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David | Special Situation Report's avatar

$12.4M follower assets


I fish where others don't. My focus is event-driven special situations. In my newsletter, I recap the latest in special sits and profile proprietary ideas (included here on my Watchlist). Formerly @ Guggenheim
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What Happened Last Week in Special Sits Land?
A lot - here are ten highlights!

  • Kohl's $KSS bidder Franchise Group $FRG is considering lowering its offer to $50 per share.

  • PBF Logistics $PBFX gained as PBF Energy $PBF disclosed it was mulling a takeover bid.

  • Spirit $SAVE amended its merger agreement with Frontier $ULCC, shunning JetBlue’s $JBLU $33.50 per share proposal.

  • Celsius Holdings $CELH may be a takeover target for Pepsi $PEP.

  • Occidental Petroleum $OXY may be the next takeover target of Buffett’s Berkshire $BRKB as it continues to buy additional shares.

  • Seagen $SGEN merger talks with Merck $MRK are reportedly picking up pace.

  • New Relic $NEWR Jana Partners added to its stake.

  • Kellogg $K announced spin-offs of its cereal and plant-based businesses, separating them from its snacking business.

  • Zendesk $ZEN agreed to a buyout by Hellman & Friedman + Permira.
Slimming Down to Fit the Gown
Will a Suitor Emerge for Square Enix?

Square Enix is a $5bn market cap Japanese video game developer traded on the Tokyo Stock Exchange (TYO: 9684) and the domestic OTC markets (OTC: $SQNXF / SQNNY).

I have been tracking the broader video gaming sector for some time. It’s in the midst of a consolidation boom – M&A activity in 2022 has already surpassed 2021, which itself set a record for the industry.

I believe Square Enix may be the next domino to fall in the sector. Consider these recent developments and the underlying fact pattern:

  • The Company is in the process of shedding underperforming non-core assets, a common tactic to “tidy up the house” prior to a sale.

  • It has been subject to takeover rumors in the recent past, denying speculation in 2021 (Bloomberg) and again hitting the rumor mill in 2022 (Forbes).

  • Its 74-year-old founder Yasuhiro Fukushima controls roughly 25% of its shares and may look to cash out after a 20+ year stint in the public markets.

In the absence of a transaction, its fundamentals look appealing:

  • It currently trades at a significant discount to peers despite leading topline growth and profitability metrics.

  • It pays a healthy dividend with a trailing yield of 2.2%.

  • And it has a debt-free balance sheet and a front-row seat to the secular growth story in video gaming.

In light of its recent divestiture, the Company has withdrawn forward guidance. But the data suggests it will be leaner, more profitable, and earn higher returns on invested capital going forward.

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This was a fab read, read it this morning with a coffee. Going to share this next Sunday too, thanks David!
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A Weekly Update on Special Situations
  • Continental Resources $CLR received an unsolicited take-private proposal from its controlling shareholder.

  • NCR $NCR said it was deciding between a sale of the entire company or splitting into two.
"The conversations with potential suitors have been extremely constructive."
– Michael Nelson, NCR Corp – VP of IR & Treasurer – at RBC Capital Markets Financial Technology Conference

  • Mereo BioPharma $MREO reportedly draws takeover interest from AstraZeneca $AZN.

  • Paya Holdings $PAYA reportedly exploring a sale amid takeover interest.

  • Seagen $SGEN reportedly in takeover talks with buyers including Merck $MRK.

  • FedEx $FDX announced a 50% dividend hike and a cooperation agreement with D.E. Shaw regarding board composition.

  • Radius Health $RDUS 15% shareholder Rubric Capital sent a letter backing activist investor’s board slate.

  • Templeton Global $GIM activist Saba Capital commented on Templeton’s attempt to invalidate shareholder vote at AGM.

  • Bausch Health $BHC suspended the planned IPO of its Solta skin-care business.

Thanks for reading! Until next week.
What Happened Last Week in Special Situations?
  • Western Digital $WDC announced review of strategic alternatives after Elliott's push to split.

  • Zymeworks $ZYME adopted shareholder rights plan after All Blue Falcons’ proposal.

  • Aerojet Rocketdyne $AJRD feuding CEO and Chairman filed opposing shareholder presentations.

  • Hasbro $HAS activist Alta Fox lost battle for board seats.

  • Hemisphere Media $HMTV shareholder Edenbrook Capital says takeover price dramatically undervalues company.

  • New Relic $NEWR activist JANA won two board seats.

"Since 2008 [JANA's activism campaigns are] averaging a return of 16.2% versus 9.4% for the S&P 500 over the average nine-month holding period."

  • $GSK spin-off Haleon starts life with target on its back.

"Those factors may lead some investors to steer clear, depressing Haleon’s valuation. It could prove more appealing to a rival...Haleon may find it harder to repel a suitor next time around."

  • Vodafone $VOD preps spinoff of IoT biz.

"Buried in Vodafone's annual report is the revelation that IoT is being prepped for a spinoff. Greater independence from the parent company 'will help to accelerate the platform's growth and attractiveness...'

  • JetBlue $JBLU submitted an improved proposal to acquire Spirit $SAVE.

A Weekly Update on Special Situations
Dexcom $DXCM denied previous reporting that it was in active takeover talks with Insulet $PODD.

Kohl’s $KSS reportedly received bids from Sycamore Partners and Franchise Group $FRG. Reports that negotiations could drag on for weeks amid challenging macro backdrop. [Kohl's now in exclusive discussions with Franchise Group).

Afya $AFYA 40% shareholder Bertelsmann SE disclosed in 13D that it plans to purchase $129mm additional shares.

Overstock $OSTK investor Simcoe Capital disclosed a 6% stake in 13D filing.

Tabula Rasa HealthCare $TRHC investor Indaba Capital disclosed a 20% stake and intention to engage with management in 13D filing.

WisdomTree $WETF entered into a cooperation agreement with Lion Point and ETFS Capital.

XPO Logistics $XPO filed a Form 10 registration statement for the planned spin-off of its brokered transportation platform.

Frontier $ULCC added reverse termination fee to Spirit Airways $SAVE deal.

Qualcomm $QCOM reportedly interested in acquiring a stake in Softbank’s Arm.
A Weekly Update on Special Situations
Blue Apron $APRN investor Joe Sanberg asked if he should try to take the company private.

Kohl’s $KSS Simon Property Group and Hudson's Bay reportedly backed out of sale process; other bidders lowering their initial bids.

Wendy’s $WEN 19% shareholder Trian disclosed in 13D filing that it is exploring an acquisition of the company.

Insulet $PODD draws takeover interest from Dexcom $DXCM.

Emerson Electric $EMR considering a sale of its waste-disposal business.

Valvoline $VVV approached by Saudi Aramco about a takeover of its lubricants business.

Innoviva $INVA to acquire Entasis Therapeutics $ETTX.

Broadcom $AVGO to acquire VMware $VMW.
A (Near) Net-Net Taken Out to the Woodshed
1stdibs $DIBS is an online marketplace that serves as an intermediary connecting buyers & sellers in a business model akin to Etsy or the original eBay. It has a market cap of $200mm and holds $161mm of cash on its balance sheet.

DIBS was a high-flyer in the private markets. It boasted a valuation of $500mm in its Series D round (receiving financial backing from high-profile names such as T. Rowe Price, Benchmark, and Insight Partners). In June 2021, DIBS took advantage of the buoyant equity markets and raised $123mm at $20/share.

Its stock has promptly shed 75% of its value in the last 11 months:

DIBS checks the box of nearly everything that is currently out of favor. Retail, high growth, high marketing, unprofitable, new offering. The macroeconomic environment has become challenging and unpredictable, damaging DIBS’s 2022 growth prospects. Q2 guidance implies this quarter’s free cash flow burn could be the Company’s worst as a public company. But given the absolute beating its stock price has taken, I thought DIBS merited a closer look.

I like its asset-light marketplace business model – it can print free cash flow if it gets to critical mass (see: Etsy). And DIBS is well-capitalized, so it won’t have to go back to the equity market anytime soon (ideally, never). That’s a good thing because it has significant low-hanging growth opportunities in front of it. If DIBS can weather short-to-medium term macro headwinds with a laser focus on free cash flow, I suspect it will be well-positioned to reap the benefits of its inherent operating leverage once the tide turns and growth returns.

Plus, 1stDibs is a one-of-a-kind digital asset. It will likely draw takeover interest from strategic buyers in the future - potentially sooner rather than later if the stock price languishes.

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A Weekly Update on Special Situations
Covetrus $CVET received $21 / share proposal from CD&R and TPG to acquire remaining outstanding shares.

Griffon $GFF initiated review of strategic alternatives.

Kohl’s $KSS said final bids will be submitted in the coming weeks; skepticism regarding a deal is growing amid poor financial results.

Spirit $SAVE bidder JetBlue $JBLU announced a $30 / share hostile tender offer.

Electronic Arts $EA rumored to have had takeover discussions with Amazon $AMZN, Disney $DIS, Apple $AAPL; held discussions with Comcast $CMCSA regarding merger with NBC Universal.

Hemisphere Media Group $HMTV shareholder Edenbrook Capital sent letter to the board expressing displeasure with sale price.

MiMedx Group $MDXG released a presentation in response to activists, highlighting its standalone value creation plan.

Republic First Bancorp $FRBK chairman Hill removed from role, filed lawsuit against company.

Turtle Beach $HEAR entered into cooperation agreement with Donerail Group.
Your newsletter and compiling all this stuff to share is always incredible! Thank you for the work you’re doing
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A Weekly Update on Special Situations
Duke Realty $DRE rebuked a takeover proposal from Prologis $PLD for not being high enough.

Nomad Foods' $NOMD co-chairmen and founders disclosed in a 13D filing that they are evaluating strategic alternatives.

Rackspace Technology $RXT announced a review of strategic alternatives; received inbound interest for one of their businesses.

Ryder $R received a takeover proposal from HG Vora which also disclosed a 10% stake.

Zendesk $ZEN continued chatter regarding a takeover.

International Seaways $INSW 17% shareholder Seatankers Group sent a letter to the board.

MiMedx Group $MDXG shareholder Prescience Point Capital sent an open letter to shareholders expressing concern with management and governance.

Aramark $ARMK announced a plan to spin-off its uniform services business.

Robinhood Markets $HOOD Sam Bankman-Fried (owner of FTX Exchange) disclosed 8% stake in a 13D filing.
$ARMK is the primary vending sponsors at the stadiums and other venues near me. I think it makes sense to spin off the uniform business and focus on the vending and concessions core.

Is there any information on when the spin-off will be?
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A Weekly Update on Happenings in Special Situations
  • Bally’s $BALY rejected Standard General’s takeover proposal and announced a $300 - $500mm tender offer.

  • Spirit Airlines $SAVE rejected JetBlue’s $JBLU takeover proposal due to regulatory concerns and reiterated support for the merger with Frontier $ULCC.

  • Radius Global Infrastructure $RADI reportedly exploring strategic options including a sale.

  • Ubisoft $UBSFY founding family is considering a take-private in light of private equity interest.

  • Chesapeake Energy $CHK in discussions with activist Kimmeridge regarding changes to boost value.

  • Hasbro $HAS activist Ancora disclosed a 1% stake, backed the other activist (Alta Fox), called for a board refresh, and sale of eOne business.

  • Western Digital $WDC activist Elliott disclosed a 6% stake and proposed separation of its businesses, suggesting 100%+ upside.

  • Vista Outdoor $VSTO announced a plan to separate via a spin-off of its outdoor products segment.

  • Funko $FNKO 25% stake acquired by The Chernin Group, eBay $EBAY, Bob Iger, and Rich Paul.
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