A while ago, I mentioned ALJJ, a levered steel player. While I thought shares were cheap, I didn’t pick any up because I didn’t like the combination of the industry and the leverage (though my friend over at OTC adventures wisely did).
Boy did I make a mistake. Yesterday the company announced an agreement to sell their steel sub and tender for 50% of shares at $0.84 – 0.86 per share, or more than 100% above the previous closing price!
Despite missing out on the initial run, I think shares represent an interesting opportunity here. Shares are trading hands for the mid $0.70s per share. The tender will take out 50% of shares (can be expanded to up to 52%) and occur before the end of the year. The chairman, who owns 20% of shares, has already committed not to tender.
That means only 80% of shares will be up for tender. Assuming every single share not owned by the chair is tendered, that would result in each person’s tender having ~62.5% of shares accepted. If you can pick shares up in the mid-70s per share, that’s at least a 10% gain on those shares.
And what happens to the 37.5% of shares that aren’t accepted? Well, you’re basically buying a cash shell at below cash value with a management team that has proven they can create value and a ton of NOLs, and who seems likely to liquidate if they can’t find the right deal. Could be worse.
Of course, there are risks here. The biggest is that Optima needs to obtain financing. If they don’t obtain it before the end of the year and drop it, the merger docs make it look like they can walk away with no repercussions. If they don’t drop it before the end of the year and the deal eventually falls through, they’ll be on the hook for $3.5m or so in penalty fees.
However, I don’t think the risk is as big as it appears. Optima has been active in the space before: last year, they acquired Niagara , who claims to be the largest independent cold finished steel bar producer in North America, and Niagara had completed two previous acquisitions in the year and a half before they were acquired (here and here). Optima kept Niagara’s CEO on when they bought them, so there’s clearly some deal expertise there. Thus, while financing is a risk, I don’t think it’s a huge one and think it’s incredibly likely the deal goes through. (side note: Jefferies acted as advisor to Optima on the deal. Would be shocked if the advised on the deal and weren’t ready to provide financing or some form of support to see the deal go through).
Even assuming the deal gets pushed out till March, the deal is offering >25% annualized returns at today’s prices. With (in my mind) low deal risk, this offers an incredible opportunity to get a high return with no market correlation.
Disclosure: Long ALJJ
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