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 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