The Special Situation Report #16: 5/8 Roundup

Summary of the Week in Special Situations

May 08, 2022

My report on DOUG received thousands of views and plenty of feedback. Overwhelmingly positive. So, thank you for that.

I did hear some healthy skepticism regarding the DOUG bull case. There are two sides to every story, and I very much appreciate hearing others’ perspectives. Among the bear arguments:

Questionable capital allocation decisions at Vector Group may persist at DOUG
DOUG standalone profitability will not justify a premium to the current stock price
Real estate volume will slow to crawl (due to rising rates and a poor economy)

On the third point, I recall a Douglas Elliman report published in January 2009 amid the throes of the financial crisis:

“Buyers are looking for, in some cases, 30 to 40 percent off what the price would have been a year ago for an apartment,” he said. “They want real estate to mirror the loss in the Dow.”

Macro conditions have had, and will continue to have, a significant effect on DOUG's financial results and stock price performance.

But that sword cuts both ways.

Consider that 2018 was the “worst year since the financial crisis” for Manhattan real estate (thanks, de Blasio). That weakness persisted in 2019, particularly in the luxury segment. In 2020, DOUG’s NYC business (46% of revenue in 2018 and 2019) was down 38% year over year.

I think there is still latent demand in the New York City market. DOUG’s expansion to Florida and Texas continues to benefit from population migration. Its luxury positioning should have a mitigating effect on rising rates.

But if rates continue to rise unabated, and the economy sputters, gross real estate transaction volumes will surely fall. No one claimed investing was easy.

Reminder to new followers, I cover event-driven news and events in the stock market. Every Sunday, I send an email recapping the latest happenings. And every few weeks, I send an in-depth report on an actionable idea.

Update on Developing M&A

Strategic Alternatives & Ongoing Situations

Bally’s (BALY) rejected Standard General’s takeover proposal and announced a $300 - $500mm tender offer (Press Release)
Cumulus Media (CMLS) rejected a $15 - $17 / share bid from a buyer consortium; announced a $50mm share repurchase program and $25mm tender offer (Press Release, Tender Offer)
Healthcare Realty Trust (HR) confirmed receipt of an unsolicited proposal (reportedly from Welltower (WELL)); reiterated its commitment to its merger with Healthcare Trust of America (HTA) (Press Release)
Kingstone (KINS) confirmed the receipt of a non-binding takeover proposal from Griffin Highline Capital (Press Release)
Sesen Bio (SESN) announced a review of strategic alternatives (Press Release)
Spirit Airlines (SAVE) rejected JetBlue’s (JBLU) takeover proposal due to regulatory concerns and reiterated support for the merger with Frontier (ULCC) (Press Release)
Turtle Beach (HEAR) said it is exploring a sale process in an open letter to shareholders (Press Release)
Zymeworks (ZYME) unsolicited takeover proposal from All Blue Capital supported by former AstraZeneca oncology head (Press Release)

Rumors

Ceres Power (CPWHF) speculation of takeover interest (Seeking Alpha)
Maravai Lifesciences (MRVI) renewed takeover interest (Seeking Alpha)
Radius Global Infrastructure (RADI) reportedly exploring strategic options, including a sale (Yahoo, via Bloomberg)
Switch (SWCH) reportedly the subject of takeover interest from Brookfield Asset (BAM) (Yahoo, via Bloomberg)
Ubisoft (UBSFY) founding family is considering a take-private in light of private equity interest (gamesindustry.biz)

Update on Shareholder Activism

Chesapeake Energy (CHK) in discussions with activist Kimmeridge regarding changes to boost value (Reuters)
Hasbro (HAS) activist Ancora disclosed a 1% stake, backed the other activist (Alta Fox), called for a board refresh, and sale of eOne business (Press Release)
Kirkland’s (KIRK) 13D filed by Osmium Partners disclosed a 14% stake and called for a large share repurchase (Filing)
Medallion Financial (MFIN) announced a cooperation agreement with KORR Value and authorized increased buyback (Press Release)
Southwest Gas (SWX) activist Carl Icahn wins four board seats in settlement agreement; CEO departs (Press Release)
Sumo Logic (SUMO) announced a cooperation agreement with Scalar Gauge Fund (Press Release)
Western Digital (WDC) activist Elliott disclosed a 6% stake and proposed separation of its businesses, suggesting 100%+ upside (Press Release)
WisdomTree’s (WETF) settlement discussion with activists broke down at the last minute; activists to file proxy materials (Press Release, Company Response)

Update on Other Special Situations

Spin-Offs

IDT Corp (IDT) postponed its spin-off of Net2phone in light of the current market conditions (Press Release)
Sanofi (SNY) completed the spin-off of EuroAPI (EPA: EAPI) (Reuters, Investor Presentation)
Vinco Ventures (BBIG) set a record date for the spin-off of blockchain business Cryptyde (TYDE) (Press Release)
Vista Outdoor (VSTO) announced a plan to separate via a spin-off of its outdoor products segment (Press Release, Investor Presentation)

Other

Bausch Health Companies’ (BHC) IPO of Bausch + Lomb (BLCO) priced well below proposed range (Reuters)
Centene (CNC) disposed of two pharmacy businesses for $2.8bn (Press Release)
Funko (FNKO) 25% stake acquired by The Chernin Group, eBay (EBAY), Bob Iger, and Rich Paul (Press Release)
Lionsgate’s (LGF.A) Starz business is the subject of interest from Roku (ROKU), Apollo (APO), and others (Deadline)
Peloton (PTON) reportedly exploring the sale of a sizable minority stake (Tech Crunch)

Announced M&A

Target / Acquirer – Transaction Enterprise Value

Energy & Natural Resources

Nomad Royalty (NSR) / Sandstorm Gold (SAND) – $590mm (Press Release, Investor Presentation)

Gaming, Gambling, Lodging & Real Estate

Watermark Lodging Trust (WRMK) / Brookfield Asset Management (BAM) – $3.8bn (Press Release)

Technology, Media & Telecommunications

Black Knight (BKI) / Intercontinental Exchange (ICE) – $13.1bn (Press Release, Investor Presentation)
Silicon Motion (SIMO) / MaxLinear (MXL) – $3.8bn (Press Release, Investor Presentation)

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The Special Situation Report