Monthly Archives: June 2016

Ferrer closes acquisition of Alexza Pharmaceuticals

Alexza logoAlexza Pharmaceuticals and Grupo Ferrer announced today that the acquisition of Alexza was successfully completed. It was pretty close though, just 9,031,157 shares were tendered in the offer which is 41.5% of the outstanding shares. Only because Grupo Ferrer already owned a bit more than 10% of the outstanding shares was the 50% threshold – needed for the successful completion of the merger – met. So while I thought that the CVR was priced very cheap the market was perhaps correctly pricing a relative high probability of deal failure. It’s totally possible that I got a bit lucky here, but no real way to know for sure. How valuable the CVR will be is something that I won’t find out anytime soon. The first milestone will take 5 years while the last ones will take 15 years. More than a little bit of patience will be required!


I guess I’m technically now only long the ALXA CVRs

Clarke announces $2/share special dividend

Clarke announced yesterday that the company would return most of the excess cash that they have to shareholders using a special dividend of CA$2/share. Clarke has been looking for attractive investment opportunities for some time, and besides buying a basket of energy related stocks they haven’t found anything. So they have decided to do the right thing, and return the money to shareholders. They are returning CA$31.3 million which represents roughly 85% of their cash on hand. At the same time Clarke has decided to eliminate its regular dividend of CA$0.10 per quarter which makes sense since they don’t have assets anymore that produce a regular cash flow. I think both are great decisions that shows once again that it is run by a shareholder friendly CEO that understands capital allocation.

The market reacted quite favorably on the news and as a result the discount to NAV (proforma for the $2/share dividend) has shrunk to less than 10%. I think this is roughly fair value (maybe still a bit on the cheap side) and because of that I decided to exit my position. A small discount is warranted because of overhead at the company level, and at the same time I expect that in the near term no value will be created anymore by share buybacks since most of the cash will be gone. And buying back shares at such a small discount wouldn’t create a lot of value anyway.

Clarke Inc NAV June 2016


Author has no position in Clarke anymore

Kahala Brands: the merger arbitrage idea of the year

MTY Food Group (TSE:MTY), A Canadian company that franchises and operaties quick-service restaurants, announced on the 25th of May that it would acquire US-based Kahala Brands (OTCMKTS:KAHL). The transaction will double the size of MTY Food Group and values Kahala Brands at roughly US$250 million. The market has reacted very favorable to the transaction, that is described by analysts as “transformative” for MTY since it will give the company a big presence in the United States besides the already established position in Canada. Since the announcement the share price of MTY Food Group has increased by more than 25%.

Kahala Brands is presumably a company that few investors knew before this transaction because it is traded on the pink sheets, it doesn’t publish financial information (it’s a so called dark company) and insiders control 93.12% of the outstanding shares. It’s a stock that sometimes didn’t trade for months, and because the Kahala Brands didn’t release financial information investors were pretty clueless to how much it was worth. In April this year it traded as low as $10.75/share, valuing the company at a P/E ratio of just 1x. Now that there is a merger it is suddenly clear how much it is truly worth and the deal valued Kahala at $149/share. Since a part of the merger consideration consists of MTY shares the implied value has increased to $159/share in the past two weeks.

Unfortunately it’s now way too late to acquire Kahala Brands at a 1x PE-ratio, but there is still a very juicy spread between the current market price of $130/share and the merger consideration of $159/share. This is a spread of 22.5% which is huge for a deal that faces no regulatory risks and it should close in two months time (the closing of the transaction is estimated to occur within 75 days after the announcement on May 25). With insiders controlling 93% of the outstanding shares the shareholder vote on July 21 will be a formality. Financing is currently being arranged for the part of the deal that MTY cannot pay using cash on hand and the issuance of shares. Since the market has responded favorably to the announced transaction it is reasonable to expect that obtaining financing will be very easy.

I think the spread is so big because Kahala Brands is a name that is so small and off the beaten path that just a few investors that specialize in merger arbitrage have bothered to take a look. Secondly the value of the merger consideration is not immediately clear. The proxy statement refers to the $149/share value (that is based on a MTY price of CA$35.68/share instead of the current CA$44.86/share). In addition to that we have to continue reading the proxy statement all the way to Appendix C to find out how the merger consideration is calculated exactly. The computation of the estimated closing value is as follows:

Computation closing value Kahala Brands

To update this computation we simply have to account for the increased value of the stock portion of the deal that is now worth 2,253,930 * CA$44.86 = CA$101,111,300 or $78,017,978. This would bring the total consideration to $261,566,978 or $159.25/share. Shareholders can choose if they want to get the share portion of the deal in MTY shares, or cash based on the 10-day volume weighted average price determined on the day immediately preceding the closing of the transaction.

As visible in the above computation the cash portion of the merger consideration isn’t a fixed amount, but it is subject to various adjustments based on among other things the amount of debt and working capital that Kahala Brands will have at the time of the acquisition. So this introduces an element of uncertainty, and perhaps this is a factor that is contributing to the huge spread. I don’t think we have to be very worried though that the cash portion of the final closing value will be materially less than this estimate because these kinds of estimates are usually conservative. If you overestimate it you might get sued, but if you underestimate it and the final consideration is actually higher everybody will be happy. In addition to that, with insiders owning the fast majority of the company, they will have every incentive to make sure that this equation will have a favorable outcome when the deal closes.


Kahala Brands is I think the juiciest merger arbitrage idea I have come across this year. This is a deal that is almost certain to close, and not only that, it should close fast as well. Because of that I think a reasonable spread would probably something like 2%, maybe a bit more. The current spread of almost 22.5% is simply insane. Of course, there is some uncertainty about the final closing value of the merger. I don’t really believe that this is a good reason for a higher spread though since the current estimate could be just as likely (if not more likely) too low as too high. Since I think the risk/reward ratio of this deal is highly favorable I have made Kahala Brands one of my largest positions.


Author is long KAHL

York Capital launches bid for Fondo Delta with CVR

After Elliott Associates launched a bid for four Italian REIFs less than two weeks ago another hedge fund has announced that it also wants to join the party. York Capital Management (I never heard of the name, but apparently they have $14 billion of AUM) will launch a tender offer for Fondo Delta, another stock that happens to be in my basket of Italian REIFs. The offer is for up to 60% of the outstanding share capital at a price of €54/share which is a premium of just 11.7% compared to the closing price yesterday and a price 40% below NAV of €92/share.

While the premium is small York Capital Management has structured the offer in such a way that shareholders will get an additional consideration if the fund can be liquidated close to NAV. Depending on the timing of the liquidating selling shareholders would receive between 18 and 30% of the liquidation proceeds above €75/share. Since that is roughly a 20% discount to NAV there is a reasonable probability that shareholders will receive some additional consideration. With the stock currently trading at €52 the spread, excluding the value of the CVR, is 3.8% which looks pretty attractive to me. Because of that I decided to add a bit to my position today with the intention to tender it in the offer.

Marina di Cutro, property of Fondo Delta


Author is long Fondo Delta