Sunday, March 26, 2023

Recut Deal w/ Arq, Torpedoes Shareholder Vote

Usually, I do not like to put in writing about shares that I do not personal however I’ll break that mushy rule right here, as talked about within the Year End put up, I offered my shares in Superior Emissions Options (ADES) ($59MM market cap).  My unique put up outlining the thesis from November 2021 is here, as ordinary, the remark part is price going by means of for a blow-by-blow of the occasions.

This afternoon, ADES revealed a press launch saying their merger with Arq Limited had been completed.  That required a double take and a fast click on for the reason that merger as initially constructed required a shareholder vote to finish, and no such vote was held.  

To take a step again, in Could 2021, ADES introduced it was pursuing strategic options because the run off in a single phase was producing a number of money, however that enterprise was coming to an finish because of the expiration of a tax credit score, leaving simply their Activated Carbon enterprise (Pink River plant) which is subscale for a public firm.  In accordance with the background section in the original deal’s S-4 filing, ADES acquired a number of non-binding indications of curiosity from non-public fairness corporations shortly after publicly saying a course of for his or her remaining Activated Carbon enterprise for between $30-$50MM.  Nonetheless, ADES flipped to being a purchaser and in August 2022, lastly entered into an settlement with Arq Restricted for a reverse merger the place ADES would purchase Arq for money and inventory.  It was a really SPAC-like deal (here’s the SPAC deck) with a pre-revenue startup and rosy income outlook a number of years out.  Shareholders who had been anticipating a liquidation sort transaction revolted, sending the shares from $6.41 instantly previous to the deal announcement (to be honest, it had spiked over the earlier week after ADES administration indicated a deal was close to on their Q2 earnings call) to a $3.86 on the shut, then drifting all the way in which all the way down to $2.20/share in December.  For context, as of 9/30 the corporate had $86MM of money or $4.50/share, in the event that they offered the Activated Carbon enterprise to one of many PE corporations, shareholders may have netted someplace within the space of $6.50/share.  A lot decrease than I initially penciled out, however nicely forward of the place shares commerce in the present day.

With that worth discrepancy, you’d count on an activist to come back in and try to interrupt the deal, power a fast sale of the Activated Carbon enterprise, distribute all of the money and reap a pleasant tidy revenue.  Nonetheless, that was unimaginable as a result of ADES has a rights settlement stopping anybody from crossing the 5% possession threshold in an effort to keep their NOLs and tax credit.  That 5% possession restrict together with the small market cap prevented most funds from proudly owning shares (its particular person buyers who’re getting screwed right here).  In a wierd twist, the unique transaction with Arq Restricted would qualify as an possession change, subsequently eliminating the NOLs and tax credit, however the rights settlement defending these tax property was nonetheless in place.  Regardless of that, there was some hope that shareholders would vote the deal down (like MTCR that was mentioned in my SESN put up feedback) or it might be terminated earlier than to avoid wasting the embarrassment, forcing the corporate right into a liquidation.

That brings us again to in the present day, ADES recut the merger with Arq presumably to bypass the shareholder vote by issuing a brand new sequence of most popular shares (this sort of rhymes with the shenanigans over at AMC with the APE most popular shares) to Arq shareholders as consideration.  

The popular shares characteristic a 8% coupon and are convertible to frequent inventory at a $4/share conversion worth if permitted by frequent inventory holders.  Widespread inventory holders haven’t any cause to not approve the conversion, saves the 8% coupon the corporate cannot afford (it is going to be money move adverse for the following couple years, even beneath their rosy projections) and it might convert at an above market worth.  The debt financing can be to a associated occasion, a board member of Arq (may even be on the brand new ADS board) that pays 11% money coupon, plus a 5% PIK.  

Whereas the deal is optically higher for ADES shareholders (not saying a lot, presumably does protect the tax asset, however questionable whether or not the mixed firm ever generates vital taxable revenue), it possible would nonetheless get voted down, after hours buying and selling displays this as nicely, shares had been down ~16% as of final examine.  Onerous to take a position on motivation, however administration owns little inventory and possibly needs to maintain their nicely paying jobs.  Apologies to anybody that adopted me into this example, I hope I am lacking one thing.  None of this smells proper.

Disclosure: No place

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