TanyaJoy
Hiding places
Before I research a company’s fundamental valuation or event path, I first focus on the potential for mispricing. There are a lot of companies out there, and I like to search good hiding places. Here’s where I’ve been looking in recent months, what I’ve been finding, and what might come next.
Companies that botched their sale process
What worked…
Zendesk (ZEN) has a comically inept board and management that managed to completely flub their sales process. Only after they gave up did a buyer swoop back in with a mercy killing. The broken process ultimately created a great opportunity for investors’ new capital. The deal should close on its original terms by December.
What’s next…
Kohl’s (NYSE:KSS) board and management might possibly be even worse. They are bad at running their business and bad at selling their business. They also messed up the sale process resulting in no deal and a collapsed stock price. But this could be an opportunity. They wildly exaggerated their earnings expectations in order to stave off a proxy challenge. Shareholders won’t fall for their “exaggerations” (shorter and possibly more accurate word also available) again. So they have less than a year no matter what. And they have zero remaining credibility. With stabilizing equity and credit markets, they might want to circle back to bidders. The last one standing was Franchise Group (FRG) with a bid of over $50 per share.
Overly audacious asks from sellers
What worked…
Nielsen (NLSN) had a wide deal spread because of a wildly bullish shareholder, Windacre, whose view of the company was and is that it’s worth far more than any potential bidder was willing to pay (which in turn was far higher than where it would trade as a standalone company). They have a blocking stake which imperiled a sale. However, they were able to reach an accommodation wherein this one holder will get options that will pay off if their bullishness proves to be correct.
What’s next…
Turquoise Hill Resources (NYSE:TRQ) had a bid from Rio Tinto (RIO) for the shares that Rio doesn’t already own, but the target’s special committee turned them down cold. This will be a very hard position to maintain, especially since they will have to face up to a dilutive capital raise if they stay a standalone company. Yes, they want more as do some prominent holders. But their want is far above the (only) bidder’s bid which in turn is far above the standalone price that the market assigns TRQ shares. That leaves today’s shares beneath the private market bid and ask, which should be a solvable problem, even with audacious asks from sellers. Perhaps they take a page from NLSN and take the best available deal, even if they want more.
Post-close litigation kickers
What worked…
Apollo (APO) successfully completed their LBO of The Fresh Market (formerly TFM) for $28.50 per share in cash in April 2016. Former TFM shareholders just received an additional $0.55 per share settlement from post-deal litigation.
What’s next…
FAST Acquisition Corp (NYSE:FST) is about to get liquidated for $10.02 on Thursday Aug. 20, 2022. At the current stock price, that leaves you out by about $0.29. For that, you are likely to get a post-deal litigation settlement worth significantly more. I would settle for $0.53 (returning to the sponsors their risk capital but distributing the rest to holders consistent with their past disclosure). But you will probably get a good return for that minimal outlay.
Conclusion
Look in the right places. Try stuff that doesn’t screen well on Bloomberg or stuff that has some problem that the market doesn’t want to contend with. Shareholders might get overly disillusioned by inept or corrupt management that botched sale processes. They might worry that the bid ask spread is insurmountable if sellers are too greedy to come to their senses in a weak market. They might not wait around for litigation to get resolved. But each additional complexity and uncertainty can lead to deeper discounts.
TL; DR
Buy KSS, TRQ, and FST.
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