Weekly Highlights - June 3, 2022

Recent developments for CNE.LN, KSS, SAVE, RADI.

It was an eventful week for several names that were highlighted in previous posts, particularly for Capricorn Energy (CNE.LN) with the announcement of a recommended all-share combination with Tullow Oil. In addition, several positive developments happened in the three event-driven names covered in a recent post — namely, Spirit Airlines (SAVE), Kohl’s (KSS), and Radius Global (RADI).

Research Updates

Capricorn Energy (CNE.LN)

On Wednesday, Capricorn Energy and Tullow Oil announced that they agreed to merge in an all-stock deal, with Capricorn Energy shareholders receiving 3.8 new Tullow shares for each Capricorn share held, with Capricorn shareholders to own 47% of the combined group and valuing Capricorn shares at approximately 210 GBp at the time of announcement (a disappointing 5% premium to the closing price on the day before the announcement). Capricorn simultaneously announced the suspension of its ongoing share buyback program.

As I highlighted in my initial write-up, Capricorn was essentially trading at a 0 Enterprise Value considering the net cash position of the group and expected earn-outs, allowing shareholders to get exposure to $500 million of oil & gas assets for free. I have not done much work on Tullow Oil assets, but on the surface and based on deal presentation, it obviously looks like a terrible deal for Capricorn shareholders:

• The combination allows Tullow Oil to delever its levered balance sheet by getting access to Capricorn cash, and get its production and exploration assets for free.

• Even excluding exploration assets which are harder to value, Capricorn is essentially giving away its production assets in Egypt, which it purchased for $323 million less than a year ago, when oil prices were much lower than where they are today (an asset that was generating over $140 million operating cash flows at $58 oil).

• Prior to the deal announcement, Capricorn management was repurchasing shares at 200 GBp, following a tender offer at 223 GBp. If they considered their stock to be undervalued anywhere between 200 and 220 GBp, why give it away at the current price?

This is extremely disappointing and absolutely terrible corporate governance, especially coming from a company that so far was shareholder-friendly by returning cash to shareholders through dividends and buybacks (but maybe also not so surprising, considering that Capricorn Directors are holding just 0.2% of Capricorn’s shares).

So what can we expect from here? The press release highlights that the combination is expected to be implemented by way of a scheme of arrangement, which means it will require approval by at least 75% of shareholders. While the shareholder register is relatively fragmented, 75% is a high bar especially considering low ownership from directors so there is still hope the deal gets rejected. Given the company’s valuation and large cash balance, it could be an interesting target for an activist or may attract other bidders, so the story might not be over.

Kohl’s (KSS)

Thursday was a wild day for Kohl’s (link to my initial post). After market close yesterday, the New York Post reported that Kohl’s auction was “delayed indefinitely”, suggesting that bidders’ interest had vanished. The news sent shares down 10%, from $41 to $37.

But just a couple of minutes later, the Wall Street Journal — a slightly more reputable source — disclosed that Kohl’s had received bids from private equity firm Sycamore Partners and retail holding company Franchise Group, respectively in the mid-$50s and around $60. Shares of Kohl’s more than recovered and traded up to $44 in after-hours (the New York Post article has since been edited).

The Kohl’s board is now expected to review the bids in the coming days. A deal is still very far from being done, but it seems that things are moving in the right direction despite recent results and reporting suggesting that bidders enthusiasm for the name had cooled off.

Spirit Airlines (SAVE)

The Spirit / Frontier / JetBlue situation (link to my initial post) got a little more interesting. As Spirit shareholders are due to vote on the Frontier merger next Friday (June 10th), proxy advisory firm Institutional Shareholders Services (ISS) advised shareholders to vote against the Frontier offer and opt for the higher cash offer from JetBlue, while acknowledging that it may face more regulatory scrutiny.

Spirit once again defended the Frontier proposal, and the Frontier offer was updated to now offer a $250 million break-up fee if regulators block the merger ($50 million above JetBlue’s). While it may just be a move to prove to Spirit’s shareholders the confidence of Frontier in the possibility of closing the deal, the addition of a break-up fee can also be seen as an admission that the merger faces the same regulatory hurdles than JetBlue’s offer.

With Spirit’s shares still trading at a 30% discount to JetBlue’s cash offer and the possibility to hedge by shorting Frontier, and pressure mounting on Spirit and Frontier, this situation still offers a short-term catalyst with significant upside and limited downside.

Radius Global (RADI)

Telecommunications industry information company Light Reading reported yesterday that DigitalBridge, a global digital infrastructure investment firm, could be among those interested in acquiring Radius Global (citing Cowen’s analysts):

"Following recent media reports that Radius Global is considering a sale, [DigitalBridge] management noted that additional investments in ground lease aggregators are 'absolutely something' DigitalBridge is considering," the Cowen analysts wrote of their recent meeting with the company's executives. "Management believes the industry has the attributes of infrastructure, adding that Landmark Dividend [a real estate investment firm owned by DigitalBridge] already gives DigitalBridge some exposure to this segment. Based on management commentary and our own channel checks, we believe DigitalBridge has interest in acquiring Radius Global."

My initial idea was relatively simple: Radius Global is an inexpensive, predictable, and quality company and was rumored to be soliciting interest from potential suitors. There is a lot of private equity dry power looking for deals, and digital infrastructure is currently one of the hottest sectors for these funds. Interest from DigitalBridge for ground lease aggregators like Radius Global just confirms my suspicion that RADI could be a very attractive target. As an aside, anyone wanting to hear more about how attractive the sector is can listen to this recent and timely Business Breakdowns podcast with Marc Ganzi, DigitalBridge’s CEO: