Alpha Vulture
Scavenging for Bargains
Exited positions
Sky Solar Holdings merger arbitrage
Sky Solar Holdings must be one of the hairiest stocks I have bought in recent times. The former CEO got kicked out in 2017 after getting caught doing unauthorized transactions with entities he controlled (he settled, and paid back $15 million). They got sued in Japan by one of their partners and settled by buying them out for $139 million. Another partner, Hudson Capital, claimed an "Event of Default" on notes that they owned, seized control of a large solar project in Uruguay and commenced litigation for more money in New York. They settled, but never completed the settlement, and now litigation has started again. And I'm almost forgetting that they went through a couple of different CFO's as well. The story is a bit more complicated than this, but obviously saying that Sky Solar is a huge mess is an understatement.
But while that is true, there is also a buyout proposal on the table for $6/ADS that offers a juicy spread of 15.4% as of this moment. The consortium behind the proposal filed their tender offer statement yesterday with the SEC and controls 77.5% of the outstanding shares. They are looking to acquire a minimum of 90% of the outstanding shares in order to take the company private afterwards, so effectively they need "just" 55% of the float to tender in the offer, and I think that should be a very doable threshold. The consortium is offering a 80% premium compared to the unaffected price which is significantly more than what the stock has traded at at any point in recent history. It is a good price, and shareholder support should not be the issue.
I think the buyer group is credible and is willing and capable of finalizing the transaction. Sky Solar's largest shareholder, and driving force behind the consortium, is a Japanese corporation, active in renewable energy. Sky Solar Holdings most valuable assets are also located in Japan, so it is a deal that makes sense. The buyers know what they are getting into and have financing arranged (also from a Japanese party). Hudson Capital has been trying to acquire Sky Solar (or their main assets) for approximately $6/ADS as well, so presumably those solar projects are worth that kind of money (you wouldn't know it by looking at their GAAP financials).
Of course, Sky Solar remains hairy, and it is for example quite possible that the litigation from Hudson Capital will somehow throw a spanner in the works. But I think that when looking at a merger arbitrage you should for the largest part ignore the company's history and current issues. The number one question is really: does the acquiring party want to buy this, and can they close the transaction? I think the answers to those questions are yes in this case, and the rest is not that important. But if things do unravel you have to assume that the downside can be big, so I would certainly not go all-in on a deal like this. But I think the current spread of 15.4% is more than big enough to compensate for the risks that I'm are taking.
Author is long Sky Solar
This entry was posted in Portfolio and tagged SKYS on July 7, 2020 by Alpha Vulture.
← Half-year portfolio review, 2020 edition Sky Solar tender offer successfully completed →
16 thoughts on "Sky Solar Holdings merger arbitrage"
Goldi July 8, 2020 at 3:26 pm
Good to see you back. What is your time frame on this one?
Alpha Vulture Post author July 8, 2020 at 5:32 pm
If everything goes well, just a month. Tender offer expires at the end of this month. But I wouldn't be surprised to see one or more delays, but given the spread I don't think the timing is that important. If the deal happens at some point in time: good result. If it never happens: bad.
Fredrik July 8, 2020 at 4:43 pm
Interesting… how do you size such a position?
Right now it's approximately a 1% position, smaller dan most of my merger arbs.
Christian Olesen July 8, 2020 at 10:17 pm
Thanks for posting this idea. Why do you think the spread is so high?
Alpha Vulture Post author July 9, 2020 at 9:46 am
After reading the first paragraph, who do you think wants to own this???
Aharon L July 17, 2020 at 5:49 am
VERY interesting, as always. And speaking of hairy situations, have you looked at the Gilat deal? I'd be somewhat surprised if this doesn't just end with a lower deal price, but you never know…
Alpha Vulture Post author July 17, 2020 at 9:56 am
Have looked at it, but wasn't very enthusiastic. Was also discussed a bit in the comments of the half-year portfolio review post.
Aharon L July 17, 2020 at 7:43 pm
Ah, thanks. I missed that.
Sushil S. July 27, 2020 at 9:19 pm
What happened today? I don't see any news.
Pogonific July 27, 2020 at 10:08 pm
Seems a big drop today on no news?
Lupo Lupus July 27, 2020 at 11:08 pm
Tender offer amended, among others, including a new financing condition
https://www.sec.gov/cgi-bin/browse-edgar?CIK=1594124
Salty McSalt July 28, 2020 at 3:19 pm
Fuck me! what a shitty idea this.
rukawa July 29, 2020 at 4:51 am
Looks like it just got extended to August 28, 2020. Anything else change? What is the new financing condition
Pradeep August 9, 2020 at 12:27 am
Wow this one got complicated really quickly. Any thought about the asset freeze and Hudson's litigation and rights here?
rc99ar August 10, 2020 at 5:29 pm
Risk/reward at $3? All parties seem to want the assets still.
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