Pitches For BOCH.L, TNA.V, DMS, ADT and VLNS

DMS – Privatization By Management – 20% Upside

BOCH.L – Merger Arbitrage – 15%+ Upside

VLNS – Merger Arbitrage – 8% Upside

TNA.V – Merger Arbitrage – 6.5% Upside

NEW QUICK PITCHES

Bank of Cyprus Holdings (BOCH.L) – Merger Arbitrage – 15%+ Upside
A potential takeover in the making. Over the last 4 months, Bank of Cyprus, the largest commercial bank in Cyprus (but listed in London), received three acquisition proposals from a large US based PE firm Lone Star Funds. The bank rejected all three offers as undervaluing the company and not addressing regulatory complexities given the bank’s strategic importance to Cyprus. The bids came in at €1.25/share, €1.38/share, and €1.51/share. The current price stands at €1.3/share (converted from GBP), a 16% spread to the latest offer that was made in July and got rejected in August. Recently, Lone Star announced that it is considering a fourth bid.

According to takeover rules, the PE firm has until September 30 to give another shot at BOCH. The buyer seems interested in the bank given its dominant market position (45% Cyprus banking market share), the ongoing recovery in financial performance, and tailwinds from the rising interest rates. So far both the 2nd and 3rd bids were increased by exactly €0.13/share. If the 4th offer was to receive the same bump, the upside on this case would rise to 25%.

From the valuation standpoint, further increases in the offer won’t be that easy for the board to reject for the board. The latest bid valued BOCH at 0.35x TBV and 6.8x PE which is generally in line with industry peers. The closest comparable bank in Cyprus, Hellenic Bank ($384m market cap), trades at 0.35x TBV and 3.8x PE. National Bank of Greece ($3.02bn) trades at 0.55x TBV and 2.8x PE, while Alpha Services and Holdings ($2.03bn) – at 0.38x TBV and 4.5x PE multiples.

Moreover, two of BOCH’s largest equity holders – CarVal Investors (9% stake) and Senvest Management (7%) – have acquired most of their shares in 2021 and in case of a slight deal bump could cash out at close to 100% returns. Caius Capital (7%) also bought BOCH shares at slightly lower than the latest Lone Star offer price, though most of the stake is in CFDs. The largest shareholder Lamesa Investments (9.3%) is backed by Russian capital and has acquired the stake at higher prices, even before the uplisting on LSE.

An important caveat here is regulatory risk. BOCH is a strategical player in the island’s financial system. Currently, the government is in the process of setting up a bill that would allow state authorities to decide whether a foreign direct investment could threaten national security, particularly in sensitive cases (such as a systemic bank acquisition by a financial buyer). Reportedly, the bill is being implemented specifically to prevent the takeover of BOCH.

So the regulatory risk is real, however, Lone Star has explicitly stated that a potential transaction would be solely subject to the Irish Takeover Panel as opposed to Cypriot regulators – this could effectively help Lone Star sidestep the mentioned issue. So it seems that until the proposed bill is passed, Cyprus regulatory approval wouldn’t be needed here.

The Bank of Cyprus offers services ranging retail and commercial banking as well as life and general insurance. The bank has been going through a turnaround for almost 10 years after the 2013 Greece Debt Crisis and the collapse of the Cypriot banking sector. However, it seems that the company is finally getting on the right track, positioning itself as a more attractive buyout target. BOCH turned profitable in 2021 for the first time since 2013 and 2022 YTD results have been even more encouraging. 86% of the company’s loans are linked to Euribor/ECB MRO/bank base rate, meaning that the bank should benefit from ongoing/planned interest rate hikes. Loan loss provisions have been declining steadily – €50m in H1’21 to €37 in H1’22.

Lone Star Funds is a reputable PE firm specializing in distressed asset investments. Lone Star has 21 PE funds with total capital commitments exceeding $85bn. The PE firm has already completed several troubled bank acquisitions in Europe, including Germany’s IKB Deutsche Industriebank in 2008 and Portugal’s Novo Banco in 2017 (in return for a capital injection of €1bn). Worth noting that the Cyprus recovery thesis is not new and has been circulating in investor circles for a number of years (e.g. this VIC write-up on Hellenic Bank). The recovery is taking much longer than expected, especially for banks’ balance sheets and operations.

Evergreen Gaming Corporation (TNA.V) – Merger Arbitrage – 6.5% Upside
Merger in the US gaming/casino industry. The nominal spread is low, however, this is a small transaction that looks very likely to close on terms shortly, within 3-4 months. TNA operates four house-banked card rooms in Washington state. The company is getting acquired by a larger private peer Maverick Gaming. Consideration is US$0.55/share (or C$0.725/share) in cash – a 6.5% spread currently. Importantly, TNA insiders, who own 78%, have already signed voting agreements, suggesting shareholder approval will be a mere formality.

The offer comes at a 44% premium to the unaffected price – an all-time high level. Despite that, it still looks somewhat low-balled compared to peers/other transactions. It values TNA at only 2.6x TTM EBITDA vs Century Casinos and VICI Properties buying Rocky Cap Casino Resort at 4.9x EBITDA and MGM Resorts selling Gold Strike Hotel & Casino at 3.9x EBITDA. A somewhat comparable similar-sized peer CPHC (horse racing + unbanked card games) trades at 4.4x TTM EBITDA. Unfortunately, at this point, there’s nothing much minority shareholders can do about the offer price, but at the buyer seems to be getting a good deal and is less likely to walk-away.

The merger is also subject to several other conditions, including TNA’s minimum cash position of $28m and Washington state gaming approvals, however, these are unlikely to present any issues given TNA’s $35m cash position, ongoing cash flow generation, and a small transaction size.

The acquisition seems highly strategic for the buyer Maverick Gaming which has been expanding its presence in Washington State’s cardroom industry. In 2019, Maverick completed two acquisitions, buying two of TNA’s peers Great American Gaming and Nevada Gold. Interestingly, in 2019 TNA received an acquisition offer from an unnamed third party (was it also Maverick?), but the talks were eventually disrupted by the onset of COVID-19.  Apparently, Maverick Gaming has recently been pushing heavily for sports betting to be allowed in Washington’s cardrooms. Currently, it is only allowed in tribal casinos. In Jan’22 Maverick even filed a federal lawsuit. The company is currently the biggest cardroom owner in the state and seems to have incentives to acquire TNA to expand cardroom operations, particularly if the company’s appeal on sports betting is eventually satisfied.

Digital Media Solutions (DMS) – Privatization By Management – 20% Upside
Last week, digital advertising solutions provider DMS received a non-binding takeover interest from its CEO and COO at $2.5/share. The board is now reviewing the offer. The bid came at over 2x premium to pre-announcement levels. The buyers own around 52% of class A shares and 100% of class B,  however, the letter of intent stated that certain affiliates/major shareholders are likely to join the bid as well. That would raise the combined ownership of the consortium to 73%+. The buyers would then need only $30-$40m of cash outlay to get full ownership of the company. Insiders say their vehicle is well-capitalized, whereas its advisor B. Riley is apparently ‘highly confident’ that it could secure financing of up to $50m. The offer looks opportunistic and values the company at around 10x 2022 EBITDA guidance and 13x UFCF.

Although the spread is enticing there are a number of issues with this situation:

• DMS is a failed SPAC, which de-spac’ed in early 2020. The share price has been obliterated since then. The current buyers – CEO and COO (+ the aforementioned affiliates) were SPAC’s sponsors.
• The current offer comes at an unusually large premium, is still non-binding and the potential downside is very material.
• Right after the merger announcement, the company accelerated its share registrations and filed 5 different prospectuses in one week. Not sure how exactly to read these and why these share registrations are being made when the company is about to be taken private.
• Financial reports are quite shallow with limited details on the actual business of the company. The company has been mostly growing through acquisitions having completed 14 takeovers since 2016. Interestingly, this year the company has been underperforming quite heavily with H1’22 adj. EBITDA at $13.5m vs $32.2m last year. Last month the company also lowered its 2022 full year adj. EBITDA guidance from the previous $45-$50m to $30-$35m (in comparison, it was $58m in 2021). Quite a material change, however, neither the press releases nor the conference calls provide sufficient color on what’s going on. Conference call Q&As are not helpful either, with analysts making one or two useless questions that are at least fun to read, e.g. ‘Can you talk about if there are any verticals which you currently don’t have big problems in, which could be a good opportunity for you?’.
• The company has a lot of debt and with the recent adj. EBITDA backdrop, leverage increased to 4.7x. A fraction away from 5x debt covenant.
• DMS has been running a strategic review since August last year. The fact that nothing happened for more than a year (last month management confirmed it was still ongoing) is not exactly reassuring here either.

ADT (ADT) – Odd Lot Tender Offer – $78 Upside
ADT provides security and smart home solutions to residential and small business clients. The company has recently announced a large $1.2bn tender offer to buy back 133m (15% of total) outstanding shares at $9/share. The offer will be significantly oversubscribed as the controlling shareholder Apollo (owns 67%) plans to tender 133m shares. However, odd-lot accounts will get accepted on a priority basis, which at current prices offers a $78 upside. The tender will expire on the 20th of October.

The Valens Company (VLNS) – Merger Arbitrage – 8% Upside
SNDL, the largest Canadian distributor of cannabis, continues rolling up cannabis peers with the recent takeover announcement of The Valens Company. Last year we covered two other takeovers by SNDL, both of which closed successfully – CLIQ.TO and ISH.CN. Consideration stands at 0.334 SNDL shares per each VLNS. The spread is at 8% with closing expected in Jan’23. Approval from 2/3rds of VLNS shareholders is likely to be received. VLNS is still a cash-burning machine and without this merger, the company would be on a brink of another dilutive financing. On the other hand, SNDL roll-up strategy is slowly working in the right direction – the buyer has just reported the first ever positive adj. EBITDA quarter for its cannabis operations. It also boasts C$300m+ cash position as a safety cushion. With this takeover, SNDL will add VLNS biomass sourcing & extraction expertise, white-label operations, and diversify its product line by adding VLNS brands to SNDL’s 350 retail stores. The buyer estimates C$15m adj. EBITDA synergies (vs currently combined operating expenses of C$130m). The main problem with this merger are somewhat volatile borrow fees – currently at 5% per year, but in Jan-Apr’22 was at 10%+.

PREVIOUS QUICK PITCHES PLAYING OUT

Atlas Corp (ATCO) – Expected Higher Bid
The initial pitch is here. As a reminder – in August, containership lessor ATCO received a non-binding offer from a consortium of insiders, major shareholders and the largest client (own 68% combined) at $14.45/share. The initial spread was 2%, now 1% premium. One of the largest minority owners, Charles Frischer (4%), has been opposing the deal and suggesting a more appropriate price of at least $16.5/share. A couple of days ago, another minority shareholder (claims to be the second largest) Albright Capital Management stepped forward saying it will reject the $14.45/share offer and encouraging others to follow suit. Albright Capital argues that the current offer undervalues the company in light of management’s growth projections going forward (43% EBITDA growth in its 2022-2024 forecast). The activist concludes that ATCO on a standalone basis will likely trade between $23-$29/share in 2024 without any significant multiple expansion.

Pasithea Therapeutics (KTTA) – Net-Net/Strategic Review
The initial pitch is here. A positive development for KTTA. As a reminder, Pasithea Therapeutics is a net-net clinical-stage biopharma company, which trades at $1.21/share vs $1.74/share net cash. Activist Camac Partners (a rather small hedge fund with $150m AUM) acquired a 6% stake in the company and started activist campaign. Now Camac has further increased its stake to 11.7% and gathered support from another 13%+ for a total of 25%, enough to call a special shareholders’ meeting. The notice has been provided thus the board is obliged to conduct a meeting within 90 days. The company burns around $0.09/share of cash per quarter.