Welcome to the first Event-Driven Binder. As the name suggests this segment of posts will focus on flagging the most interesting/attractive special situation ideas that have sprung up on my radar lately. I will do my best to filter out the ideas and keep these notes as noise-free and concise as possible.
To see more about what this blog is about HERE.
The first post is a bit light and maybe a bit of a hodgepodge as well. For now, I’ve put them into two separate categories:
Special situations - a bit more interesting cases in terms of either upside or structure/development than standard/classic special situations.
Classic merger arbitrage.
Going forwards, I hope that I will be able to organize the ideas more efficiently so that the whole thing becomes quicker to run through. We’ll see. For now, let’s get started.
Special situations
Uranium squeeze - Probably the most intriguing idea over the last few weeks has been Uranium market squeeze orchestrated by Eric Sprott. Sprott is a well-known Canadian investor/billionaire who specializes in precious metals. He took over Uranium Participation Trust, now named Sprott Physical Uranium Trust (SRUUF), and in mid-August announced an ATM of $300m units offering with the goal of buying physical uranium. Over the last 3 weeks, he has issued $213m shares so far buying nearly 5.8m lbs of uranium. With the global uranium demand standing at just 190m lbs, it’s pretty clear that if the buying spree continues and Sprott is joined by others, they can corner the market pretty quickly. SRUUF is also looking to list on NYSE, which will unlock the playground for Robinhood and WSB crowds. Data seems to support the argument that global uranium supply/demand is imbalanced and that the recent spike is just the beginning of new Uranium super-cycle. In 3 weeks, the spot price has already appreciated by 20% reaching 6-year highs and dragging all Uranium related stocks with it. However, the spot price still stands significantly below the previous peak. I have no horse in this race as I find commodity markets to be rather unpredictable, but it is an interesting one to keep a track of.
MCW short - I am not a particularly keen short seller, especially for valuation shorts in the current retail-driven markets. However, the presence of a strong catalyst might make quite a difference, hence, the freshly IPO'd Mister Car Wash got my attention. Mainly due to absurd valuation at 7x run-rate revenues and a clear catalyst - almost 75% of outstanding shares are set to unlock by the end of October. MCW owns the largest tunnel car wash chain in the U.S. The company was acquired in 2014 by PE firm Leonard Green, which took it to IPO this June at $15-$17/share price range. Interest from the market was low and the IPO ended up priced at the lower limit. Around 17% of shares were sold in the offering after which Leonard Green owned 78% (there were a few other smaller holders too), however, it really seems keen on selling this stock - a secondary priced at $19.57 was completed a few weeks ago with LG selling 4% of outstanding shares. Despite 62% of revenues being subscription-based, the valuation appears excessive for a highly capital-intensive business with no moat whatsoever. The strong growth appearance during the latest quarter was mostly the result of subdued sales during covid peak last year. Further quarters will look far less favorable. I expect Leonard Green to continue off-loading shares after the lock-up, which coupled with visually lower growth will bring valuation to more reasonable levels.
PSTH arbitrage - This is a well-known and wide-followed situation, so I am unlikely to add anything new here. But worth highlighting anyways. PSTH received a class action claiming that SPACs, in general, should be considered investment companies as they park the raised capital in short-term bonds and not cash. Ackman says it’s BS, but nonetheless, because of the lawsuit, PSTH will likely be unable to find a target until the deadline, about 10.5 months. Ackman wants to wrap up $PSTH asap and is launching a new vehicle SPARC (something of a SPAC as well). If SPARC gets the green light from the SEC and NYSE, PSTH shareholders will receive $20 in cash (trust value) and 1 SPARC warrant for each PSTH share. At the current price, you are effectively getting SPARC warrants for free, whereas based on where most other SPAC OTM warrants are trading, it could easily be worth $1-$2 once listed. SPARC still has to be approved by the SEC and, in order to get listed, NYSE will have to amend its warrant listing rules, which say that shares into which warrants are exercisable have to be listed as well. SPARC shares will be listed only after the warrants get exercised, which won't happen until SPARC finds a target. Not sure how to handicap the regulatory risk, but the downside is protected by PSTH trust value and any upside comes for free.
Selling SPRT puts - Last week, Plum Capital posted a nice piece on selling Support.com OTM put options. $SPRT is the newest meme stock, which went from $6/share at the beginning of August to a peak of $53/share by the end of the month. One of the potential trades is selling $10 strike Dec'21 puts hoping that similarly to $AMC, $GME, $KOSS, $EXPR, and many other meme stocks, $SPRT share price will stay bloated over the next 3-4 months and the sold options will expire worthless. I like the set-up and have played previous meme spikes similarly, but always worth keeping in mind that selling options is inherently risky and might result in losses exceeding 100%. Another similar set-up, which got meme’ed at about the same time is $BBIG.
Classic merger arbitrage
JOYY is rumored to be taken private by its chair/founder and one major shareholder (Xiaomi's founder) at $75 -$100/share. There's a 12% - 49% spread at the moment as the market is hardly buying the rumors. I think the market is wrong. Buyers have enough voting power to take the deal through and should be more than incentivized to steal $JOYY at the currently absurd valuation. Almost all market cap is cash and EV will be negative after the sale of one of the divisions closes. Seems to be one of those heads I win, tails I do not lose situations. Obviously, it’s China, but still, this one seems to be worth a tracking position and a deeper look.
RYFL - In the consolidating banking sector, the absolute majority of tiny bank mergers have been closing successfully for quite some time already. Here's yet another interesting deal with a 6.5% spread - merger of Finward and Royal Financial at $20.14/share or 0.4609 in $FNWD stock. Due to 35% max limit on cash portion, the combined consideration is $19.68/share. Management of both companies own large stakes and shareholder approvals should pass easily. There is also an interesting twist for smaller accounts - holders of 100 shares or less will not be prorated on cash consideration leaving $152 upside for odd-lots.
BCN.L - Gangfeng is in the final stages of taking over London-listed Bacanora in a cash and stock deal. Bacanora is now trading slightly below the level of cash consideration - £0.675/share. Shares of Zinnwald Lithium will be distributed on top of that at a 0.236 ratio. 10% spread in total - investors are getting Zinnwald shares for free. Zinnwald is an advanced stage lithium project in Germany with London listing and is currently 44% owned by Bacanora. Only shareholder and Mexican regulatory approvals are outstanding - I expect both of them to pass smoothly. Longstop date is on the 31st Dec 2021.
ML.V - Ganfeng is also buying another lithium miner Millennial Lithium listed in Canada. Unlike Bacanora deal above, there's some regulatory risk due to Canadian government's increased scrutiny for critical minerals M&A, especially by Chinese buyers. That might be the key reason for a 9% spread with closing expected in Q4’21. However, the market seems to be missing the point that ML's assets are not even in Canada but Argentina - hard to see why Canadian regulators should care that much. Management owns 17%, shareholder approval is pending but likely to pass.