Quick Pitches For GSMG, LMN.SW, SO.PA

GSMG – Chinese Take-Private

LMN.SW – Activist Campaign/Potential Sale

SO.PA – Expected Tender Price Increase

NEW QUICK PITCHES

This is a Chinese going private transaction that seems likely to close in a few weeks and presents the opportunity for a great IRR. Minority shareholders are getting bought-out by management. All conditions have been satisfied. Management owns 73% stake. US-based private equity fund Shah Capital (10%) is rolling its shares. We’ve previously covered the situation here, when the upside stood at 15% and highlighted it again last month when the spread got eliminated. Since then, shareholder approval was received at the end of October. With no remaining hurdles left, the merger was anticipated to close shortly, and only a minimal 1%-2% spread remained. Then on the 18th of November without any announcements or updates from GSMG, the spread suddenly widened to the current levels of 8%-9%. Strangely, trading volumes have been rather normal (ADV of $100k). Apparently, the market is now anxious about the sudden price drop and refuses to close the gap. This being a Chinese takeover with a black-box business doesn’t help either. Nonetheless:

• Such random price swings are not uncommon in micro-cap Chinese privatizations and we’ve seen such instances on SSI before – e.g. GSUM (the spread was eliminated after shareholder approval but then after a few days widened again to 6% and continued to trade at that level for a few weeks until closing). The spread of GSMG has also been quite volatile during the whole transaction – it even increased to nearly 40%  during the market sell-off in July, even though a definitive agreement as already in place. It then quickly narrowed to 10% range again.
• While GSMG’s business is a black-box, participation of Shah Capital adds confidence and credibility to the whole privatization process.
• There’s basically no hurdles left here that could derail the deal (assuming the buyer still wants to close it). There is no financing condition and the sum needed to buyout the minority is relatively small – US$31m.
• Historically, Chinese privatizations with definitive agreements signed have been closing with a very high success rate so far. In the last several years, we’ve seen only two cases fail (SVA and CXDC).

Therefore, the current 8% spread could be an interesting arbitrage opportunity. However, please keep in mind that if the merger fails, the downside could be very material.

Lastminute.com (LMN.SW) – Activist Campaign/Potential Sale – Upside TBD
Lastminute.com is a European online travel agency listed in Switzerland. Recently, the company has become a target of two separate activist campaigns – Jeremy at Raper Capital (0.5% stake) and Dark Horse Capital (1% stake). The activists have written letters to the board saying that the market is unlikely to ever value LMN properly due to the ongoing fraud scandal and asked management to start a company sale process. The activists suggest that larger peers could be interested in such a synergistic and accretive takeover. In particular, Booking Holdings seems like the most likely buyer here as it has already been in partnership with LMN for a few years – white labeling LMN’s dynamic packaging technology. The management did not respond to the activist letters. However, last week LMN announced a complete reshuffling of the board – a number of nominees were presented for the upcoming AGM in Dec’22.

Over the last couple of years, LMN has become an orphaned security due to the pandemic’s impact on travel and, more recently, several key employees (including the founder/CEO) getting detained by Swiss regulators over a potential COVID support money fraud. The current interim CEO and a few other employees have also been placed under suspicion and the investigation is still ongoing. Regulators have already said that LMN will have to return all of the received COVID benefit funds – CHF 29m. CHF 34m (CHF 3.09/share) provision has already been recorded in Q3’22 financials, so the exposure to further charges should be limited. All of this has significantly impacted LMN’s public image. Recent post-pandemic performance has also turned out weaker than expected as, despite a decent recovery in bookings/revenues, the company did not manage to sustain operational efficiency and margins plummeted below the pre-COVID levels. All of this is reflected in the stock price, which is down 40% YTD. The company still generates strong FCF and now trades at around 4x normalized adj. EBITDA – significantly below its giant global peers TRIP – 6x, EXPE – 7x, and BKNG – 12x (all multiples indicated assuming 2019 revenue levels and current margins).

Somfy (SO.PA) – Expected Tender Price Increase – Upside TBD
This is a play on a potential tender offer price increase with a protected downside. Somfy is a €5bn market cap Paris-listed producer of door and window automation products, including remote control operated shutters, curtains, and doors. Recently, SO’s major shareholder Despature family (74% economic interest and 84% voting power) has proposed to acquire the remaining outstanding shares in Somfy via a tender offer priced at €143/share. The controlling family intends to subsequently proceed with a minority shareholder squeeze-out if a 90% ownership stake is reached. Apparently, there is no minimum tender condition included. Somfy shares now trade 1% above the offer price – the market seems to be expecting a higher revised bid. Note: all documents are in French, so my understanding of certain peculiarities from Google Translate might be limited/incorrect.

At a quick glance, the offer price could use a little bump to better reflect a takeover premium and incentivize shareholder participation. The tender values Somfy at 12.4x TTM EBITDA – at the midpoint of Somfy’s historical multiple range of 9.1x – 14.8x during 2018-2021. The offer also comes after a 30% YTD Somfy share price decline. Other larger peers with similar/slightly lower margins ASSA-B.ST ($26bn market cap) and LR.PA ($21bn market cap) trade at 13.9x and 13.5x multiples respectively.

Despatures are a prominent billionaire French family, which has held a controlling stake in Somfy since 1984. Somfy is one of the two main businesses owned by the family. As mentioned in the tender offer document (in French only), Despatures are apparently planning to transition their holdings to the next generation of the family and this Somfy take-private might be a step towards this ‘inheritance’ process. Worth noting that in 2020, the family group’s owned Edify – a spin-off from Somfy – was similarly taken private by the Despatures.

PREVIOUS QUICK PITCHES PLAYING OUT

Nitro Software Limited (NTO.AX) – Potential Bidding War – Upside TBD
Nitro Software was covered here a few weeks ago. Aussie document productivity software developer Nitro Software has received buyout interests from 2 parties – PE firm Potentia Capital (owns 20%) and KKR-backed Alludo. Potentia made 2 offers – A$1.58/share in August and A$1.8/share in October. Alludo then matched Potentia’s latest bid. We highlighted this situation as a bidding war seemed likely to continue. Last week, Alludo improved the bid to A$2/share and persuaded NTO management to sign a definitive agreement. Two days later, on the 17th of November, Potentia released a proposal suggesting it could match or exceed Alludo’s offer if granted DD. Nitro’s shares are trading 6% above Alludo’s offer – market expects the bidding war will continue.

Stealth BioTherapeutics Corp (MITO) – Completed +7%
Stealth BioTherapeutics was originally highlighted here. MITO was merging with Chinese PE/VC firm Morningside Venture Investments Limited (owns 67%). MITO’s shareholders were to get a cash consideration of $0.313 per ADS or $0.263 after ADS fees. Regulatory and shareholder approvals seemed very likely. The buyer’s intentions were serious – it had already made similar acquisitions before and was buying MITO at below net cash levels. The merger successfully closed last week. This idea returned 7% in 3 months.

OZ Minerals (OZL.AX) – Completed +5%
OZ Minerals was highlighted in this issue of SSI’s Weekly report. Aussie copper and nickel miner OZL received a non-binding acquisition offer from BHP group at A$25/share. Management rejected the offer as being insufficient. BHP seemed to be highly interested in the target to supplement its copper asset portfolio. The market saw a decent chance of a higher bid as shares traded above the initial $25/share offer. After 3 months of silence, BHP has offered an improved best and final price of $28.25/share, which the board now intends to recommend after BHP is done with due diligence. Shares are now trading at only 3% spread to the new offer.