As you can probably tell by my latest string of posts, I’ve been incredibly interested in special situations recently (including my last post on Swank (SNKI)). There’s a simple reason- special situations provide a natural hedge against flat or falling markets, and as markets continue to rise I grow more and more concerned at the dwindling pool of value opps. Don’t get me wrong, there are still plenty out there- but you have to dig a bit deeper than you did 8 months ago.
Anyway, one interesting potential special opp is New Frontier (NOOF, first mentioned here). In the past few weeks, NOOF has recieved two buyout offers- the first one at $1.35 by its major shareholder, the second for $1.50 by a competitor.
So the company’s clearly in play. And it’s not hard for me to imagine how this scenario plays out- NOOF basically auctions themselves off and gets acquired by the competitor who bid $1.50 per share. Longkloof (the major shareholder) owns 15% of the company, but they are a fund and are not in the business of owning companies (in general), so they make sure the price is fair and then bow out. NOOF likely has significant synergies with the competitor, and thus the competitor can bid more than Longkloof (and again, Longkloof doesn’t want to own companies!)
But the synergies are what make NOOF interesting. At $1.50 per share, NOOF is trading for ~0.5x book value and ~0.25x sales. That’s very low- I can’t think of any companies with fortress balance sheets that was consistently cash flow positive that got bought out by a competitor for that low of a multiple. Maybe that low of a multiple for a financial buyer, but not a strategic.
Consider this: if the competitor thinks they can realize synergies of just 2.5% of NOOF’s sales (and nothing on their own sales), that would equate to an increase in profits equal to 10% of the deal price. And I think the competitor could realize those savings pretty quickly- the 70 year old CEO/founder makes ~2.5% of sales per year. If anything, I think that shows 2.5% is waaaay too conservative for a strategic buyer of NOOF.
So with the company clearly in play, and a lot of synergies to be had by a strategic buyer, I think NOOF makes a pretty interesting value prop trading below the latest offer price.
There is, of course, risk. While NOOF has hired special advisors, they have not shown any interest in either of the buyout offers. I think they’re in play, and I think it’s in everyone’s best interest for them to sell out (especially given the 70 year old CEO is probably ready to cash out and retire), but it’s possible that they decide not to. If they decided not to, they’d likely slip to at least pre-offer prices, and probably further- that’s ~40% downside.
Still, I think a buyout makes too much sense not to happen now that they’re in play. Veeeerrryyy interesting at today’s prices…….
Disclosure- No current position in NOOF, but that could change at any time
Anyway, one interesting potential special opp is New Frontier (NOOF, first mentioned here). In the past few weeks, NOOF has recieved two buyout offers- the first one at $1.35 by its major shareholder, the second for $1.50 by a competitor.
So the company’s clearly in play. And it’s not hard for me to imagine how this scenario plays out- NOOF basically auctions themselves off and gets acquired by the competitor who bid $1.50 per share. Longkloof (the major shareholder) owns 15% of the company, but they are a fund and are not in the business of owning companies (in general), so they make sure the price is fair and then bow out. NOOF likely has significant synergies with the competitor, and thus the competitor can bid more than Longkloof (and again, Longkloof doesn’t want to own companies!)
But the synergies are what make NOOF interesting. At $1.50 per share, NOOF is trading for ~0.5x book value and ~0.25x sales. That’s very low- I can’t think of any companies with fortress balance sheets that was consistently cash flow positive that got bought out by a competitor for that low of a multiple. Maybe that low of a multiple for a financial buyer, but not a strategic.
Consider this: if the competitor thinks they can realize synergies of just 2.5% of NOOF’s sales (and nothing on their own sales), that would equate to an increase in profits equal to 10% of the deal price. And I think the competitor could realize those savings pretty quickly- the 70 year old CEO/founder makes ~2.5% of sales per year. If anything, I think that shows 2.5% is waaaay too conservative for a strategic buyer of NOOF.
So with the company clearly in play, and a lot of synergies to be had by a strategic buyer, I think NOOF makes a pretty interesting value prop trading below the latest offer price.
There is, of course, risk. While NOOF has hired special advisors, they have not shown any interest in either of the buyout offers. I think they’re in play, and I think it’s in everyone’s best interest for them to sell out (especially given the 70 year old CEO is probably ready to cash out and retire), but it’s possible that they decide not to. If they decided not to, they’d likely slip to at least pre-offer prices, and probably further- that’s ~40% downside.
Still, I think a buyout makes too much sense not to happen now that they’re in play. Veeeerrryyy interesting at today’s prices…….
Disclosure- No current position in NOOF, but that could change at any time
