December 7, 2020- Rumoured Slack Acquisition by Salesforce is Confirmed as Parties Strike Definitive Merger Agreement. Did the “Rumourtrage” Bet Work For Speculators?

SPAC Northern Genesis Acquisition Announces Deal with Lion Electric. Is the Market Still Keen on Electric Vehicle Mergers?

Alaska Communications Receives a Superior Proposal, Triggering Potential Bidding War. What Happens Next?

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Transcript:

Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.com.

Julian Klymochko: Welcome podcast listeners to Absolute Return Podcast episode 103. Today is Friday, December 4th, going through a bit of a Santa Claus rally, but a lot of speculation out there, specifically in US large cap growth equities, and we’re seeing some broth evaluations, extremely high. Hitting record measures on multiple different valuation levels. Specifically, market cap to GDP, Buffet’s favourite valuation indicator and others such as EV/sales, EV/EBITDA, even exceeding the previous tech bubble valuation by North of 20%. So certainly, be careful out. Seeing quite a bit of froth, but nonetheless wanted to chat about some specific deal’s situations happening this week. 

  • Continuing last week’s discussion on rumortrage. Now this rumour deal actually came to fruition this week. Slack’s acquisition by Salesforce confirmed as a party struck a definitive merger agreement. We’re going to chat about how this rumortrage bid worked for speculators.
  • Some SPAC news, Northern Genesis acquisition. They announced the deal with Lion Electric. Is the market still keen on electric vehicle mergers? I think we all know the answer to that, but we’re going to get into why. 
  • And lastly, interesting bidding war brewing for Alaska Communications. They had a deal, but received a superior proposal in their go-shop process. This is going to trigger a potential bidding war. What happens next?

RUMOURED SLACK ACQUISITION BY SALEFORCE IS CONFIRMED AS PARTIES STRIKE DEFINITIVE MERGER ARGEEMENT 

Julian Klymochko: But Mike, let’s start first off. Wanted to follow up on our coverage last week of the Slack and Salesforce rumours. Now these rumours did come to fruition as Salesforce inked in $27.7 billion dollar deal to acquire messaging software company, Slack, in a cash and stock transaction. Now, this one’s interesting. If we look at the strategic rationale, the deal will allow Salesforce really to better compete against industry giant, Microsoft whichever and obviously has on their radar. Microsoft Teams is actually a Slack clone, perhaps Slack plus Zoom or something of that nature. And since Microsoft started teams and added it to its 365 bundle without increasing the price, Slack has gone from 4 million users to 12 million users. However, Microsoft Teams has gone from zero to 115 million users. So, it’s certainly a massive competitive threat for Slack. So certainly, they wanted to team up with perhaps a much more powerful company and combined felt like they could much better compete against Microsoft. 

Getting into the deal terms. The consideration offers to Slack shareholders worth about 47 bucks per share. Now that this represents a premium of 59% to the unaffected price and a just tremendous valuation of nearly 25 times next year’s sales. So, we’re not talking about EBITDA. We’re not talking about earnings, but we’re talking about 25 times sales, forecast sales. I mean on trailing basis, it’s even much, much higher than that.

Now let’s talk about the rumortrage or what we also call pre-arbitrage when you’re speculating or trading off deal speculation rumours in the media, etc. Traders who bought Slack shares on deal SPAC, after the rumour broke last week, capitalizing on this rumortrage or pre arbitrage opportunity, they did okay. They earned about 5.2% this week as the two companies came together and struck this definitive deal. From the perspective of a merger arbitrager, the spread is actually not bad. It’s roughly 5.3% annualized implying a 92% implied odds of success. In my opinion, it’s a fairly safe deal, highly strategic, no potential financing issues. And Salesforce is one of the most credible acquirers out there. Regulatory should be no problem and is expected to close, I believe in the middle of 2021. Mike, what are your thoughts on this deal? Salesforce for Slack?

Michael Kesslering: Yeah, I mean. The topic regards to big tech right now, but this is one of the only big tech mergers that you can kind of think of where there really isn’t that risk. There’s not much overlapped with regards to their actual businesses.

Julian Klymochko: Well, also the DOJ isn’t looking to go after Salesforce. They’ve got their sights on Microsoft, Facebook, Google, mostly.

Michael Kesslering: Exactly, and so the way that I was really looking at this was, you know, we discussed this last week, but you know, it comes down to was is this really necessary for them to acquire Slack? Like could they not have just done a partnership that would have perhaps given them some of the exact same benefit, but I guess there’s a couple ways to look at it right now is Salesforce, as a company, they do need to continue growing to warrant their multiple. So, they are very much in the business of acquiring growth. They’ve done that before. They’ve done that before. I will say, that’s not a criticism that a company’s acquiring growth. They’ve done that before successfully, which is a very difficult thing to do. Saying that is with a whole, a lot of praise. But with regards to another reason that they could be acquiring them is to really just get their successor to Mark Benioff and Stewart Butterfield right now. I mean, he’s one of the most talked about CEOs in Silicon Valley. He’s very highly respected. I believe in one of his interviews today, I believe it was a Bloomberg interview. They did mention that he would be staying on as a president within the company and running Slack as its own business division. But could this be them just looking for you know, eventually Mark Benioff will have to retire and Stewart Butterfield could be a very good option. So, in that situation that would argue a little bit more for an acquisition as opposed a partnership agreement. But the other aspect is, and we talked about this before is this does seem like a very different sort of deal where they really just don’t want Microsoft to acquire them in a worst-case scenario.

And it’s interesting, Julian, that you bring up the user base numbers of Slack versus Microsoft. And I think that just really highlights the importance of distribution. I mean, anybody that uses the Slack product versus Microsoft Teams, I don’t think there’s any doubt that Slack has a far superior product, but Microsoft has the distribution and really in this sort of business that accounts for a lot, but it’s a really interesting deal. It’s at a surprisingly large spread to be honest, in terms of the merger spread that you see right now for investors. But yeah, it’s interesting situation where I think a partnership potentially could have sufficed if you’re just looking at it from a business perspective, not a succession planning perspective.

Julian Klymochko: Right. Fun fact, Stewart Butterfield is Canadian. Grew up and was educated in BC, and that’s where he had his first success. And last week we discussed how Slack was initially a big failure and they had to pivot, it was initially a video game and they had a messaging app within that video game that they spun out as Slack. And obviously, tremendously successful, 27.7 billion. He’s had success in the past with Flickr, which he sold to, I believe Yahoo, but Flicker was once again, born from a failed video game company. So, you know, Stewart Butterfield’s next start-up is a video game company, perhaps that one fails, but what comes from it is an extremely successful software company. And Mike, you really nailed the sentiment on Salesforce. There’s somewhat like a shark that needs to keep moving. Salesforce needs to keep doing acquisitions, such that they can show the growth because they trade out a mass multiple, and they need to continually show that revenue growth. Interesting trade, worthwhile taking a look at it from a merger arbitrage perspective.

 

SPAC NORTHERN GENESIS ANNOUNCES DEAL WITH LION ELECTRIC 

Julian Klymochko: Let’s get onto this SPAC deal. The trend of electric vehicle deals continues as blank check company, Northern Genesis Acquisition. They announced a business combination agreement with Quebec-based Lion Electric, which manufacturers all electric, medium and heavy-duty urban vehicles. Are actually pretty cool-looking, so perhaps, is this one the Tesla Jr.? I don’t know, we’ll see. But pro-forma, this company will be valued at 1.9 Billion, including about $500 million dollars in cash, 300 million, which is from the SPAC Northern Genesis that they raised in their IPO, $200 million dollars coming from a concurrent pipe financing, private investment and public equity. These types of concurrent financings that we’re seeing with these SPAC business combinations and this $500 million dollar of capital will be used to expand Lion Electric vehicle manufacturing to build a new battery assembly factory and to develop new battery systems. And this company is still quite early stage. I mean, they do have a bit of revenue in 2020 revenue of 25 million. They’re forecasting, 2024 revenue in their investor presentation of 3.6 billion.

So definitely expecting significant growth, but they have not started building like their expansion plans yet. They’re evaluating 10 potential sites, 9 US States: California, Illinois, Indiana, others, New York, Ohio. Plans to pick a site and complete its plan by the end of the year. So, one of those States will be a successful, 9 or 10 selections. And production at this factory expected to start at the beginning of 2023. So certainly, a lot of operational risk on this one. Like I said, revenue of nearly 30 million this year, but expecting to go up a hundred X over the next four years. They claim a total addressable market about 110 billion and at their current valuation, I mean, that already takes a decent amount of time. But I mean, if we talk about the price action on this deal, Northern Genesis stock up more than 40% since rumours of the deal first broke. So certainly, market investors, speculators, traders, loving these EV deals. And Mike recount complained. We’ve been long Northern Genesis since its IPO and The Accelerate Arbitrage Fund. We are long of both the shares and the warrants because we did pick up the units at a cheap price, not so cheap anymore, are they?

Michael Kesslering: No, they certainly aren’t. And really in terms of the strategy, I mean, we constantly talk about the need to have diversification in these deals. And that’s just something that you don’t know which of these sponsors is going to find a company like this. That is going to enjoy such a nice pop. I will say that when you’re looking at the Lion Electric Company, at least they actually have some revenue. They actually have proven an ability to produce the buses, right. They’ve been doing that for a few years. So, they do have some manufacturing expertise. It’s not just a market cap on the back of renderings. That’s very positive.

Julian Klymochko: You can say it, you can say Nikola, right? 

Michael Kesslering: Yeah, exactly. The rendering department, which you know, I assume gets compensated more than their engineering department. 

Julian Klymochko: How about the solar panel installers?

Michael Kesslering: Exactly, but when you look at the deal, it is interesting. I mean, they’re going to have a ton of cash, assuming that the share price stays at a large premium, you’re not going to get SPAC investors redeeming. So, they’re going to have a ton of capital to work with. Over $500 million to execute on their plan. Which is pretty crazy when you think about it in 2020, where you can be a company of $25 million dollars in revenue, and all of a sudden you raise $500 million dollars in the snap of your fingers. But the other thing to point out as well you know, being a Canadian company, they are backed by the Desmarais family of Power Corp

Julian Klymochko: Very wealthy Canadian family for non-Canadians listening.

Michael Kesslering: Yes, they back Power Corp. So, they invested in 2018 and will own about 31% of the proforma entity. So, there will still be some Canadian ties here. That’s kind of been the theme of today’s podcast with Stewart Butterfield as well. But yeah, it’s good to see as a shareholder, we love the pop and but you know, looking at the sponsor team prior to the deal, did it indicate that they were going to find a deal like this? Not necessarily. It just goes to show how hard it is to pick with these sponsor teams.

Julian Klymochko: Yeah, it makes sense. So, we like diversification amongst SPAC, except for Canadian SPAC. I mean, there’s nine of them, six of which have a cannabis mandate. And it’s funny how you have a Canadian company Land Electric going public via a US SPAC and definitely fading the Canadian SPACs, because there’s really just, I mean, not a lot of interest in those ones and really not what we’re seeing in the US. Nonetheless Lion Electric, it’ll be listed on the New York stock exchange and trade under the symbol L.E.V. 

 

ALASKA COMMUNICATIONS RECEIVES A SUPER PROPOSAL, TRIGGER POTENTIAL BIDDING WAR 

Julian Klymochko: Speaking of Canada, actually going up north above Canada to Alaska, a bidding war is brewing for small cap company, Alaska Communications. What happened here? last month, Macquarie and GCM teamed up to strike a $300 million-dollar friendly acquisition of Alaska Communications at three bucks per share. So, this represented a 57.1% premium, which is sizable. Significantly higher than the average 25 to 30% premium.

However, we look at it on a valuation basis. This transaction was only 4.2 times trailing EBITDA, which is low. I mean, what does the S&P 500 trade at? 15 times, 14, 15 times EBITDA. So, 4.2 times EBITDA is one of the cheapest stocks that you can find in the market. But as part of the deal, the Alaska Communications board implemented a go-shop provision, which allowed them to go out and publicly seek other buyers to go-shop expired this week. And upon expiration, it was revealed that two bids for the company came in. One of which was deemed to be superior to the current $3 offer. And that’s a peer proposal, or perhaps could be a superior proposal at $3 dollars and 15 cents. So slightly above the $3 dollar share price, however, Alaska Communication shareholders loving it, bidding up the stock to $3.76, clearly pricing in a tremendous bidding war on this one, the stock was up 23.3% on the news. Lofty expectations of a bidding war between these companies. ALSK, Alaska Communications stock at a 19.4% premium to the $3 dollars and 15 cent offer. And 25.3% above the initial deal price of $3 dollars. Lofty expectations, I mean, I like these types of deals. I like to get involved in bidding wars. However, this one you’re paying a significant premium for that potential option, but I should mention that even at $3.15, valuation still extremely low, I mean, four and a half times EBITDA, there is room to grow. If we look at another comparable or precedent. CBB, Cincinnati Bell of which we are long in The Accelerate Arbitrage Fund. CBB was a beneficiary of a bidding war that resulted in a 47.6% increase over its initial deal price. And it’s a somewhat similar company. The final deal for CBB ended up at seven times EBIT. So, it was another company that was a very low valuation. Another interloper came in, but up the stock, 47.6% and settled on a deal there. How this one’s going to play out? No word yet from Macquarie and GCM, the current buyers, but they do have four business day, right? To match. We’ll hear from them later next week. Mike, what are your thoughts? Do you think that the market is right and having these lofty expectations?

Michael Kesslering: Yeah, it doesn’t really seem warranted, right? Like I just really, I have to compare it to, if this was a Canadian listed company, it would probably be trading at perhaps a slight discount.

Julian Klymochko: $3.20, maybe $3.15.

Michael Kesslering: Yeah, it might be traded great at terms. And you’d be able to just get this optionality for free. It seems like you’re able to take advantage of that a little bit more in Canada. But for a US company like this, I mean, yeah, like you’re paying up quite a large premium to then I don’t know what the upside would be above $3.76. Technically there was another bidder as well, only one that they deemed a superior proposal, so there’s three technical bidders here. So yeah, certainly there can be a bidding war, but does that mean that it goes about $4 dollars a share? That seems like a lower probability, right? And so, if your probability waiting this, it doesn’t seem like it would come out with a positive, expected value at this point, unless you really, you had done some thesis or some underlying knowledge of these bidders and why they would be willing to go well over $4 dollars a share.

But we love to see bidding wars. Even if we’re on the outside looking in this particular instance, we are on the outside looking in but it is great to see for the robustness of mergers and the whole merger space. But as well, one other thing to point out would be that if this isn’t match, I believe in Alaska would be required to pay about a $4.2 million termination fee to Macquarie and GCM. So, they wouldn’t walk away empty-handed, they get paid a little bit for their troubles. But yeah, it’ll be one that we’ll be following very closely. But yeah, it just seems like the market has gotten a little ahead of itself on this one.

Julian Klymochko: Yeah, you had an interesting comment there. If it was in Canada then perhaps the optionality main price then would be significantly lower. I definitely agree with that sentiment there because you look at a company like CDV, Cardinal Resources, of which we do have a position in The Accelerate Arbitrage Fund. That has been the most vicious bidding war I’ve ever seen. There are now three parties involved and it’s trading at a 2% premium, like that’s significantly different than like a pretty much a 20% premium. And so, you got to pay for whether in the US it just seems like it’s so much more competitive in these types of situations, but I should mention at $3.76, 25.3% above the initial deal price. If we do you utilize, you know  CBB precedent, Cincinnati Bell, that one increased 47.6% over the initial deal price.

And, you know, that type of bidding war would take Alaska Communications up to $4.43. So not out of the question, but we gotta probability-weight these things. And the ironic thing about this one is that the winning bidder in the Cincinnati Bell transaction was none other than Macquarie. So, they seem to pop up similar types of deals. And perhaps that is in market participants’ minds, bidding Alaska stock up to $3.76 saying,  well, Macquarie paid seven times EBITDA for Cincinnati Bell, and they’re willing to go toe to toe with Brookfield Infrastructure and beat them out. Then perhaps Macquarie is willing to do the same here. So certainly, a very interesting situation. No position at this point, but who knows, perhaps we’ll get involved at some point, if we deem the risk-reward attractive, but nonetheless tons of deals happening these days, bit of a frothy market. So be careful out there, folks. That basically wraps it up for us on episode 103 of The Absolute Return Podcast. Hope you enjoyed it. If you did, definitely check out more @absolutereturnpodcast.com, certainly follow Mike on Twitter. What’s your handle? 

Michael Kesslering: @Mike_Kesslering

Julian Klymochko: And check mine out @JulianKlymochko. Always Tweeting the good stuff. Wish you all the best over the next week in you’re investing, trading and speculating. Be careful out there. Just given this crazy froth that we’re seeing. Until next week, we’ll chat with you soon, cheers.

Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.

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