Just one week ago I wrote that I initiated a position in Aratana Therapeutics (NASDAQ:PETX). At the time stock was trading was trading at roughly a 1.2% discount to the price Elanco Animal Health (NYSE:ELAN) was willing to pay, and a CVR with a max payout of $0.25/share was thrown in the mix for free. With Elanco now trading at $30.77/share and Aratana at $4.63/share the spread is a negative 1.6% and the CVR is implicitly valued at $0.07/share. My rough, and perhaps optimistic guess, of its value was around $0.10/share so there is little reason to keep my Aratana position. Unfortunately I decided to not hedge with short position of Elanco, so while the spread went in the right direction, I didn’t make any money. But that’s not a bad result for a week like this!
No position in Aratana Therapeutics anymore
Last Friday Aratana Therapeutics (NASDAQ:PETX) announced that it would be acquired by Elanco Animal Health (NYSE:ELAN). Elanco will pay 0.1481 shares of common stock – worth $4.85 at current market prices – while Aratana is trading at $4.79 for a spread of just 1.2%. While it’s a low-risk deal that should close soon, that’s not enough to get excited about. It gets interesting because Elanco will also issue a contingent value rights that will payout $0.25/share if certain sales milestones are reached before the end of 2021:
Each CVR will entitle its Holder to receive $0.25 in cash if Aratana, Elanco or their respective affiliates achieve cumulative net sales of an animal health product that contains capromorelin as an active pharmaceutical ingredient equal to or exceeding (a) $25,000,000 during the period beginning on July 1, 2019 and ending on December 31, 2020, or (b) $50,000,000 during the period beginning on July 1, 2019 and ending on December 31, 2021. Elanco has agreed to use “Diligent Efforts” (as defined in the CVR Agreement) to achieve the foregoing milestone.
How likely it is that they manage to hit either the $25 million milestone before 2020 or the $50 million milestone before 2021? I don’t really know. It doesn’t sound like a crazy high hurdle to me, but then again, who knows what the market is for a drug that apparently is used to stimulate the appetite in dogs… If we assume that the CVR is worth something like $0.10/share today, the spread increases from 1.2% to 3.3%. Not spectacular, but for a deal that should close in roughly two or three months time that isn’t too bad. Couldn’t resist buying some shares.
Author is long Aratana
Argo Group announced today the results of the tender offer I talked about previously. As I sort of expected slash hoped, the tender offer was undersubscribed, and as a result the company is accepting all 8.1 million tendered shares at the 26p/share maximum. A great result since the stock was trading around 15/16p before the tender offer was announced. Even though the company bought the stock at a pretty decent premium, the tender offer was accretive to NCAV/share. The big question is whether or not I should try to re-initiate a position in the stock, or that I should be happy to have been able to exit without having to face the ridiculous bid/ask spread on the London AIM market. It’s still trading at a pretty sizable discount to NCAV, but at the same time insiders are also increasing their control of the company. Their stake jumped from 52.7% to 63.7%, and if they would exercise their options for 4.3 million shares they get to 74.8%. Having 75% of the votes is for example enough to delist a stock from the AIM market, so corporate governance, never Argo Group strongest point, might become even more a risk.
Because of the long holding period my annualized return on my Argo Group position, ignoring some opportunistic buys and sells I made throughout the years, is sort of disappointing. It’s certainly not terrible, but a 10.8% internal rate of return is also not great:
||Bought first shares
||Expected result tender offer
No position anymore as soon as Argo Group pays for my shares
Retail Holdings announced today that a 54.1% owned subsidiary has entered into an agreement to sell their whole stake in Singer Bangladesh for $75 million. Given that Singer Bangladesh is the largest remaining piece of Retail Holdings assets this gets the company pretty close to the finish line with regards to their plan to fully liquidate. Besides Singer Bangladesh they only have a 60.8% stake in Singer India left that is also owned indirectly through the same subsidiary.
While the sale of Singer Bangladesh is nice, the price is very disappointing. Retail Holdings owns (indirectly) a 37% stake of Singer Bangladesh that is worth $91 million based on the latest market price in Bangladesh. Besides this stake, they also own a 20% stake consisting of non-remittance shares and these shares have $15 million in accumulated unremitted dividend distributions. Given the restrictions these shares have with regards to paying distributions to shareholders outside Bangladesh it makes sense that these are worth substantially less than normal shares, but I think they should certainly be worth something. Selling their whole Singer Bangladesh stake for a discount to the latest market price and throwing in the non-remittance shares and their accumulated unremitted dividend distributions for free seems a pretty bad deal. In a best case scenario, with a zero percentage discount, these assets could be worth $155 million, more than twice the agreed upon price of $75 million.
Despite the bad deal the stock is up a tiny bit today, which makes sense. Most of Retail Holdings market cap will soon consist of cash, and presumably be returned to shareholders. Taking into account the $75 million that will be received for their Singer Bangladesh stake, NAV/share stands roughly at $12.40 which means that there is actually a little bit of upside left from today’s share price of $11.66. Guess that shows that buying stuff with a sufficiently big discount does offer some margin of safety, but still: I’m pretty disappointed by this outcome.
Author is long Retail Holdings
Almost four months ago I wrote a blog post about Sorrento Tech, formerly known as Roka Bioscience (NASDAQ:ROKA), thinking I probably got screwed out of a liquidation payment. I bought shares on the last day of trading on December 28, 2017 while the company closed it stock transfer books on the same date, probably giving no thought to the fact that it takes two days for trades to settle. In 2018 the company announced its first liquidation distribution, and with a record date of December 28, 2017 it seemed like people who bought shares in the last two days of trading were out of luck.
Not how it should be, because when I bought the shares they weren’t trading ex-dividend, and as the legal owner of the shares I should be entitled to any and all future distributions. But being right is one thing, getting paid what you deserve is something else. Luckily the company proved willing to work with DTC to resolve the situation, and while it took a couple of months, DTC rescinded the original payment last month and made the new distribution payable to beneficial owners as of October 24, 2018. Most brokers processed the new payment instruction on March 1st, but for some reason it took Interactive Brokers a full three weeks more. A little bit annoying, but quite happy that this mess finally got resolved :).
I would also like to thank all the readers that contacted me about the situation with tips and information about their attempts to get the situation fixed. It’s pretty amazing to be able to find people who are in the same situation as you, especially when we are talking about two days of trading in a $4 million market cap company. Doesn’t get much more obscure than that!
Author is long ROKA