Sky Solar Holdings must be one of the hairiest stocks I have bought in recent times. The former CEO got kicked out in 2017 after getting caught doing unauthorized transactions with entities he controlled (he settled, and paid back $15 million). They got sued in Japan by one of their partners and settled by buying them out for $139 million. Another partner, Hudson Capital, claimed an “Event of Default” on notes that they owned, seized control of a large solar project in Uruguay and commenced litigation for more money in New York. They settled, but never completed the settlement, and now litigation has started again. And I’m almost forgetting that they went through a couple of different CFO’s as well. The story is a bit more complicated than this, but obviously saying that Sky Solar is a huge mess is an understatement.
But while that is true, there is also a buyout proposal on the table for $6/ADS that offers a juicy spread of 15.4% as of this moment. The consortium behind the proposal filed their tender offer statement yesterday with the SEC and controls 77.5% of the outstanding shares. They are looking to acquire a minimum of 90% of the outstanding shares in order to take the company private afterwards, so effectively they need “just” 55% of the float to tender in the offer, and I think that should be a very doable threshold. The consortium is offering a 80% premium compared to the unaffected price which is significantly more than what the stock has traded at at any point in recent history. It is a good price, and shareholder support should not be the issue.
I think the buyer group is credible and is willing and capable of finalizing the transaction. Sky Solar’s largest shareholder, and driving force behind the consortium, is a Japanese corporation, active in renewable energy. Sky Solar Holdings most valuable assets are also located in Japan, so it is a deal that makes sense. The buyers know what they are getting into and have financing arranged (also from a Japanese party). Hudson Capital has been trying to acquire Sky Solar (or their main assets) for approximately $6/ADS as well, so presumably those solar projects are worth that kind of money (you wouldn’t know it by looking at their GAAP financials).
Of course, Sky Solar remains hairy, and it is for example quite possible that the litigation from Hudson Capital will somehow throw a spanner in the works. But I think that when looking at a merger arbitrage you should for the largest part ignore the company’s history and current issues. The number one question is really: does the acquiring party want to buy this, and can they close the transaction? I think the answers to those questions are yes in this case, and the rest is not that important. But if things do unravel you have to assume that the downside can be big, so I would certainly not go all-in on a deal like this. But I think the current spread of 15.4% is more than big enough to compensate for the risks that I’m are taking.
Author is long Sky Solar
Good to see you back. What is your time frame on this one?
If everything goes well, just a month. Tender offer expires at the end of this month. But I wouldn’t be surprised to see one or more delays, but given the spread I don’t think the timing is that important. If the deal happens at some point in time: good result. If it never happens: bad.
Interesting… how do you size such a position?
Right now it’s approximately a 1% position, smaller dan most of my merger arbs.
Thanks for posting this idea. Why do you think the spread is so high?
After reading the first paragraph, who do you think wants to own this???
VERY interesting, as always. And speaking of hairy situations, have you looked at the Gilat deal? I’d be somewhat surprised if this doesn’t just end with a lower deal price, but you never know…
Have looked at it, but wasn’t very enthusiastic. Was also discussed a bit in the comments of the half-year portfolio review post.
Ah, thanks. I missed that.
What happened today? I don’t see any news.
Seems a big drop today on no news?
Tender offer amended, among others, including a new financing condition
Fuck me! what a shitty idea this.
Looks like it just got extended to August 28, 2020. Anything else change? What is the new financing condition
Wow this one got complicated really quickly. Any thought about the asset freeze and Hudson’s litigation and rights here?
Risk/reward at $3? All parties seem to want the assets still.