The opportunity set is particularly interesting in event-driven situations right now. The current market drawdown may be offering many opportunities but it seems that fundamentals do not matter at the moment, whereas event-driven situations are idiosyncratic opportunities and can work regardless of where inflation or interest rates are headed, often with a pretty short timeline (and the possibility to partly hedge market risk by setting a pair trade or shorting an index). For sure, the current environment may be the exact reason why these opportunities exist, but the discounts we are seeing across the board lead me to believe that it is more the result of the drawdown and lack of liquidity rather than a real worry about increased regulatory scrutiny or concerns about tightening financial conditions impacting deal financing. Even Buffett is getting interested, with his large bet on Activision Blizzard (ATVI)!
I’m going to highlight three additional situations that I find particularly interesting below (Spirit Airlines, Kohl’s, and Radius Global), but there are many more at the moment (Magnachip, Swedish Match, Twitter, or Alphamin Resources, just to name a few).
Spirit Airlines (SAVE)
On February 7, 2022, Spirit Airlines (SAVE) announced a definitive merger agreement to combine with Frontier Airlines (ULCC), in order to create a single ultra-low fare airline. Under the terms of the merger agreement, which had been unanimously approved by the boards of directors of both companies, Spirit equity holders would receive 1.9126 shares of Frontier, plus $2.13 in cash for each Spirit share they own. At the time, it implied a value of $25.83 per Spirit share.
Two month later, on April 5, 2022, Spirit confirmed the receipt of an unsolicited proposal from JetBlue Airways (JBLU) to acquire of all the outstanding shares of Spirit’s common stock in an all-cash transaction for $33 per share, or a 28% to Frontier’s initial offer and a 50% premium to where Spirit’s shares traded the day before the announcement. Despite this significant premium, Spirit’s board of director reiterated its support for a merger with Frontier Airlines and determined that the JetBlue offer did not constitute a superior proposal, as defined in the Frontier’s merger agreement. The main argument raised by Spirit’s board was the low likelihood of closing a deal with JetBlue given regulatory hurdles.
It did not deter JetBlue, and the company decided to go hostile by announcing last week an all-cash, fully financed $30 tender offer for Spirit - conditioned to Spirit’s shareholders rejecting the Frontier’s deal during its special meeting on June 10, 2022 - as well as its willingness to negotiate in good faith a consensual transaction at $33.
Spirit board responded a couple of days later, urging shareholders to reject JetBlue’s tender offer, highlighting again the significant completion risks due to the lack of any realistic likelihood of regulatory approval.
Shares of Spirit are currently pricing a close to zero likelihood of a revised offer. As of yesterday’s close, Spirit shares traded at a 6% discount to the Frontier offer (and a 36% discount to JetBlue’s tender price), compared to an average discount of ~8% to Frontier’s (ULCC) offer before JetBlue stepped-in:
The vote for the Frontier merger is scheduled on June 10. Maybe an activist will end up revealing a stake before then and push Spirit’s board to more seriously consider JetBlue’s offer, or shareholders will decide that the $30 cash offer is too good to pass compared to Spirit’s current trading price?
Maybe Spirit’s board is right in their assessment, and maybe JetBlue’s intention is only to block the Spirit/Frontier transaction. But unless the discount blows out to a much higher level, investors can get exposure to any potential upside by acquiring SAVE and shorting 1.9126 ULCC share for each SAVE share they own.
Kohl’s (KSS)
Kohl’s is an interesting situation. Shares of the department store retail chain currently trade at ~$40, and we know the company has recently received multiple bids from $64 to the high $60s.
The company released earnings on Thursday and confirmed that its board was still exploring strategic alternatives; and that it had already engaged with 25 parties. The company is now waiting for fully-financed final bids to be submitted in the coming weeks. Opening comments on the earnings call, as well as recent executive departures, seem to confirm that the company is willing to sell itself:
Through this process, we have the opportunity to engage frequently and openly with our shareholders. I want to thank each of them for sharing important feedback to our Board and management team, which we take seriously. On that note, shareholders want to ensure that the Board will continue to run the sale process with shareholders' best interest in mind. We continue to engage with multiple interested parties. As we've described, they are working to prepare fully financed binding proposals.
At this point, we have formally communicated to the multiple parties in our process the specific procedures for the submission of actionable bids due in the coming weeks. We continue with our detailed diligence phase and are pleased with the number of parties who recognize the value of our business and plan. We'll update the market when it's appropriate to do so.
Again - we are talking about a company that received credible offers from multiple buyers around $68. We now have confirmation that it is very seriously considering a sale. And yet, despite these positive developments, the discount has widened to approximately 40% to the $68 offers on the backdrop of poor guidance from various retailers.
Maybe all buyers will get cold feet following these earnings and comments. Maybe the final bids will come in lower than initially anticipated. But isn’t that more than priced in? The company downgraded its 2022 financial guidance and is now expecting earnings per share to be in the range of $6.45 to $6.85 (compared to $7.00 to $7.50 previously). If buyers were initially willing to pay 9.4x earnings (at $68 and based on the midpoint of the initial guidance of $7.00 to $7.50), the revised guidance would then lead to a final offer of $62 based on the same multiple, or more than 50% upside to the current share price.
In case no deal materializes, while it would certainly be a bad news, downside could be relatively protected given that Kohl’s is profitable, trades relatively cheaply, and already has approved a $3.0 billion share repurchases program (approximately 60% of current market capitalization!) and plans to repurchase at least $1.0 billion (20% of its current market capitalization) this year alone.
Radius Global Infrastructure (RADI)
Radius Global Infrastructure is a wireless tower ground lease company (think tower REITs but focused on the land under the towers).
It is a quality company and most of its rent is inflation-indexed. The company is rumored to be exploring strategic alternatives and planning to solicit interest from potential suitors. These rumors were acknowledged by management during the Q1 earnings call:
Before we open the call for questions, I would like to acknowledge the market rumors that surfaced in the media last week. While we're always focused on shareholder value creation, as I'm sure you can appreciate, we have a policy of not commenting on market rumors. Accordingly, we request, and I really mean we request that you please keep questions today related to our first quarter results and to our business and outlook.
Since Clark Street Value has already written up the name, I will redirect readers to this great write-up for more information: Radius Global Infrastructure: Tower Ground Leases, Rumored Sale.
I’m sure a lot of infrastructure/PE funds would be really interested in this asset, and would not be surprised if it was being acquired for over $18 per share (shares closed yesterday at $15).
Thanks for posting, your work has been great so far. Keep it going!
Very interesting, thanks!