place. Management is taking GSMG private at $1.55/share and hedge fund Shah Capital is rolling over its 11% stake. The offer has been raised after the initial $1.27/share bid was rejected by the conflicts committee (which I admit sounds strange for a fully controlled Chinese buyout). The transaction is expected to close in H2’22. Shareholder approval is guaranteed due to 73% ownership by the buyer’s group.

Shah Capital is a US-based hedge fund with a rather concentrated $380m portfolio of mixed bag investments, including stakes Turquoise Hill Resources, Antero Resources, a large K-12 school operator in China New Oriental Education & Technology Group, and some smaller microcaps. It also had a couple of activist campaigns previously.

The company itself is a failed SPAC from 2019, with all investors having chosen to redeem funds from the trust account. The business itself is a bit of black-box, as it’s difficult to find and review any of its products/services – that might be purely because I have no idea how to look for info on Chinese media services. The company claims that they are engaged in video content production and advertising – generating revenues from traditional pre-video, in-video, and pop-up advertisements. The Cheers app is GSMG’s core platform, through which the company supposedly distributes content.

Biohaven Pharmaceutical (BHVN) – Merger Arbitrage + SpinCo
Biohaven, a maker of migraine tablets, will be acquired by Pfizer at $148.5/share + 0.5 shares of publicly tradable new-co. Te new-co is probably worth at least $5.3 per received half a share on retained cash + recent acquisition cost basis. At current prices, the cash consideration implies 2% upside or 6% including the spin-co. The transaction looks like a done deal and Pfizer is very unlikely to walk away. Set to close only in early 2023. All regulatory approvals have already been received. Shareholder support is very likely given a large premium to pre-announcement prices and no voiced concerns over the last two months.

The new-co will be capitalized with $275m in cash (or $3.87 per half a share) and will retain all non-migraine-related products under development, including just recently purchased Kv7 platform for $100m (or $1.4 per half a share). It will also receive potential royalties from Pfizer on any annual net sales of Nurtec in the US over $5.25bn capped at $400m/year (free additional option). The development drug portfolio is very early stage and cash will probably be significant. Also, Pfizer did not want to pay for this asset and is now complicating the merger specifically to carve it out even though it would have been only a negligible 4% of the total consideration. On the other hand, assuming there is zero risk to PFE/BHVN, I am not paying anything for this spin except for the opportunity costs.

Pfizer does not have any competing products and clearly wants to acquire all of Biohaven’s migraine-related assets. In 2020, Biohaven launched Nurtec, an oral tablet to treat migraine. In 2021, Pfizer acquired non-US distribution rights for Nurtec and also bought a tiny stake in BHVN company at a 25% premium to market prices. The recently released preliminary proxy indicated Pfizer as well as 4 other large pharma companies expressed initial interest to acquire Biohaven 4 years ago. However, BHVN decided to postpone such transactions as it wanted to prove its value by generating sales first. Last year’s sales were $460m, a 600% increase YoY. Most recent financials show Nurtec’s sales of $124m in Q1, a 182% growth YoY. 2022 guidance is for $850m in sales.

Algoma Steel Group (ASTL) – Tender Offer with Odd Lot Provision
A quick update Algoma’s tender. Shares currently trade at the lower limit of $8.75-$10.25 tender range with expiration on the 27th of July. The offer is for 25% of shares and will expire on the 27th of July. Despite the continued decline in steel prices, these are still materially above historical averages and the company remains cheap at 4xEBITDA. There is a decent chance the offer gets undersubscribed and priced at the upper limit. I have already highlighted this opportunity in our earlier weekly newsletter, to which you can refer for further info.

Goodness Growth Holdings (GDNSF) – Merger Arbitrage
The spread on Verano’s acquisition of US micro-cap cannabis company Goodness Growth widened to 16% (previously highlighted here). There has been no company-specific news. Stock exchange ratio stands at 0.22625. Shareholder approval is still pending. Closing isexpected in Q4’22. Verano sports an almost $2bn market cap with plenty of cheap borrow for hedging.

Columbia Care (CCHWF) – Merger Arbitrage
Another opportunity in cannabis merger arb space – was previously highlighted here. The spread on Cresco Labs acquisition of Columbia Care is back at 13% without any company-specific news. Columbia Care shareholders already approved the transaction and regulatory hurdles are unlikely as companies are pre-emptively divesting licenses in certain states to meet regulatory caps. The closing expected is in Q4’22. The uncertainty regarding the final exchange ratio (currently at 0.5579 and might change depending on legacy earnout) should be cleared before the announcement of Q2’22 results in mid-August.