Two days ago I wrote about the EXFO (NASDAQ:EXFO) going private transaction that had as biggest risk the potential that minority shareholders could block the transaction. I thought that it was more or less a done deal after the chairman bumped the price by a token amount, and got support from ISS and some of the biggest minority shareholders. Nevertheless, I would have expected a decent amount of grumpy shareholders to vote against the deal. But apparently even I was too pessimistic about that. In the end just 66.8% of the outstanding subordinate shares voted at the meeting, and the deal was overwhelmingly approved with 91% of the votes cast in favor. I would never call investing easy, but sometimes it can certainly look like that!
Author is long EXFO
An interesting special situation is reaching its conclusion in EXFO (NASDAQ:EXFO). The chairman is trying to take the company private. Initially he was bidding $6.00/share, but Viavi (NASDAQ:VIAV) threw a wrench in the works with an unsolicited $7.50/share binding proposal that was upped to $8.00/share a month later. The chairman is not interested in these alternative proposals, and with an ownership of 61.5% of the shares and 93.5% of all votes he can block any alternative transaction with ease. Nevertheless, it put a bit of pressure on him to improve his bid, and he increased it by a token amount to $6.25/share.
The going private transaction is expected to be completed this month, but the stock is currently trading at $6.05/share for a 3.3% spread. Obviously, the market is a bit skeptical that the transaction will be completed, and the main hurdle is minority shareholder approval at the upcoming shareholding meeting on Friday, August 13. To get approval 50%+1 votes cast need to be in favor of the merger, and the shares of the chairman are excluded from voting. After the price bump to $6.25 the company locked in the support of some of the biggest minority shareholders owning 14.75% of the minority shares.
I think this should be enough to bring the deal over the finish line. There are always some people who will not vote at all, effectively increasing the weight of the locked in votes. While I’m sure everybody would have preferred $8/share above $6.25/share it is clear that that deal cannot happen without support of the chairman, and the $6.25/share deal is not a terrible one if you look at where the stock was trading before the going private transaction was announced. The $6.25 offer represents a 68% premium, and presumably plenty of shareholders will be okay with that. Additionally, the deal is supported by ISS while Glass Lewis advices to reject it (but 86% of robovoting investors use ISS). So I think this is not a deal that will get overwhelmingly rejected, and that’s all that is needed to get it approved. The 14.75% votes that the company managed to lock in are not an insurmountable lead, but it is a tough hurdle. If you assume that approximately 90% of people will vote you will need 60% of the remaining votes to be against the deal to block it. That sounds like a lot to me.
And even if the deal fails, how terrible is that? If people just massively voted that the stock is worth more than $6.25/share and you bought it for less? I surely expect the stock to drop when the deal breaks, but at the same time, it is hard to see the logic in that. So all in all, I think this is a decent spot to try to pick up some pennies in front of the famous steamroller.
Author is long EXFO
A corner of the special situations market that has had my attention almost since starting this blog are going private transactions with Chinese companies. A decade ago investors got a strong reminder that investing in China isn’t without risks after a massive wave of fraud was discovered. And more recently, the for-profit education sector showed how businesses can be wiped out at the whim of the Chinese government. But where there is risk, there is also opportunity. And because of that I do think that Chinese going private transactions offer in general a fertile hunting ground for special situation investors. Spreads are usually a lot bigger than for similar transactions in the US or Europe, and since insiders are usually taking the company private at a cheap price they are plenty motivated to complete the transaction. Once a definitive agreement is signed almost all deals get completed.
New Frontier Health (NYSE:NFH), an operator of hospitals in China, became public at the end of 2019 through a combination with a SPAC. Now, less than two years later, insiders are trying to take the company private again for $12/share. Not the worst possible outcome for shareholders, given that most should expect to lose money if you don’t redeem your SPAC shares for trust value. At the same time, it does not make this transaction an obvious great deal for insiders. You take the company public at $10/share (effectively less since a bunch of warrants are given away as well) and then you buy it back less than two years later for $12/share. I have no doubt that insiders are getting a good deal. It is just not as obvious as IPO’ing your company for $10/share and buying it back for half price. New Frontier Health seems like a reasonable decent business and in their latest investor presentation they estimate a SOTP valuation of $15/share and a growth scenario that could get to $45/share.
New Frontier – Potential transaction value creation slide
Insiders own 39.3% of the company and the definitive merger agreement was signed less than a week ago. So we don’t have to worry that for example recent changes in the Chinese/US regulatory landscape have given insiders second thoughts about completing this deal. At the moment the stock is trading at $11.19, offering a 7.2% spread to the merger consideration. With an expected deal closing in the fourth quarter of this year I think this is a pretty decent opportunity. There are Chinese going private transactions with bigger spreads, but for a Chinese deal without any visible hair on it, I’ll take it.
Author is long New Frontier Health
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On the 19th of January Coherent Inc. (NASDAQ:COHR) announced that it would be acquired by Lumentum Holdings Inc. (NASDAQ:LITE) for $100/share in cash and 1.1851 shares of Lumentum for a total consideration of $5.7 billion. A few weeks later MKS Instruments (NASDAQ:MKSI) kickstarted a bidding war with an unsolicited proposal only to be joined a few days later by II-VI Incorporated (NASDAQ:IIVI). Since then a multitude of improved proposals have been launched, all increasing the purchase price step-by-step while increasing the cash consideration and decreasing the equity consideration.
MKS Instruments dropped out of the bidding war some time ago. Yesterday Lumentum made its latest bid, valuing the company at $6.9 billion with a $220/share cash consideration and 0.61 shares of LITE for a total consideration of $274/share (using yesterday’s closing price). This morning II-VI upped the stakes with a bid of $220/share in cash and 0.91 shares of IIVI for a total consideration of $285/share (using the pre-market IIVI price). Coherent already declared the latest bid of II-VI a superior proposal and while this bidding war is probably reaching its final stages, there is certainly a decent chance we will see a couple more small price jumps.
So now that we have had a quick recap of the story so far, what would you expect the current price of Coherent to be? Surprisingly enough, the stock is in the pre-market trading at $265/share, at a decent discount to both the latest Lumentum bid (~3% spread) and the latest II-VI bid (~7.5% spread). During most bidding wars you see the target consistently trading above the latest bid price because people (almost) always expect that higher bids are a possibility.
In this case it is clear that a deal will be reached to sell the company above the current stock price, and it is certainly possible that both parties have some room left to bid more. So, apparently the market is pretty skeptical about the ability of the eventual acquirer to close the deal. Perhaps regulatory approval could be an issue, since it certainly will be a combination of two sizable companies in the same industry. But at the same time, as an outsider, it does not look too hard to me for this deal to get approved. MKS Instruments will remain as a very sizable competitor, and there multiple other sizable competitors such as IPG Photonics as well.
Perhaps I’m missing something crucial here, but to me it looks like that a bet on Coherent has pretty good odds. If there are no more bumps to the purchase price: fine. If there are more bumps: great.
Author is long Coherent