PDL Biopharma: liquidation in the final innings

PDL Biopharma (NASDAQ:PDLI) announced at the end of 2019, after a strategic review, that the company would cease making investments and pursue a strategy of monetizing their existing assets. This year the company has made a huge amount of progress. They completed two separate spin-offs, sold another operating division, reached a big settlement on some outstanding notes and sold a small part of their royalty portfolio. If every company could be as quick in implementing a liquidating as PDLI I would be a happy camper. PDL Biopharma is now about to enter the final phase of its liquidation process, and will file a certificate of dissolution with the state of Delaware on January 4, 2021 after which the stock will cease to trade.

Thanks to the flurry of transactions done this year the company is now a greatly simplified entity, and yesterday they published for the first time a balance sheet under liquidation basis of accounting. Because of this all costs that are expected to be incurred during the liquidation are added as a liability on the balance sheet, making it easy to estimate the total amount of liquidation distributions we can roughly expect. As you can see below the company has, proforma for the Lensar spinoff that occured after the end of the quarter, net assets in liquidation of $382.3 million.

With 114.2 million shares outstanding this translates to $3.35/share while the stock is currently trading around $2.35 which implies a potential upside of more than 40%. Of course, just by looking at the balance sheet above you know that most of the value resides in assets that are less certain than cold hard cash and we have to account for the fact that the remainder of the liquidation could take a significant amount of time. But at the same time, I don’t you don’t need to do a deep analysis to know that with a spread of more than 40% between net assets and price any potential return will most likely be pretty okay. Unless, of course, you believe the value of the assets on the balance sheet are all wildly overstated and deserve a huge haircut. I don’t think that they do, but some of the receivables certainly carry credit risk and might not be paid in full. I will breakdown the remaining assets below:

  • Receivables from asset sales
    These are the receivables from the sale of the Noden operating subsidiary. It was sold for up to $52.83 million, of which $12.2 million was paid at closing. The remainder will be paid in the next three years in quarterly installments, and there are two additional contingent payments of $3.25 million in total, and a small VAT reimbursement receivable. The carrying value on the balance sheet is slightly lower, but not by much, than the sum of all possible payments.
  • Notes receivable
    These notes are the ones involved in the settlement mentioned in the introduction. PDLI loaned out money on a secured basis to Wellstat, but they defaulted. After a bunch of legal proceedings they reached a settlement under which Wellstat would pay $7.5 million at signing and either $5 million in February 2021 and $55 million in July 2021, or $67.5 million in July 2021. Obviously there are some risks here giving the background of litigation, but paying $7.5 million shows a decent commitment to the settlement in my book. The carrying value on the balance is also discounted compared to minimum of $60 million outstanding.
  • Royalty assets
    With a value of $227 million they are by far the biggest asset, and will for a large part determine the outcome of this liquidation. The company is looking to sell the royalties, but if its unable to find a buyer that is willing to pay a good price they are considering putting it in a liquidation trust and let the cash flow to shareholders. I’m perfectly fine with that. The royalties are generating solid cash flows, $17.6 million in the last three months, and $42.6 million in the last nine months. Because almost all royalties are from a single drug (Glumetza) the stream of cash is not the most stable. It is declining as well because of competition from multiple generics that have been on the market for some years. But just based on historical cash flows the valuation seems to be in the right ballpark, and it is certainly not going to be a zero. They will generate some solid cash flows.
  • Income tax receivable
    This is a “little” present from the Trump administration. These are mostly losses that they can now carry back to previous years when they were a significant tax payer. While I can imagine that it will take some time before they get this money from the IRS, I think this should be a low risk asset that will almost certainly payout.

The liability side of the balance sheet does not need a whole lot of discussion. The only item that could perhaps generate a windfall profit, but also could turn out to be more costly, are the uncertain tax positions. The company is under audit for the tax years 2009 through 2015 by the California Franchise Tax Board and for the 2016 tax year by the IRS. In September the company reduced the carrying amount of the uncertain tax positions by $4.4 million, so that shows that there is the possibility for (hopefully, positive) surprises there.

Given that the last payments from the Noden sale will not be received before the end of 2023 it is clear that this liquidation will take time to complete. Additionally, the Wellstat notes will only be paid halfway in 2021, it will take time to get the tax receivable, and it will take time to sell the royalty portfolio. To get an idea what kind of impact the timing of these cash flows will have on the eventual internal rate of return that investors can expect I created the following simplistic cash flow model. There are some small assets that I ignore, and the timing of these cash flows are not necessarily the timings you should expect as an investor in the stock.

Simplistic cash flow model PDLI liquidation

You might have noticed that there is $83 million of cash on the balance sheet. I have made the conservative assumption that this whole amount will be fully reserved to pay for the known liabilities, and not used for an initial liquidation distribution. Since the total liabilities are $106.5 million I have also adjusted the cash flow from the Wellstat payments downwards by $15 million, adding a few million as a reserve for unknown liabilities as well (common in a liquidation). The $5 million liability “cost to sell assets” has been deducted from the potential proceeds from the royalty portfolio sale.

As you can see, this simplistic model throws out a more than satisfactory 27% IRR. You can recreate it and play around with some assumption, but you will see that there is quite some room for bad news before returns turn negative. Reduce the Wellstat payment by $45 million and the IRR is still 14.5%. Set all the Noden payments to zero? 17.5%. A 50% (!!!) haircut on the royalty portfolio? Still a 1% positive return.


PDL Biopharma is at the moment one of the idea’s I’m most enthusiastic about. I think it is easy to see how this liquidation can generate great returns while multiple things most go horribly wrong before you start losing money. That’s the kind of bet I like to make. But perhaps I’m missing something, and in that case I would love to hear from you!


Author is long PDLI

Sky Solar tender offer successfully completed

Two months ago I described Sky Solar as one of the hairiest stocks I bought in recent times, and it quickly turned into a roller coaster ride that did not disappoint. Even though it was somewhat expected, Hudson Capital tried its best to derail the deal, and managed to get a court order in the Cayman Islands to freeze assets of Sky Solar. The market didn’t take this development very well, and the price plummeted from almost $6/share (the merger price) to a low of $2.74 in the course of the next two weeks. I wish I could say that I bought a truckload of shares at the bottom, but I did not. Not all my trading was terrible though. When the company announced a few days later that the court order in the Cayman Islands was completely discharged I managed to snap up a couple of shares at a great price.

Today Sky Solar announced that the tender offer was successfully completed, realizing a return of 15.4% in two months time (not counting the shares I bought halfway at much lower prices). The cash has not yet hit my account, but that should happen in the next few days. For those who didn’t tender, the story is not yet over. Because of ongoing litigation from Hudson Capital, the merger to squeeze out the remaining shareholders cannot be effectuated. No big deal, because for some reason the stock is now actually trading slightly above the merger price.


Author is technically still long SKYS

Sky Solar Holdings merger arbitrage

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

Half-year portfolio review, 2020 edition

The first half of 2020 was without a doubt the most action packed start of any year since I started this blog, but you would not know it if you would look at the table below. After hitting a low somewhere in March, both my portfolio and the global stock market staged a remarkable recovery, and I’m back in positive territory while the stock market isn’t that far behind. During the depths of the coronacrisis I was pleased with how my portfolio managed to withstand the carnage. At the lowest point I was down approximately 13% for the year while the MSCI All Country World Index almost hit the 30% mark. I have written many times that I expect to do relative well in periods of market stress, and it’s good to see that that was not just wishful thinking. March 2020 was a portfolio stress test unlike anything I have had experienced before.

Year Return* Benchmark** Difference
2012 18.44% 14.34% 4.10%
2013 53.37% 17.49% 35.88%
2014 30.11% 18.61% 11.50%
2015 24.23% 8.76% 15.47%
2016 64.97% 11.09% 53.88%
2017 29.04% 8.89% 20.15%
2018 13.07% -4.85% 17.92%
2019 32.34% 28.93% 3.41%
2020-H1 3.80% -6.31% 10.11%
Cumulative 870.77% 140.94% 729.83%
CAGR 30.66% 10.90% 19.76%

* Return in euro’s after transaction costs, net dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s

While my portfolio managed to survive the crisis (so far) I have to admit that I didn’t really do that much to capitalize on the opportunities that (in hindsight) were available. I was a cautious buyer because I thought that the economic impact of the coronacrisis could be severe and it would be hard to predict how it would impact various companies. To be honest, that’s probably still true, even though it doesn’t look like it anymore.

But I couldn’t resist picking up some shares at the depth of the crisis, and as you can see in the graph below, especially the special situations bucket performed admirably. Mergers were trading at historic large spreads, and while plenty of deals got cancelled or renegotiated most worked out quite satisfactory in the end. The only stock that caught me with my pants down was Stein Mart (NASDAQ:SMRT). I had not read the fine print of the merger agreement sufficiently careful, otherwise I would have realized earlier that drawing down the revolver too far would cause a material adverse change, giving the buyer an easy out.

As you can see, most of my portfolio is still down for the year. The two main exceptions are Viemed Healthcare and Xpel, two stocks that I would classify as reasonable priced growth. The sea of red below consists mainly of classic value stocks, and it is not a coincidence those have all performed poorly. While the stocks I own are in general too small to be part of any index, it is quite remarkable how much value stocks are underperforming this year. The Vanguard Value ETF is for example down -15.55% year to date while their growth ETF is up 11.44%.

Does that makes sense? I really don’t know. You could make an argument about how lower interest rates make companies with their value further out in the future more valuable, or maybe the coronacrisis will be the final nail in the coffin for struggling companies.┬áBut as long as I continue to buy cheap companies with a solid balance sheet I think things should work out in the end. We will see what the second half of 2020 is going to bring!


Author has a position in most of the stocks mentioned in the overview

Asta Funding insiders bump merger consideration

Last month I wrote how I happily exited my position in Asta Funding around $12.50/share while the company was planning to go private at $11.47/share because I was skeptical that RBF Capital’s attempt to extract a higher price would be successful. Apparently their 8.8% position provided enough negotiation leverage, and the merger agreement was amended yesterday to a price of $13.10/share, marginally higher than the $13/share offer of RBF Capital itself. As part of the deal RBF has entered a voting agreement to vote all its shares in favor of the merger. At this point I think the deal is basically a done deal, and I would expect shares to trade close to the $13.10 price. And if not, Asta Funding would remain an attractive merger arbitrage candidate.

Thanks to a stroke of luck I bought back my position last week already when a large seller showed up, but otherwise I think I would still have been reasonable happy with my decision to sell early at $12.50. The new offer is basically the best case scenario that is playing out, and the missed upside would have been just a couple of percentage points.


Author is long Asta Funding