SSI Weekly – Pitches for ALX, TTNP, IFM.AX

ALX – Activist Campaign – 50% Upside

TTNP – Reverse Merger/Activism – TBD Upside

IFM.AX – Merger Arbitrage/Bidding War – 9%+ Upside

NEW QUICK PITCHES

Alexander’s (ALX) – Activist Campaign – 50% Upside
Alexander’s is a REIT that owns a couple of assets in NY, most notably the Bloomberg office tower and the retail condo beneath it. Activist and long-term shareholder (owns <5%) Lionbridge Capital has been fed up with the company’s prolonged underperformance, substandard corporate governance, and lack of strategy. The activist has written a letter calling for changes including launching a major capital return and strategic alternatives.

ALX is trading at a 60% discount to the activist’s NAV estimate of $425/share (cap rate estimates seem reasonable and are similar to the ones used in this VIC article). According to Lionbridge Capital, the stock price underperformance is surprising given ALX’s high-quality assets (55% of revenue is derived from its long-term lease to Bloomberg) and cash-rich (at 45% of mcap) balance sheet. Activist argues that ALX could pay a $165/share special dividend (70% of MCAP) with the post-dividend stock trading at $180-$220/share implying a total value of $345-$385/share (35%-50% upside from current prices). Further upside potential from improved investor relations and conversion into an internally-managed company. The activist is apparently having talks with potential institutional buyers for the company. It is yet to be seen how effective this campaign will be, however, however, the investors are getting paid a 7% dividend yield for waiting and holding landmark NY RE assets with long-term leases.

The main issue here is that ALX is controlled by Stephen Roth and his large NY REIT Vornado with a 50% combined stake. While being smart capital allocators, they have seemingly been keeping ALX as a second fiddle to Vornado – just a small trophy asset in NY. However, Stephen Roth and most of the board are relatively old, around 80, which might also play a part in their decision to finally start creating value here.

Titan Pharmaceuticals (TTNP) – Reverse Merger/Activist Campaign
This is a situation where an activist that specializes in reverse mergers is playing by its usual playbook and suggesting a chance for substantial value creation. Titan Pharmaceutical is virtually a development stage biopharma that has managed to get FDA approval for one of its drugs but so far failed to successfully commercialize it. In Dec’21, the company announced exploration of strategic alternatives looking to liquidate, sell the company, or carry out a reverse merger transaction. Currently, TTNP sits at $18m market cap vs $8m of net cash on the balance sheet. The company also has a significant amount of NOLs – $260m (worth around $55m undiscounted). That makes the company an ideal target for a reverse merger.

A small boutique fund Activist Investing started accumulating ownership in the company – increasing the stake from 5.6% in April, to 10% in June and then to 25% currently. Moreover, the activist clearly stated that the decision to initiate a position in the company was mainly driven by the potential of a reverse merger. After disclosing a 25% stake, Activist Investing called for a special shareholder meeting to get control of the board. The date of the meeting is set for August 15. Their main request is to increase the number of board seats from 5 to 11 with all 6 new nominees being activist’s affiliates. Interestingly, the board agreed with the proposal without any pushback. It’s very likely that the activist will get the seats and it seems unlikely that this ends in anything other than a reverse merger with FCF rich target in order to utilize NOLs.

Activist Investing mainly focuses on investment in distressed companies with setups ripe for the reverse merger. The playbook is always similar – engage with the board pushing for the reverse merger and profit on the merger announcement. They seem quite good at it as well. Here are 3 of their recent campaigns:

• Ikonics (IKNX). The activist bought into IKNX back in Dec’20 with shares trading at $5.2/share. In this case, the activist mainly engaged with the board privately and through 13D fillings regarding the possible reverse merger transaction. By the June of next year, a definitive reverse merger with bitcoin miner Tera Wulf was signed. Activist Investing exited just shortly after that with a 90% profit.
• Mer Telemanagement (MTSL). In Jan’21, Activist Investing unveiled its 10% position in MSTL at around $3.4/share. Later the activist nominated 3 directors to the board and requested the removal of the three incumbent board members. The activist was pushing for a reverse merger with a sports betting platform SharpLink. By the time, the definitive merger agreement was signed on April 15, the stock was already up significantly. The activist sold most of its shares shortly after at 100% profit.
• Electro-Sensors (ELSE). Activist Investing disclosed a 5.6% stake in the company in Jan’22 at above $6/share. Since then, shares dropped and continued to trade below $5/share. In this case, the activist only filed a 13D in which they disclosed intentions to engage with the board to actively explore potential strategic options. The activist and the existing directors managed to quickly find a company to merge with without the need to reshuffle the board. In Jun’22 definitive merger agreement was signed with Mobile X Global at which point shares shot up by 20% and since then continue to trade just under $6/share. The activist is probably slightly in the red on this trade so far, however, the merger is still ongoing and there is time for the situation to play out further.

Infomedia (IFM.AU) – Merger Arbitrage/Bidding War – 9%+ Upside
Aussie online auto parts and service provider Infomedia is currently subject to two non-binding acquisition proposals both offering a 9% potential return. In May, the first offer came from a consortium of PE firm TA Associates and major shareholder Viburnum Funds (own 19.4%) at A$1.7/share. The same month, another bidder, Battery Ventures, offered A$1.75/share, but after DD decided to withdraw. In June, another bid emerged from PE firm Vista Equity Partners at A$1.7/share. With Battery Ventures out of the picture, TA/Viburnum and Vista Equity Partners were granted a second round of due diligence. Recently, the spread has widened due to rumors that the deadline for final bids was moved from the beginning to the end of August. The deadline is now in-line with IFM’s annual results date. While the reason for such a delay is unclear, a recent AFR article suggested that the delay wasn’t concerning as the initial timetable was subject to changes and negotiations were still ongoing as of late July. It seems unlikely that both buyers will drop their offers. Viburnum Funds has been a long-term shareholder and is clearly interested in the company – after making the offer they immediately bought another 5% stake materially increasing the ownership to the current 19.4%. Also, it is puzzling that Vista Equity placed its bid at the same A$1.7/share level as Viburnum, knowing that the competing party owns a large number of shares and can probably vote it down. Vista Equity is an experienced player, which owns a couple of similar automotive industry-related companies. Given that Vista Equity still hasn’t dropped from discussions after the second round of DD suggests that it might be ready to make a higher bid to win. The main issue here is the lack of valuation support. Current offers value IFM at 30x forward PE (although peers are also expensive) and if both bidders walk away, the downside to pre-announcement prices is 25%.

PREVIOUS QUICK PITCHES PLAYING OUT

All below-listed cases are probably still attractive, but recent positive developments have already driven the shares upwards.

Kingstone Companies (KINS) – Potential Sale / Activist Pressure
A great update on Kingstone Companies – a $40m market cap P&C insurer providing services in New York was highlighted in our latest SSI Weekly. On August 5, Griffin Highline Capital finally announced that it had completed due diligence and made a final non-binding proposal, however, the offer price still remains undisclosed. The market reacted extremely positively to the news with shares going up by 22% on the announcement. With KINS currently at 0.85x BV, further upside potential remains but might be more limited.

A quick recap of our previous pitch: in May’22, KINS received a non-binding proposal at an undisclosed price from Griffin Highline Capital (owns 5.6%), which focuses on buying/managing insurance businesses and has built its current stake in KINS at 2x higher levels last year. Management quickly hired an advisor to explore strategic alternatives. For 3 months, no updates have been heard from either party. With no updates KINS shares declined 10% below the pre-announcement levels and the company was trading at 0.65x BV.

UEX Corporation (UEX.TO) – Merger Arbitrage / Bidding War
Last week we highlighted this as a potential bidding war situation in the uranium space. As expected, the bidding war has begun with multiple competing bids coming in recently. Initially, UEX received an offer from its larger peer Uranium Energy (UEC) at 0.0831x UEC shares (C$0.44/share). Another peer Danison Mines (DNN) made a competing bid at an undisclosed price that was deemed superior by the UEX’s board. On August 8, UEC unveiled an improved offer with the consideration at 0.089x UEC shares or C$0.49/share. The next day, DNN submitted a counter-offer at 0.32 DNN shares, which initially came at 7% premium to UEC’s offer, but due to price movements in both stocks, it now stands at the same $0.49/share. UEC has been given 5 business days to come back with the counter offer before a definitive agreement is signed with DNN. Given multiple bids already placed, shareholders seem more conservative with their expectations for yet further bid improvements – UEX shares now trade slightly below both offers. However, the current setup presents another good entry point with the downside protected by 2 competing bids + a tiny spread to the current offer. On top of that, there’s a chance the bidding will continue. Since our initial quick pitch, UEX is up by 36%.

AutoCanada (ACQ.TO) – A Large Tender Offer
In our prior SSI Weekly, we highlighted a large tender offer for 16% of the company at C$22-C$25/share. Shares were trading close to the upper limit. At a quick glance, the company looked cheap and there was a chance of tender ending up under-subscribed and priced at the upper limit. AutoCanada, an operator of automobile dealerships mostly in Canada has benefited from increased demand for used cars that led the company to print record earnings one quarter after another. The situation has developed better than we have anticipated. On August 2, management extended the tender expiration deadline and increased the price range to $25-$28/share. It seems that shareholders probably did not show enough interest at the previous price range, so the management was forced to sweeten the deal. On the announcement, the stock shot up right away and now again trades above the upper limit. Shareholders clearly think that the stock is undervalued and it seems the market expects another price increase. Since our highlight shares are up by 15%.

Biffa (BIFF.L) – Merger Arbitrage
Biffa is a £1.2b market cap provider of waste management services in the UK, highlighted on our weekly couple months ago. Quick recap: on the 7th of June, BIFF announced a non-binding offer from Energy Capital Partners (PE firm) at 445p per share. The spread used to stand at 15% due to uncertainty around a potential tax fine related to landfill tax compliance issues. The potential fine was estimated at a very wide range of £170k to £153m. Likely due to this uncertainty, the put up or shut up (PUSU) date for a definitive proposal was extended multiple times. During the last few weeks the spread peaked at 23%. And then, on August 2 management provided some color on the situation in their recent operating performance update. Specifically, the company stated that the expected fine will be within the range of £20m. Even though this is just a preliminary estimate it is still very reassuring compared to the potential upper range of the fine. On top of this, the company reported very positive financial performance with revenues up by 39% and EBITDA up by 41% YoY. BIFF also reinstated regular dividend payments. On the news, the spread has quickly narrowed from 23% to 12% today. After such a positive update it seems reasonable to expect that by the end of August we will finally see a definitive agreement signed.