June 8, 2020- IPOs are Scorching Hot as ZoomInfo and Warner Music Soar in their Market Debuts. Does This Confirm the Coronavirus Bear Market is Over?
Tiffany Shares Thrown into the Discount Bin as LVMH Briefly Reconsiders the Deal. Why Did the Buyer Want to Cut the Price?
Guyana Goldfields Receives Another Unsolicited Offer as the Bidding War Continues. What Will Happen Next?
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 episode 71 of The Absolute Return Podcast. I am your host Julian Klymochko.
Michael Kesslering: And I’m Mike Kesslering.
Julian Klymochko: Today is Friday, June 5th, 2020, quite the markets this week, obviously continuing with the big bounce, the big recovery we’ve had ever since the March 23rd low. It is pretty shocking. A lot of interesting things, although happening in the market.
- First off, IPOs are back, baby. They are scorching hot as zoom info and Warner music. Two new IPOs this week that absolutely soared in their market debuts. Does this confirm the Coronavirus bear market is over?
- Some M&A news. Tiffany shares thrown into the discount bin as LVMH to briefly reconsider the deal. Why did the buyer want to cut the price on this deal? We are going to chat about what to do when mergers hit turbulence.
- Lastly, the most interesting bidding war of the year, Guyana Goldfield received yet another unsolicited offer as the bidding war continues, what will happen next? We have provided a lot of coverage on this Guyana Goldfield situation thus far on the podcast of the past number of episodes. We are going to continue the saga as they got another bid. It just keeps getting more and more exciting, but before we get into that.
IPOs ARE SCORCHING HOT AS ZOOMINFO AND WARNER MUSIC SOAR IN THEIR MARKET DEBUTS
Julian Klymochko: Touching on IPOs, which have really heated up really signifying a massive recovery in investor risk sentiment over the past number of months, obviously throughout the coronavirus pandemic and March really saw nothing for IPOS. Then as things started thawing, we did see a number of IPOS from SPAC, special purpose acquisition companies and select the biotech companies. But for a while, there are a number of weeks, we didn’t see anything outside of SPACs and some of these speculative start up biotech issuers, but now things are just rolling with these massive, massive IPOS of a wide variety of companies.
The first one being the world’s third largest record label Warner Music, they would return to the public markets this week. With the years largest IPO, they raised $2 billion in the initial public offering, valuing the company at 15 billion. Now this offering was unique because it consisted entirely of secondary shares being sold by Len Blavatnik Access Industry. What a secondary issuance is the company is not selling shares. The shareholder, the controlling shareholder here acts as industries. Flip their stock to the public and let it trade on the exchange. Warner music not getting any actual cash from this IPO. Interesting thing is that Len Blavatnik Access Industries acquired Warner music in 2011 for just 3.3 billion. They have seen the value of their state grow nearly fivefold over the past nine years. As music, streaming drove revenue in the music business. For example, Spotify is Warner’s as largest single source of revenue counting for roughly 14% of Warner’s revenue over the past fiscal year.
And the other thing I should mention, man, as quantitative easing and all this monitoring fiscal stimulus been great to Len Blavatnik, the guy’s banking, many billions of dollars here. I believe that pumped his net worth to North of $20 billion. Certainly, Len’s got to be thanking the fed and the treasury for pumping equity markets here and opening up that IPO window, allowing him to get a partial exit on a stake here.
Another IPO tech company, Zoom Info. They actually offer databases for businesses and sales contacts. They raised nearly $1 billion an initial public offering that value the company at about $8 billion. And you look at the price action on these companies, and it really just signifies how speculative this market as being. And typically, if we look at historical IPO performance, typically you see these big IPO pops in these rabid bear markets, sorry, rabid bull markets when things are just going crazy, investor risk sentiment is off the charts, which would be just a wild flip-flop given what happened two, three months ago. One of the swiftest, if not the Swift bear market of all time, SNP declined 35% peak to trough TSX down nearly 40% peak to trough sentiment was just absolutely horrible to see that flip in what 12 weeks. It is just absolutely stunning, such that we are back to a 1999 tech boom scenario where you are having these crazy IPO pops. Warner stock finished the week up over 25% while Zoom Info shares rallied more than 80%, which is just absolutely mind blowing, but a lot of people are getting rich on these deals. For example, Len Blavatnik pocketing $2 billion on Warner music’s IPO increasing his net worth actually forget 20 billion, more than 31 billion.
Zoom Info. Talk about the history on this company. It was actually acquired by Great Health Partners, private equity firm for only $240 million, just three years ago. They subsequently flipped that to Carlyle private equity firm, NTA associates for an undisclosed price. But now you look at TA Associates Stake is worth 4.4 billion. Carlyle stake is worth 3.8 billion, and they still have the controlling shares in this company after the IPO. Now this is what we call a bull market folks. If you need any other signs, you just got him with this IPO craziness. What are your thoughts on these couple of big IPOS here?
Michael Kesslering: Yeah, first to go back to the Warner deal. Obviously, a great pop, as you had mentioned for that Nick, you know, doing very, very well in this, in this transaction. But as well, one thing to keep an eye on moving forward with the company would be, is I believe that their agreement with Spotify, you had mentioned that that’s their main revenue source, that’s up for renegotiation in the next couple of years and it’ll be interesting to watch what the tact that Spotify takes with that as they are doing a little bit more of a shift towards podcasting. It will be interesting to see whether that offers them a little bit more leverage in negotiations or, if it’s the opposite as obviously Warner is gaining some power here in that relationship as well.
It will be interesting following that. As you had mentioned as well with Zoom Info private equity backed, you know, a very good, very good exit for those private equity firms. As well, I did just want to mention with the IPOS in general. I did see an interesting stat today that indicated that 73% of the SPAC IPOS over the last year have traded above their IPO price on the first day of trading. Which that’s a very niche segment of the market, but just another further indicator that not only is it a very strong market for IPOS just this past week for tech companies and I guess some of the sexier names, but as well as some of these niche areas such as such as SPAC.
Julian Klymochko: Yeah, so it is nice to see a number of IPOS aside from the SPAC. Obviously, we cover SPAC very closely. Have positions in a lot of them, but what these IPOS signify Zoom Info, Warner music really just resurgence in market sentiment. Investor risk profiles and the market healing itself from a dramatic downturn in March and April, It is great to see.
TIFFANY SHARES THROWN INTO THE DISCOUNT BIN AS LVHM BRIELFY RECONSIDER THE DEAL
Julian Klymochko: Onto some M&A 101. Some classes started [Ding-Ding], back in the heady days of November 2019, LVMH struck a friendly deal to acquire luxury jewellery retailer, Tiffany & Co. for 135 bucks per share. Now at the time, this represented nearly $18 billion deal and a 37% premium. Tiffany as a company was something that LVMH desired for a long time. LVMH is a real consolidator in the space; it is run by Europe richest man really specializing in luxury and they saw Tiffany as really the last non-family controlled luxury acquisition candidate that they could get their hands on.
And it started with quite the dance they logged in and offer a bear hug letter, made it public. Slowly, got access to due diligence materials. The data room increase the price, and finally got a friendly deal done and what looked like a big win at 135 bucks per share. But as we all know, over the past six months, things have changed dramatically. The financial performance of retailers has been hit hard as nonessential businesses were forced to shutter their stores to stop the spread of the Coronavirus. Now, the deterioration of markets combined with retailers negatively affected operations since March has led the LVMH board to have second thoughts on this deal. It is really interesting because this really shows the difference between short term and long-term thinking, and it’s tough for LVMH not to think that they didn’t overpay just because stock prices had declined dramatically.
And so what happened this week was on Tuesday, the LVMH board leaked to the press that it met to discuss concerns over the deals specifically and this is according to sources. Specifically, the LVMH board was looking into ways to push the Tiffany board to restrike the deal at a lower price. Now, this is a difficult, sensitive issue because back in November, they signed a definitive agreement and a deal is a deal, right. You sign a contract you are expected to stick with that contract, especially with such a reputable buyer to consolidate like LVMH. It certainly shocked the market for them to see that the LVMH board was taking a real good look at the deal and expressing their concerns publicly through this media leak that they actually, you know, are having second thoughts. The market got concerned over that, the stock price tanked about 15% on Tuesday.
Basically the LVMH CEO Bernard Arnault like I said, Europe’s richest man, super, super successful in consolidating the luxury space. He had been talking to advisors to identify ways in which they could pressure Tiffany to lower the agreed upon price. And this is what Reuters reported. They are looking through their merger agreement and these merger agreements and this one specifically. They are crafted by highly paid lawyers and they are typically airtight this merger agreement. It is a real tight merger agreement. I have read it and so it is tough. I mean, there could be perhaps some waver room but when you have these lawyers looking over. The ultimately determined today that they are not going to try to pressure Tiffany to renegotiate the deal at this time. They explored different potential legal options, whether it be some sort of covenant breach reps and warranties on the condition side, there is a number of ways to potentially try to get them to renegotiate. However, also in the press, Tiffany said, look, if you guys are going to try to renegotiate anything, we’ll see you in court because a deal’s a deal and a contract is a contract. Ultimately, on Tuesday, Tiffany’s shares tanked 15%, a lot of arbs going crazy and having a tough time sleeping. Meanwhile, today it pretty much reversed. Tiffany shares rallying as much as 8% on that whole rumour kind of going away. I guess it’s still lingers a bit, many are still concerned, just given the underlying condition of Tiffany. It is tough to have good financial results when you run a retail operation and your stores are forced to close for two, three months, right. Still there is a lot of concern. Tiffany is reporting earnings on Tuesday. It will be really, really interesting to see what they report.
Obviously, it is expected to be really, really bad, but its opening back up. I was in the mall last Saturday. I saw the Tiffany store is jam packed at a half an hour line-up. It is really, really interesting one to monitor and this is where the experience, talent and expertise within merger arbitrage and due diligence really helps you keep a cool head. Stay in their position, not before Serpico within this volatility, this volatile trading, because you know, many people would get spooked by this and before us to sell their shares just as a risk management tactic.
But this is really where the experience comes in. Not something we have not seen before, when you analyse thousands upon thousands of deals and read thousands of these merger agreements. And, you know, it could be somewhat analogous to another deal that we’ve talked about on this podcast, which would be the Delphi Technologies acquisition by BorgWarner, in which they did successfully campaign for a lower price. They alleged a covenant breach on Delphi side by withdrawing or drawing down their revolving credit facility. They got Delphi to the negotiating table and ultimately BorgWarner was able to negotiate a 5% reduction in the consideration paid. But as of now, LVMH decided against trying to pressure Tiffany to renegotiate the definitive deal, but still Tiffany shares down over 4% this week and significantly below the $135 agreed upon deal price. What is it trading at around 121 bucks per share today?
Michael Kesslering: Yeah and in terms of the price action of the last couple of days. I am glad you brought that up Julian is, I do think some of that has been a little bit exasperated by some of the sell side research that I have seen and some of the desk notes from some of the south side research firms is that about a month ago, a number of firms were really highlight…their merger ARB desks were highlighting the opportunity set that that was apparent in risk ARB which it was a fantastic opportunity set and for a number of managers that weren’t typical merger ARBs. Some long only managers, they were was some definite poking around by long only managers of deals that they could get involved in, so specifically cash deals that were strategic, you know, thought of as reasonably safe, but still offering a good risk reward.
And Tiffany’s was one deal that I saw mentioned kind of over and over where there was, there was a lot of long only interest and at that time, Tiffany was trading in the $126 to $128 range. Then when you get bad news like this, is not something that those managers are focused on a day-to-day basis. All of a sudden, you get this bad news that that LVMH is looking for ways that our board specifically is looking for ways to get out of this deal or re cut. You have the stock really plunged down and I think a lot of that had to do with some of those, some of those long only managers selling out dip back down to, you know, the $113 level. And at that time you had a lot of merger ARBs that at $113, that risk reward, that risk asymmetry becomes very favourable.
You saw it a lot of interest from our scarves at those levels. It was just a very interesting thing to fall in terms of the price dynamics. Now, one thing as well, that Julian, you mentioned this week I believe you had tweeted out that Tiffany had actually paid out their dividends. They had an X date this week and they would, and one of the, I guess in the background with that is that one of the allegations that are the levers that LVMH was looking to pull was, with regards to debt covenants and their worry that Tiffany’s would breach some of their debt covenants. And just thinking about it logically Tiffany would not have paid a dividend this week, if they were at all concerned about breaking their leverage covenants and putting the deal in jeopardy as obviously make this, transaction is more important to them than, paying out the dividend. But as well, I mean, Tiffany, they do a report earnings on Tuesday, so it will be interesting to watch for that and I kind of doubt that there’ll be mentioning anything to do with the transaction if they do have a call, but it will be interesting to watch their results at the very least.
Julian Klymochko: Yeah, you know, this deal expected to close later this year, perhaps in a few months, a lot of conditions on the regulatory side that still need approval. The interesting thing is that I noticed there is, I tweeted about it perhaps a week or so ago is that, you know, LVMH has recently announced annual report. They actually referred to Tiffany as the highlight of the year, and they are already talking about like they closed the deal. Would be interesting, like it is quite unexpected that they would walk away from this deal. I think mostly that they badly want Tiffany, but they are looking to be opportunistic in terms of getting a lower price.
Michael Kesslering: And I don’t think they want a competitor either getting, Tiffany as well, that I think that’s a definite concern of them as well. If they walk away from this deal, sorry if they find a way to walk away from this deal that’s a pretty large caveat is then potential activities goes to a competitor and I don’t think they want that.
Julian Klymochko: Oh, no, definitely not. LVMH certainly wants the company. The other thing is things have dramatically changed over the past week. For example, Richemont, a competitor, their shares are up 20% this week and LVMH, their stock is almost at a new all-time high. You have had this dramatic market recovery, especially on the beaten down names, such as Tiffany. And if Tiffany didn’t have this buyout agreement, then obviously their stock would have been down quite a bit more. The merger is holding it up. However, it would have had a dramatic rebound, and it is certainly not getting any cheaper as time passes. That is something to keep in mind as well. Just for disclosure purposes, we are long Tiffany stock in the Accelerate Arbitrage Fund to keep that in mind, but obviously we like it and are long the stock for a reason. Onto another interesting MNA file.
GUYANA GOLDFIELDS RECEIVES ANOTHER UNSOLICITED OFFER AS THE BIDDING WAR CONTINUES
Julian Klymochko: And perhaps, you know, it’s my topic right now, a disclosure, it’s our top position in the Accelerate Arbitrage Fund and what I say over and over again on this podcast, you never want to be left out of a bidding war. And we have the most dynamic bidding war of the year happening right now and I fear that a lot of arbitrageurs have been left in the dust on this one. What happened here was takeover target Guyana Goldfields, which is a TSX listed gold mining company. They received yet another unsolicited takeover offer. This time an unnamed foreign-based a multinational miner has submitted an all cash offer for the gold producer at $1 and 85 cents per share representing deal value of $323 million on a 30% premium to Silvercorp current friendly cash and stock offers. We have been covering the situation, a past number of podcasts over the past month or so wanted to give you some background on how we got to this point.
The Canadian firm Guyana Goldfields was first approached by Silvercorp back in April, which put forward $105 million cash and stock deal. This transaction would have created a diversified precious metals producer with two silver mines in China and a gold operation in Guyana. A couple of weeks later, Guyana Goldfields received a separate rival bid from Grand Columbia gold, which prompted Silvercorp to sweeten its offer. Now at the time I mentioned to podcast listeners that I thought this was a knockout bid from Silvercorp because it was just absolutely huge about 85% premium, unfortunately for Silvercorp, it was in fact not enough because now the board of directors of Goldfields has deemed this unsolicited, buck eighty-five per share proposal to be superior to that of Silvercorp friendly bid. But they’ve also granted Silvercorp a five day, right to match the offer, to increase the consideration that it is paying now that happened yesterday.
The five day, right to match typically its business days. We haven’t heard from Silvercorp yet, clearly today they are pondering what to do here, but in my experience, I mean, typically in a competitive situation, if a bidder has no interest in going further, they kind of come out and say it right away. They don’t use the full five days, but it looks like Silvercorp is going to, we should hear from them when this podcast comes out, perhaps Monday or Tuesday, but shockingly on the Goldfields stock side, and this is why I’m so bullish, still bullish on the stock. Now the stock rally 21.5% this week to trade at a buck 75, which is still a substantial discount to the third party bid. Now I remember having this conversation, what, two weeks ago on the last round of the bidding war. Didn’t we when Guyana Goldfields stock was at a discount to Silvercorp last bid. Didn’t we have that conversation and now look what happened.
Michael Kesslering: Yeah, and it was in that situation too. It was just a slight, slight discount at that point in time. Now you have about a 5.5% gross discount rate now, which is a pretty large discount. The way to think about that is that you’re getting paid to have optionality. Typically to get, to get optionality, you would pay, you know, whether it be a call option, right? You are, buying a call option where you are paying a premium upfront. In this scenario, you’re getting paid to take that premium. Now we are not saying that we know exactly how this will play out. Because you know, there is multiple ways that this can play out and we have no idea at the end of the day. But on a risk adjusted basis, there really is an asymmetry in terms of the potential pay out and something that I had mentioned last time as well, is just that you want optionality in a bidding war because there’s plenty of other factors that are coming into play.
You are looking at executives, egos, and that is usually a good bet to have optionality on. But you know, this will be interesting to watch. As you had mentioned a Silvercorp five-day match period. I believe that began yesterday. I think it was just five days, I think at the press release. It said that the match period ended on June 9.
Julian Klymochko: Okay
Michael Kesslering: But regardless sometime next week, which will be very interesting to see how that plays out in terms of who this unnamed bidder is, Julian, do you have any speculation as to who you think this might be?
Julian Klymochko: Well, all it stated was a foreign-based multinational miner. It is really hard to say, but there aren’t a lot of companies that can throw down $323 million cash. That kind of narrows the field, perhaps the market is a bit concerne. Like it could be you know, one of these Chinese firms like is happening on another Canadian deal. There is a Chinese acquiror and there is perhaps a bit of political risk there, some concern and it is trading at a large discount, but you know…
Michael Kesslering: That is what I was thinking.
Julian Klymochko: I would not necessarily be concerned about that on this deal because in contrast to the other deal, Guyana does not have assets in Canada, right? Their assets are in Guyana, obviously. It would be less of a security risk for the investment Canada approves. Obviously, we like the stock here, decent chance that Silvercorp comes back and matches. I guess we shall see next week what happens. But historically target shares traded a premium to both the offers in this case. But here they’re trading at a massive discount offering about 20% annualized to this unsolicited offer that has been deemed superior by the board, which means if Silvercorp doesn’t want to match, then the board will go with this buck eight-five per share offer. As you indicated, Mike, tremendous upside optionality in this still continuing bidding war, which we like.
It does remain the largest position in our arbitrage fund, so some disclosure there. Put our money where our mouth is and you know this position has paid off. We have been bullish on it the whole time and we continue to be bullish on it now, but that is about it for episode 71 of The Absolute Return Podcast, a busy, busy week. We are going to have another busy one next week, a lot of things happening. Tiffany earnings, Silvercorp match period on Guyana Goldfields coming to a head. So lots of things to look forward to, and we can’t wait to update you next week on what’s happening there, but until then, you can always check out more episodes @absolutereturnpodcast.com, you can check us out at Twitter, Mike, what’s your handle?
Michael Kesslering: It is M_Kesslering.
Julian Klymochko: You can find me at Julian klymochko, K-L-Y-M-O-C-H-K-O and that is it for us folks until next week, which you all the best in your investing, trading and speculating. And 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.