Pitches for KINS, KLTR, ANGN, HSBI, PIXY

KINS – Potential Sale / Activist Pressure – 30%+ Upside

KLTR – Merger Arbitrage – 16%+ Upside

ANGN – Net-Net / Strategic Review – 34% Upside

HSBI – Merger Arbitrage – 5% Upside

PREVIOUS QUICK PITCHES PLAYING OUT

Substantial upsides remain on all cases listed below – so these are still fully actionable. Positive recent developments have somewhat reduced risks.

ResApp Health Limited (RAP.AX) – Merger Arbitrage – 10% Remaining Upside
Great update on the ResApp/Pfizer saga that has been highlighted multiple times in our weeklies recently. To our surprise, Pfizer has significantly improved its offer from the previous A$0.146/share to A$0.208/share. A previous 17% merger arb play already returned 52% with another 10% to go. Clearly, Pfizer likes the technology more than we could have anticipated. 50% offer raise confirms that the threat of shareholder rejection was very real. With a new offer, we think that is no longer the case as even the retail investors on Hotcopper have begun to turn around their negative sentiment. A substantial 10% spread still remains with plenty of liquidity. The shareholder meeting date is just 2 weeks away – August 19.

Ceragon Networks (CRNT) – Merger Arbitrage – 15% Remaining Upside
Ceragon Networks (as previously highlighted here) received two non-binding offers from peer and 3rd largest shareholder Aviat Networks (owns 5%). First one came in Nov’21 at $3.25/share and the second was just recently announced at $2.8/share. Both were rejected as being too low. However, management and CRNT’s largest shareholder noted they would be interested in selling at a proper price. This week, after CRNT released positive Q2 earnings (a strong 38% growth QoQ in bookings from its US segment), Aviat came back with a new bid –  $3.08/share comprised of $2.8/share cash + $0.28 in Aviat’s equity. Shares now trade 10% above the levels we last covered, but 15% upside still remains. Management said it is considering the offer. It is not clear if this bump will be sufficient for CRNT to enter into an agreement especially as the additional consideration is in stock. However, the management is also under pressure from the ongoing proxy fight with the same bidder and the shareholder meeting is planned for August 23.

Stealth BioTherapeutics Corp (MITO) – Merger Arbitrage – 14%  Remaining Upside
A positive update on the Stealth Biotherapeutics (MITO) merger, which we noted in our previous weekly. At the time, MITO had a non-binding proposal from a Chinese PE/VC firm Morningside Venture Investments Limited (MVIL) which already owned 67% of the company. Now, a definitive agreement has been reached. The proposal values MITO at $0.325 per ADS after deducting $0.05 ADS cancellation fees – a considerable bump from the previous $0.263. Shares jumped 21% on the news but the spread to the latest offer (after ADS fees) remains wide at 14%. Closing is expected in H2’22.

RealNetwork (RNWK) – Take private by the CEO – 6% Remaining Upside
CEO/founder (owns 38% stake) submitted a non-definitive take-private offer for RNWK at $0.67/share back in May’22. For almost two months the company did not provide any updates on the process which led to the volatility in the spread and presenting multiple attractive entry points, including a 12% spread two weeks ago when we highlighted the opportunity. The most interesting twist there was that the second largest shareholder was doubling down on his position after the offer announcement and increased the stake from 8% to 12% in May. Last week, RNWK finally signed a definitive agreement with the CEO at an improved $0.73/share offer. On the announcement shares promptly traded up by 13% and currently sit at $0.69/share representing a 6% spread to the latest offer. Majority of minority shareholder approval will be required, but it shouldn’t be an issue. The CEO has clearly shown he really wants this deal and will probably not walk away. The buyout is expected to close in Q4’22.

UEX Corporation (UEX.TO) – Merger Arbitrage / Bidding War
A month ago we have highlighted a definitive merger agreement in the uranium space. UEX Corporation was getting acquired by its larger peer Uranium Energy (UEC) in an all-stock transaction at an implied offer of C$0.44/share. Recently, the UEX management released a statement that they have received a superior deal from a larger peer Denison Mines and intend to support it. The stock shot up by 14% on the news and now trades 7% above the Uranium Energy offer. The exact offer submitted by Denison Mines was not disclosed. So far, UEC has not rejected the possibility of matching the competing bid but noted that they are evaluating other possibilities and they may elect not to match the offer. The situation could develop into a bidding war. The deadline for the competing offer expired as of the 4th of August, however, no updates have been disclosed yet.

Denison Mines is a much larger uranium miner that also has a significant presence in Canada similar to Uranium Energy. Moreover, this is a highly strategic acquisition for Denison as it would allow to consolidate 100% ownership in their flagship Wheeler River Project partially owned by UEX.

SEVERAL NEW QUICK PITCHES

Kingstone (KINS) – Potential Sale / Activist Pressure – 30%+ Upside
KINS is a $40m market cap (0.65xBV) P&C insurer providing services in New York. In May, KINS received a non-binding proposal at an undisclosed price from Griffin Highline Capital (owns 5.6%). Griffin Highline Capital focuses on acquiring/managing insurance businesses and acquired its current stake in KINS last year at 2x higher levels. Management quickly hired an advisor to explore strategic alternatives. Yesterday, Griffin Highline Capital announced that it completed due diligence and has made a final non-binding proposal. Management hasn’t responded yet. Shares are currently trading at 10% below May’s pre-announcement levels. Recently, an activist (owns 4%) wrote 2 letters to the board saying the best outcome for shareholders is a sale of the company and demanded transparency from management regarding the acquisition offer. The activist believes there are a number of suitors willing to pay a premium price to KINS book value. To increase the board’s motivation to run a proper sales process, the activist urges shareholders to withhold their votes in the upcoming meeting.

The company currently trades at 0.65x BV mostly due to its underwriting troubles linked to the company’s 2017 decision to expand into other states. Earlier the combined ratio used to be under 90% and KINS was generating attractive mid-teens ROE. In recent years combined ratio shot up to 100%-110%. Since mid-2019, management has been trying to implement a turnaround – stopped writing commercial business (represented 12% of premiums but 46% of loss and loss adj. reserves) and increased premium rates in NY. So far the turnaround efforts haven’t been successful with recent weak results also attributable to water catastrophe losses, a harsh winter, plus mark-to-market accounting of their bond holdings. The current CEO has been in the position since 2001 and is the largest shareholder owning 8% of the company.

Kaltura (KLTR) – Merger Arbitrage – 16%+ Upside
Israeli-based video sharing and management platform Kaltura (KLTR) received multiple offers from a private peer Panopto. Panopto is owned by K1 Capital, a PE firm focused on SaaS businesses. So far, 3 bids have been made with the first two offers promptly rejected on June 5 and July 10. The third/latest offer came on the 29th of July at $3/share (+$0.25 vs the second one). The current spread stands at 16% reflecting the risk that the latest increase might not be enough to move the needle. The interesting thing is that over the last month, K1 Capital has accumulated a 7% stake in KLTR. So the bidder is clearly very motivated. The products of Panopto and KLTR seem to be complementary and the merger would result in a very much-needed increase in scale + cost cuts. The fact that negotiations around the latest offer have already been ongoing for a week (the offer did not get quickly rejected this time) seems positive as well. KLTR ownership structure is quite tight with 13% of the shares held by insiders and 57% venture investors.

The interest for KLTR comes at a tumultuous time for the company as its shares trade 80% below the IPO price (last July) – a result of a slowdown in sales growth and increased cash burn. The company has been a covid beneficiary growing top line +24% in 2020 and +37% last year. However, similar to many competitors in the industry, it is now experiencing a normalization in growth rates (Q1’22 +11% YoY). KLTR management attempted to keep the same growth level as during COVID by spending significantly more on SG&A. But this only led to skyrocketing cash burn. However, the management expects to get costs back under control to avoid the need to raise capital by year-end.

Angion Biomedica (ANGN) – Net-Net / Strategic Review – 34% Upside
Angion Biomedica (ANGN) is a net-net biopharma that has recently discontinued the development of its entire pipeline including its flagship drug and announced exploration of strategic alternatives. Currently, ANGN sits at $32m mcap vs $43m net cash (cash less total liabilities and employee termination expenses). Liquidation or full company sale (ANGN also has $119m NOLs) would be a very positive outcome here, however, there’s a risk that management will rather choose to spend the cash on something else (e.g. buy/start a new drug project, etc.). Major lay-off program, including the chief medical officer/head of research, speaks in favor of the former. The management owns about 20% of the company, however, they are also used to receiving hefty salaries, which creates mixed incentives.

Heritage Southeast Bancorporation (HSBI) – Merger Arbitrage – 5% Upside
One year ago Heritage Southeast Bank agreed to be acquired by VyStar Credit Union. This was the largest-ever credit union takeover of a bank. The takeover eventually failed due to certain regulatory issues. Recently, HSBI became the target once again, but this time it’s a pretty standard merger of two community banks. First Bancshares will acquire HSBI in an all-stock transaction at 0.965 FBMS shares. The current spread is at 5% with plenty of cheap borrow for hedging. The offer values HSBI at 1.8x TBV and 14x TTM earnings. The transaction is expected to close in Q4 2022 – Q1 2023 subject to shareholder approvals from both sides and customary regulatory approvals. I expect HSBI’s shareholders to be in support as last year they agreed to Vystar’s offer, which came at a lower 1.7x TBV valuation. Buyer’s shareholders are also likely to be in support as the offer values HSBI rather in line with FBMS’ 1.6x TBV multiple and earn-back is expected at under 3 years. The buyer has been interested in HSBI for over a year now. The transaction would bring FBMS into Georgia’s Atlanta and Savannah + Florida’s Jacksonville markets. FBMS is definitely interested in improving its presence in Florida as it has just closed its Beach Bancorp acquisition there.

Shiftpixy (PIXY) – Reverse stock split – Risk Free $20
Trade for some ice cream money. Shiftpixy (PIXY) announced a 1:100 reverse stock split to comply with the Nasdaq listing requirements. This is a timely highlight as the transaction is expected become effective on the 22nd of August. Fractional shares post-split off will be rounded up. Basically, if you buy only one share of PIXY at $0.2 you will still be getting 1 share of post-split PIXY which is expected to trade at c. $20. So a way to convert $0.2 >> $20. Be sure to check if your broker rounds up shares, a list of brokers that do can be found here.