ALJ Regional Holdings merger arbitrage

I first wrote about ALJ Regional Holdings (ALJJ) more than a decade ago, and now that I’m back in the stock it seems only fitting that I write about it once again. When I first got involved it was trading on the pink sheets and Jess Ravich owned 22.1% of the company. After some years in the daylight on the Nasdaq it is back where it started, on the pink sheets, but now Ravich owns 58.9% (more counting a convertible note) and he is looking to increase that percentage further. 

To make that happen the company is planning a merger in which shareholders will be cashed out at $1.97/share. With the stock currently trading at $1.84/share that is a juicy looking spread of 7.1%. Accredited investors have the option to rollover their stake and get unregistered shares in a private company, but given the current course of the company I doubt many investors would be comfortable with such a structure.

In the proxy statement it is not explicitly written that accredited investors have a choice, if you read it you would think that they have to accept the unregistered shares. But I don’t think that this can be true, because it is impossible for the company to verify who qualifies without cooperation of said shareholders. Issuing non-registered shares to non-accredited investors is presumably a risk they don’t want to take. In section 5(b) of the merger agreement we find:

Cash Consideration. Notwithstanding anything to the contrary in this Agreement, in no event shall NewCo be required to issue any shares of NewCo Common Stock to any person that does not provide duly completed and executed Investor Suitability Documentation (as defined below) establishing to the satisfaction of NewCo that shares of NewCo Common Stock may be issued to such person in connection with the Merger and the other transactions pursuant to an exemption from the registration requirements of the Securities Act and other applicable securities laws. To the extent that NewCo is unable, in its sole discretion, to conclude that NewCo Common Stock may be issued to such stockholder in compliance with the Securities Act and other applicable securities laws, including making a determination that such stockholder is an Accredited Investor, NewCo shall be entitled to pay, in lieu of the Stock Consideration otherwise payable pursuant to Section 5(a)(i), an amount in cash equal to the Cash Consideration.

And in section 5(f) about securities law compliance we read the following (emphasis mine):

Securities Law Compliance. No later than ten (10) business days following the Effective Time, NewCo shall use commercially reasonable efforts (including engaging a third-party service) to distribute to each ALJ shareholder who is eligible to receive Stock Consideration (except for those shareholders who has less than one hundred (100) shares of ALJ Common Stock) the documentation, in form and substance reasonably acceptable to NewCo, necessary to determine whether or not such person is an Accredited Investor (collectively, the “Investor Suitability Documentation”). NewCo shall use its commercially reasonable efforts to cause each ALJ shareholder to promptly deliver such Investor Suitability Documentation. For the avoidance of doubt, if a shareholder has not completed and returned Investor Suitability Documentation to NewCo or its agent or representative, NewCo shall have the right under Section 5 to determine that such shareholder is not an Accredited Investor.

So it sounds that in theory the company has the right to choose what consideration to offer in the merger, but that in practice it will be up to the investor because you will get cash if you don’t provide the proper documentation to prove that you are an accredited investor. But perhaps this is causing some merger arbitrage funds to stay away from this deal.

To approve the merger ALJ Regional Holdings needs >50% of votes in favor of the merger, but despite the fact that Ravich owns 58.9% of the shares he cannot unilaterally approve the transaction. There is no majority of the minority requirement, but he is bound by a voting agreement that limits his votes to 40% of the outstanding shares. His remaining shares are voted proportionally with minority shareholders. So the company needs some minority shareholders to vote in favor of the deal, but not that many. If 7% of shares from minority vote yes (~17% of minorities) Ravich will vote 17% of his stake above 40% in favor as well which would add a bit more than 3% of votes. Combine all the votes and you pass the 50% mark.

I don’t think that shareholders will love this deal and approve it with an overwhelming majority. The deal is done at a meager premium to the market price before announcement, it is done at a small discount compared to the price of the tender offer the company did at the end of 2022, and most importantly, it appears to be significantly below fair value. I also doubt that accredited investors will be trilled by the opportunity to swap their shares to unregistered stock in a new private company. But 17% of minority investors voting in favor is not a particular high hurdle, and I suspect that they will reach that number. The low to non-existent premium also reduces the risk for those who want to play the merger arbitrage game. If for some reason the deal doesn’t go through, the downside is presumably not too big either.

It should be noted that the merger is not an iron clad deal, the company can basically decide to abandon the transaction at any point in time if it chooses to do so. Given that the transaction is a sweet deal for Ravich I think it will happen, but there is less certainty than in a normal merger. There are appraisal rights available for shareholders, so perhaps if a large number will go for that route it will throw a wrench in the merger plans. Perhaps going for appraisal is a superior plan to trying to eek out a few percent in the merger arbitrage, although I’m not quite sure if that is even possible for new holders. The record date for the special shareholder meeting is March 31, 2023, and I believe you need to vote against the merger in order to perfect your appraisal rights? Not sure though, since I have never participated in one before.


Author is long ALJJ

Update on my Italian real estate basket after eight years

More than eight years ago I bought a basket of Italian real estate funds based on a simple thesis. As a group the funds were trading at a discount of ~50% to NAV while they were already in the process of liquidating, or were going to liquidate soon, because all the funds had fixed maturity dates. Most of them were supposed to liquidate between 2015 and 2017. Given that I’m still writing about these funds in 2023 shows that the liquidating process hasn’t been the easiest one. Perhaps not too surprising, since these funds were sold to retail investors and sometimes (mostly?) stuffed with crappy assets.

But at the same time, a lot of progress has been made. When I first wrote about these funds there were 24 separate entities with a NAV of more than €4 billion. As you can see above, now only 7 entities remain with a NAV of less than €650 million. Some of that reduction in NAV has been because of write-downs, but most has been achieved by selling assets and distributing cash to shareholders. The average discount to NAV of the remaining funds remains high, almost at the same level as 8 years ago, but I’m less enthusiastic about this investment now than back then. A bit can be attributed to having experienced how long this process is taking, but in general, I’m cautious about what happens in the tail-end of a liquidation. Presumably the properties that are remaining are the least attractive of the whole bunch… 

So at this point in time, I have this part of my portfolio in runoff mode, and while I keep an eye on developments, I don’t plan on adding to this basket anymore. Since my initial investment in 2015 I have achieved an IRR of 12% on the basket which I think is quite okay. It’s not a homerun, but anytime you can make a double digit IRR over a long time period I think you should be quite happy. It will probably take many years more before the last fund is liquidated, but because most of the cash has already been returned I expect that the IRR will not change a lot anymore.


Author is long QFAL, QFATL, QFID and QFSOC.

Sio Gene Therapies liquidation

A liquidation that I have been tracking for a couple of months is Sio Gene Therapies Inc. (NASDAQ:SIOX). The company is a failed biotech that decided to wind-up operations and return the remaining cash to shareholders and yesterday they released the first preliminary proxy statement with an estimate of liquidation proceeds. Sio Gene Therapies estimates that their initial liquation distribution will be between $0.38/share and $0.42/share. With no directly obvious source of cash for a second distribution and a stock price at almost $0.41/share this doesn’t look very attractive, but I think it is. In the proxy statement we find this helpful table:

If you look at this you would think that the initial liquidation distribution is probably going to be their last one as well, since there is no cash leftover. But in the table, there is one line item that deserves closer scrutiny. A lot of money is “disappearing” in the reserve for potential or unanticipated claims and contingencies. When a company is liquidating it is mandatory to keep a reserve for a certain number of years (3 in most cases) in case unexpected claims show up. This is of course certainly possible. It could be as simple as the company missing some invoices in their administration or it could be worse with a full-blown lawsuit about Some Bad Thing in the past. But this is of course not expected to happen, and I think that shareholders should expect to get the majority of this reserve at the end of the liquidation process.

If we add back the full 7 million (low estimate) slash 6 million (high estimate) reserve back to the estimated cash the upside from the current share price is respectively 13.60% and 18.87%. The company is targeting to file their Certificate of Dissolution in April 2023 and process the initial liquidation distribution shortly thereafter. You don’t have to do any math to realize that this will result in an excellent internal rate of return. Of course, this fully depends on the release of their reserve for potential or unanticipated claims. But there is quite some margin for error here. I assume that the initial distribution will take place at the end of April 2023 and the final distribution 3 years later. In the low scenario we keep an IRR of 10.6% when 3.5 million of the reserve is used, and in the high scenario we can use the full 6.0 million reserve and still achieve a 12.7% IRR. I think that is an attractive bet, so I bought some shares.


Author is long Sio Gene Therapies

2022 end-of-year portfolio review

I would not blame my readers if they thought that the Alpha Vulture blog had died, like so many other financial blogs before it. But after more than 10 years, it is still alive, if just barely, and with 2022 behind us it is time for the obligatory performance review. Throughout the years I have claimed that I expected my portfolio to do relative well in years of market turmoil, and 2022 is the first year that really proved it in the annual results. While the MSCI All Country World Index lost 12.58% the portfolio gained a respectable 11.63%. In absolute terms, the lowest return since I started this blog, but that is obviously still a really fantastic outcome. Given that I have a lot of readers from the US, it is important to realize that I measure my results in euro’s, and that the depreciating of the euro caused a significant currency conversion tailwind. In euro’s the MSCI ACWI was down “just” 12.58% while it lost 17.96% measured in dollars. I estimate that the currency conversion gains had a similar impact on my own results.

Year Return* Benchmark** Difference
2012 18.44% 15.01% 3.43%
2013 53.38% 18.11% 35.26%
2014 30.11% 19.23% 10.88%
2015 24.23% 9.34% 14.89%
2016 64.97% 11.73% 53.24%
2017 29.04% 9.47% 19.57%
2018 13.07% -4.34% 17.41%
2019 32.34% 28.93% 2.70%
2020 19.31% 7.18% 12.13%
2021 31.31% 28.08% 3.23%
2022 11.63% -12.58% 24.21%
Cumulative 1535.58% 222.35% 1313.23%
CAGR 28.92% 11.23% 17.70%

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

The basket of special situations saved the year for me with a more than 10% point positive contribution. The two biggest contributors inside that basket were Imara Inc and Twitter Inc. The latter is possibly the merger deal with the most media coverage ever, and I doubt there is anything that I can write here that you have not already read somewhere else. I think it was obvious to almost everybody that Elon Musk had a paper-thin legal case to get out of the merger, but the spread was huge because… well… Elon is Elon. If someone could pull a rabbit out of a hat it would probably have been him. Although that image might now be crumbling…

A bit more off the beaten path is the position in Imara. The company is a broken biotech that decided to wind-down operations. When I acquired the stock, it was trading significantly below net cash, pro-forma for a just announced asset sale, and I expected that they would liquidate and return the cash to shareholders. This did not happen, and instead they decided to go for a reverse merger with another biotech company. If I could have chosen in advance what the outcome would have been, I would have gone for the liquidation, but luckily the reverse merger plan was received well by the market, and the stock is now trading higher than the possible liquidation value. Sometimes you also need a bit of luck!

The other stocks in my portfolio performed somewhat mixed. Considering the overall performance of the global stock market, they performed relatively well, but as you can see, there are a couple of big losers and not many big winners. The biggest losers was United Development Funding that saw its share price go down 60%. ECC Capital fared even worse, and went down 88%, while Beximco Pharmaceuticals didn’t do much better with a minus 56%. What these names have in common is an absolute lack of liquidity. Even if I would have been able to foresee what would happen – which I did not – I don’t think I could have done much. With some stocks you can enter, but then just have to let the dice roll and see where you end up, because realistically there isn’t much more you can do after that point.

As a new years resolution I’m planning to increase my blogging frequency going forward. Given the incredible low bar I have set for myself in 2022 I’m confident that this is a new years resolution I can keep… I hope my readers had a good 2022 as well, and I would like to wish everybody a happy, healthy and prosperous 2023!


Author is long most of the stuff in the performance attribution graph

New Frontier Health completes going private transaction

Yesterday New Frontier Health (NYSE:NFH) announced that the going private transaction was completed successfully. I wrote about the stock in August when it was trading at a 7.2% spread. I thought it was a deal without any hair on it, and it was indeed more or less completed without any hiccups. There was a small delay at the end, because when the company received shareholder approval more than 10% of the outstanding shares were demanding appraisal rights. Based on the press release it isn’t clear if this condition was waived, or if some holders agreed to withdraw their appraisal demands. But I don’t think it is a big surprise that this issue was resolved. The funds or individuals seeking appraisal rights have nothing to gain if the merger doesn’t go through, and my assumption is always that insiders are getting a good deal, so everybody involved has a good incentive to figure out a solution.


Since I haven’t received the cash yet, still long NFH