Quick Pitches For B, DXC, AGF-B

B – Merger Arbitrage – 90%+ Upside

DXC – Potential Takeover – 64% Upside

AGF-B.TO – Odd Lot Tender Offer – C$75 Upside

NEW QUICK PITCHES

Barnes Group (B) – Activist Pressure – 90%+ Upside
Barnes Group is producer of high-precision components for numerous end-markets, including industrial equipment and aerospace. It was recently reported that activists are pressuring the company. Irenic Capital Management has built an undisclosed position in the company and is pushing for management changes and a strategic review, including a potential company/asset sale. The activist has noted that the company is grossly undervalued and might be worth $60/share in a sale – double the current market price.

Irenic Capital Management has suggested that the higher-margin Aerospace segment (29% of revenues) might be worth the entire market cap of the company. Such a claim sounds quite reasonable and would require the segment to be valued at 25x TTM EBIT multiple. This is in line with larger peers that have material exposure to aerospace – e.g. WWD and ESE with 44% and 63% of revenues from aerospace respectively trade at 22x-24x TTM EBIT multiples. Smaller peers with much more limited exposure to the Aerospace industry (CR, TGI, TRS) trade at lower 12x-15x TTM EBIT multiples. The remaining Industrial business is also worth close to the current market cap if valued at 17x multiple where the recent industry transactions were completed. With total company net debt at $0.5bn, the SoTP valuation would point to at least 50%+ upside from the current prices.

Activist pressure comes at an opportunistic time: (1) at 7-year low share prices driven by Barne Group’s weak recent operational performance, as well as (2) recently launched operational improvement initiatives. Facing macroeconomic headwinds, including war in Ukraine and weakness in automotive end-markets, the Industrial segment has significantly underperformed, leading to an overall slow recovery from the pandemic slump. The aerospace segment performed much better but still needs to reach pre-pandemic levels. The company had to cut 2022 guidance – organic sales growth is now expected at 5-6% YoY compared to 8-10% forecasted in Q1’22. Recently, however, management has started to initiate changes to integrate operations and reduce costs. In Jul’22, the company announced closure of its automotive component manufacturing facility while simultaneously planning to expand facilities serving its higher-margin and better-performing aerospace business. The company will also close its internationally-located automation centers given the weak performance of the automation business. Barnes Group seems to be in the early stage of operational turnaround and the company’s longer-term earnings power might be materially higher compared to TTM earnings used above to sense-check activists’ valuation claims.

Irenic Capital Management is a newly established activist hedge fund co-founded by Elliott Investment Management’s veteran Adam Katz. At Elliott, Katz previously successfully led several high-profile activist campaigns, including at Alcoa and Arconic and B will be the first campaign for his new fund.

DXC Technology Company (DXC) – Potential Takeover – 64% Upside
DXC is a $6bn market cap IT services and technology company. In early Sep’22 media reports appeared that DXC has hired an advisor and is in talks with at least one PE firm, with KKR being singled out as a potential suitor. Last week, DXC finally confirmed the rumors, announcing that the company has been approached by a financial sponsor. Bloomberg subsequently reported that Baring Private Equity Asia might be the potential acquirer. The rumored acquisition price is $45/share – 64% upside from the current prices. Interestingly, the market took these developments rather coldly with shares trading at only 10%-15% premium to pre-rumor levels.

The buyout rumors come amid DXC multi-year strategic review and previous buyout interests. After the arrival of a new CEO in 2019, DXC disposed of multiple business units, including State & Local HHS ($5bn, Mar’20), healthcare provider business ($525m, Jul’20) and, more recently, Microsoft Dynamics business (Aug’22) while also pursuing several strategic acquisitions. This has allowed the company to significantly reduce net debt (from $6.3bn in Mar’20 versus the current $2.6bn) as well as reach profitability with net income of $736m in FY2022 compared to losses for the previous years. With improving financial performance, the company became an acquisition target last year – in Jan’21, DXC received a non-binding offer (price wasn’t disclosed, but rumored to be at $10bn enterprise value) from a French-listed peer Atos. The management rejected the offer, noting it as ‘inadequate and lacking certainty’.

DXC trades at only 6.6x TTM adjusted EBIT. A $45/share offer would value the company at a 10x multiple. Much larger but still somewhat comparable peers trade at much higher multiples – ACN ($176bn market cap) is at 18x and GIB (C$23bn) at 12.5x. DXC management seems to think the stock is cheap – $701m worth of DXC’s stock (over 11% of the current market cap) has been repurchased since Mar’21 at around today’s levels.

AGF Management Limited (AGF-B.TO) – Odd Lot Tender Offer – C$75 Upside
Asset manager AGF has launched a tender offer for $10m or about 10% of its non-voting B class shares. The price range is C$5.85-$6.75 and shares trade close to the lower limit. Paid-up capital is far below the offer price at C$3.3/share, so this trade is actionable only to Canadian investors or others accounts that are exempt from Canadian withholding taxes. The offer includes an odd-lot provision. Insiders who own 46% of class B shares will not tender. Excluding insiders, the offer comes for 18% of the free float of the B shares. The offer expires on the 8th of Nov.

PREVIOUS QUICK PITCHES PLAYING OUT

Imara (IMRA) – Strategic Review – Shares up +200% from $1.15 to $3.55
The idea has initially been covered in July with IMRA trading at $1.15/share. IMRA was a failed biopharma company that traded at 50% discount to net cash. The company discontinued all treatment developments and started a strategic review, with company sale/liquidation among the likely options. Subsequently, small-cap/biopharma-focused fund BML Investment Partners increased its stake in IMRA from 6.2% to 12%. A couple months later (as per our update), IMRA announced sale of its main treatment tovinontrine pushing the shares upwards. Yesterday, the company announced merger with a clinical-stage oncology-focused biopharma Enliven Therapeutics. The transaction is all-stock – IMRA’s stockholders are expected to own approximately 16% of the combined company. Target’s equity holders will also receive CVRs related to the previously announced sale of tovinontrine. Transaction closing is expected in Q1’23. Upon the announcement, IMRA’s share price soared – stock is now up 43% in pre-market trading. Overall, it seems that the special situation part has now played out well and the remaining upside will depend on the success of Enliven’s drug portfolio. Given this, the recent share price jump might provide a timely exit opportunity.

Atlas Corp (ATCO) – Expected Higher Bid – Spread narrowed 12% >> 5%
Atlas Corp was last covered here. Quick recap – ATCO operates two businesses – containership leasing (89% adj. EBITDA) and mobile power fleet platform (11% adj. EBITDA). The company received a non-binding offer from a consortium of insiders, major shareholders, and the largest client (with 68% combined ownership) at $14.45/share. Minority shareholder approval was needed. However, two minority shareholders were opposing the deal and stated they want a higher offer at >$16.5-$23/share. Eventually, the buyers then increased their bid to $15.50/share. ATCO’s special committee began evaluating the new offer. The spread stood at 12% at the time. Recently, ATCO confirmed meaningful progress in deal talks with potential buyers sending its shares up. Though a firm deal is yet to be announced, the market seems to think that there is quite a high probability the current offer will be sufficient as the spread now sits at just 5%. The current offer also looks much more attractive due to industry headwinds (falling charter rates have brought ATCO’s peers, which trade at half ATCO’s P/E and EV/EBITDA multiples, down by around 20%).

KnowBe4 (KNBE) – Merger Arbitrage – Spread narrowed 15% >> 2%
KnowBe4 was originally highlighted on the 30th of September. KNBE, a SaaS cybersecurity business, received a non-binding offer from PE firm Vista Equity Partners (owns 9%) at $24/share. Spread stood at 15% at the time. The offer came from a reputable PE firm that had taken KNBE public before and was “informed by significant work that we and our advisors have completed”. On the 11th of October, KNBE entered into a definitive agreement with Vista at an increased $24.9/share offer price. 83% of voting shares are already in support (so other significant shareholders have agreed to roll their positions), however, approval from a majority of disinterested shareholders will also be required. The market believes this is a done deal now as now only a 2% spread remains. The transaction is set to close in H1 2023.

LAIX (LAIXY) – Going Private – Spread from 11% >> 0%
This idea was originally highlighted on the 23rd of June. LAIX was a tiny nano-cap net-net Chinese company that developed the English Liulishuo app. It signed a definitive agreement to be taken out by management (owned 97% of voting power) at $1.9/ADS. At the time of our coverage, the spread stood at 11% (netting out the $0.05/ADS fee). The definitive offer came at a substantial premium vs initial bids ($1.13/share). Management has just announced that the transaction has now closed. This marks yet another successful Chinese take-private transaction suggesting the market may still be overly cautious about definitive Chinese privatizations.