Quick Pitches For AKUS, LMST, NTO.AX, SCHL

AKUS – Merger Arbitrage & CVR – Upside TBD

LMST – Merger Arbitrage – 5% Upside

NTO.AX – Potential Bidding War- Upside TBD

SCHL – Odd Lot Tender Offer – $260 Upside

NEW QUICK PITCHES

Akuous (AKUS) – Merger Arbitrage & CVR – Upside TBD
Akouos, a clinical-stage biopharma focused on gene therapies for hearing loss, is getting acquired by Eli Lilly (LLY). Consideration stands at $12.50/share + one CVR worth up to $3/share. The transaction is expected to close in Q4 2022. Assuming zero risk of closing, one is paying $0.65/share for a $3/share CVR. This is the second LLY’s acquisition into a gene therapy market (and 1st in the hearing loss segment). Hence, regulatory issues are unlikely and the transaction is very likely to close as expected in Q4.

The CVR consists of three parts – $1 each. The first and second parts are based on starting/progressing of early-stage trials (one of which is already on the way) and hence appear likely to be paid out. The third CVR part depends on a successful outcome of at least one of those trials and is much more speculative.

• $1/share – will be paid once the 5th patient is administered a leading candidate of the company AK-OTOF (treatment of otoferlin gene mediated hearing loss) during phase 1/2 prior to Dec’24. AK-OTOF received IND last month and is currently already in phase 1/2. AKUS has already said that the first two participants will be 7-year-old kids and the following might be as young as two-year-old kids. More updates will be provided later this year. Given that the first few patients are already set, the likelihood of getting this part of the CVR paid seems high.
• $1/share – upon the fifth participant being administered with any other monogenic form of hearing loss treatment that will be on the AKUS pipeline at the time of merger closing (except for AK-OTOF and AK-antiVEGF) prior to Dec’26. All other AKUS candidates except AK-OTOF are at an extremely early stage (discovery or early preclinical) and information on them is very limited so far. The most advanced one (except AK-OTOF and AK-antiVEGF) is AK-CLRN1, for which the company is currently planning a pre-IND meeting with FDA. Assuming a similar timeline to AK-OTOF, this second part of the CVR could be expected to be paid out in 2-2.5 years.
• $1/share – upon the first participant being administered with an Akouos gene therapy product (excluding AK-antiVEGF) for a monogenic form of sensorineural hearing loss in a Phase 3 trial, or (b) receipt of FDA approval in the U.S. for such Akouos product, whichever occurs first, on or prior to Dec. 31, 2026.

Nitro Software Limited (NTO.AX) – Potential Bidding War – Upside TBD
Australian document productivity software developer Nitro Software is targeted by two bidders – a financial and a strategic. The situation is still at a non-binding stage, but a bidding war might emerge. The financial buyer PE firm Potentia Capital amassed 17% stake in NTO and offered to buy out minority shareholders at A$1.58/share in August. The offer was swiftly rejected as undervaluing but NTO’s management showed willingness to continue negotiations and hinted about other potentially interested parties. Potentia Capital then increased its ownership to 19.9% and on October 28 came back with a higher A$1.8/share bid. The offer was said to be best and final unless the PE firm is granted full due diligence or competing proposals emerge. A few days later, on the 31st of Oct, NTO announced a competing A$2/share cash bid from Australian virtualization and graphic tools software developer Alludo (owns CorelDRAW, Parallels, WinZip), which is backed by KKR. NTO management considers the products of both firms to be complementary. Under this superior proposal from the software peer, Potentia Capital’s bid was rejected. Alludo was granted 3 weeks of due diligence, while NTO management said that the buyer had already completed critical DD (financials/valuation) and the remaining DD would be mostly confirmatory in nature. The shares now trade at A$2.09, slightly above the offer signaling that the market sees a chance of a bidding war. There are three ways the situation could develop:

• The most optimistic scenario is an overbid from Potentia Capital. It is a rather young fund with A$1bn AUM, half of which was raised just recently (June’22). It has clearly shown its interest in NTO by amassing a 20% stake and has already made 2 offers. The PE firm has also previously said it could raise the price if given access to due diligence. Any overbid could then be followed by another offer from Alludo.
• Potentia Capital could also decide to sell to Alludo. Potentia has acquired most of its stake this year around A$1.2-A$1.3/share price, so it already sits on considerable short-term gains. In this case, the downside from current levels to A$2/share price would be 4%.
• However, the main issue here is that Potentia previously said it doesn’t want to sell its stake and will vote against any competing bids. This would create a significant hurdle for Alludo’s proposal, which is planned to be carried out as an off-market takeover (tender offer) with a minimum acceptance threshold of 50.1%.

Nitro Software offers tools for PDF document management, processing, and eSignature. NTO is a growth stock, which has been expanding topline at 30% CAGR but is still burning cash (expects to break even in H2’23). Similarly to other software/tech stocks, NTO share price has been decimated this year with pre-announcement price being down 70% on TTM basis. Valuation support here is rather vague as the company is unprofitable and most peers are diversified software giants (e.g. Adobe). Alludo offer values NTO at 4.7x FY’22 sales, in line with the IPO valuation (4.5x forward sales) at the end of 2019 when the investor sentiment towards tech stocks seemed much better.

Limestone Bancorp (LMST) – Merger Arbitrage – 5% Upside
A rather standard merger of two community banks. Usually, such situations tend to work out pretty smoothly. LMST – a $196m market cap bancorp with operations in Kentucky – is getting acquired by a larger peer Peoples Bancorp (PEBO, $849m market cap). Consideration is 0.9x PEBO for each LMST share. At current prices, the spread stands at 5.0%. Borrow is cheap and widely available. Closing is expected in Q2 2023 and all conditions are likely to get satisfied without any hurdles. The merger will require approval from shareholders on both sides as well as blessing from regulators. LMST shareholders are likely to approve the transactions given that it comes at a 10-year high share price and values the bank at 1.6x TBV with ROE of 14% – above larger Kentucky-focused peers RBCAA ($875m market cap, 1.1x P/TBV, 11% ROE) and CTBI ($822m market cap, 1.5x P/TBV, 12% ROE). LMST’s management owns 18%. PEBO already operates 25 branches in the state and will add 20 more of LMST branches. The deal is accretive to PEBO’s book value (the buyer trades at 2x TBV, 12% ROAE). On the regulatory front, any pushback is unlikely given the tiny size of the transaction and the fact that this merger will put the combined company at only sixth place in terms of Kentucky deposit market share among community banks.

Scholastic Corporation (SCHL) – Odd Lot Tender Offer – $260 upside (questionable)
SCHL is a publisher and distributor of children’s books, which recently announced a $75m tender offer for around 6% of outstanding shares. Odd lot positions (99 shares and below) will be accepted on priority basis. The tender range is $35-$40/share. The offer expires on November 22. SCHL’s shares currently trade around the midpoint of the range. Given the small tender size, it’s difficult to argue in favor of the offer getting priced above the current levels.