Franklin Street Properties: Office Basket, Strategic Alternatives

The second in the office REIT basket is Franklin Street Properties (FSP) (~$180MM market cap), this one might be a more direct comparable to City Office REIT (CIO) in that it owns 14 central business district (some less CBD than others) multi-tenant office buildings in the sunbelt (like CIO) but also in places like Denver and Minneapolis which have been slower to recover.  FSP has been on my radar for a long time as they've included the below language for years in their quarterly results, it's been an unofficial liquidation of sorts since the pandemic.  They've sold over $1B in property and used the proceeds to deleverage their balance sheet.

We continue to believe that the current price of our common stock does not accurately reflect the intrinsic value of our underlying real estate assets.  We will continue to seek to increase shareholder value by pursuing the sale of select properties when we believe that short-to-intermediate term valuation potential has been reached.

In May, FSP officially announced a strategic alternatives process:

“The Board of Directors is committed to maximizing value for all our shareholders,” stated George J. Carter, Chairman and CEO. "We believe that FSP's share price does not adequately reflect the underlying value of our real estate, and, accordingly, we have undertaken this strategic review process to explore opportunities to eliminate this disconnect."

We haven't seen the CIO proxy yet, but I anticipate in the background to the merger we'll see many counterparties participated in the auction (CIO mentioned conducting a comprehensive process).  FSP could be a consolation prize if you're a private equity manager with cash to burn.

FSP typically hosts a quarterly conference call to review their financial results, earnings were released today and FSP decided to skip having a call.  The market has been frustrated with the speed of this slow motion liquidation, but it appears they're finally serious about selling the remaining assets/entire company.  FSP's portfolio is only 69% leased, the office landlord business has a lot of operating leverage to it, if you (or an interested private buyer) have a strong view that leasing activity will recover then this one might be cheaper than it screens on an current NOI run-rate basis.

Franklin Street Properties is a bit of a family business, management pays themselves well, but do own 10% of the shares and to their credit have shrunk the business over the last 5 years.  The risk here is that they run a process and don't feel like they're getting fair value, continue to pay themselves handsomely and let the slow-motion liquidation continue for a few more years.

Disclosure: I own shares of FSP

Net Lease Office Properties: Office Basket, REIT Spin/Liquidation

I'm starting up an office REIT basket, last week City Office REIT (CIO) announced it was being acquired by MCME Carrell (an affiliate of Elliott Management and Morning Calm Management) for $7/share in cash, which is approximately a 10% cap rate on CIO's net operating income (85% occupancy).

It's been 5 years since the worst of the pandemic, return to office trends keep moving in the right direction.  Anecdotally, my commuter train is generally as crowded as it was pre-pandemic (excluding Fridays) and the Chicago loop seems mostly normal again.  New supply is virtually non-existent, likely will be for the foreseeable future, these things take time, but private equity seems willing to take a risk on office at these valuations.

First up, and likely the least risky of the three, is Net Lease Office Properties (NLOP) (~$500MM market cap), a well-known favorite that many other value bloggers have written up since it was spun off from W.P. Carey (WPC) (NLOP's external manager) in November 2023.  It is a vehicle designed to be a liquidation with a limited life, similar to other REIT spins of the past like Retail Value or Spirit MTA -- popular among value investors, REIT liquidation, gives me nightmares of the New York REIT (NYRT) pitch.  

But this situation has mostly de-risked, at the time of the spin, NLOP was saddled with a 14% interest rate mezzanine loan, after several initial rounds of asset sales, the mezzanine loan has now been completed paid off as of April.  That news is important because the remaining debt is all non-recourse mortgages attached to specific properties, any further asset sales on the unencumbered properties can be used to make special liquidating distributions to shareholders.  Much of the mortgage debt might end up getting extinguished via foreclosure, can almost think of those properties as call options on the office recovery.

As the name suggests, NLOP owns primarily single tenant office properties where the tenant is responsible for most of the operating expenses of the property (net lease or triple net lease).  Keeping things simple, below is a quick back of the envelope illustration of what NLOP would be approximately worth at a 10% cap rate, similar to the CIO transaction.

There's a lot more fun you can have modeling out the liquidation value here, including the cash flow from here until the final distribution, what handing back the keys means on the encumbered properties, etc.  The portfolio is 85% leased, there's one chunky property, KBS's headquarters in Houston that makes up 23% of the rent roll, but I'm generally more optimistic on Houston than others, it wasn't as impacted by covid and has a more in-person office culture than some other cities.  I think it's a manageable.

Disclosure: I finally joined the party and now own shares of NLOP

GCI Liberty: Cheap, Tax Asset, Malone Fatigue?

GCI Liberty (GLIBA/K) is back in public markets, the leading telecommunications provider in Alaska was spun off on Tuesday (7/15) from Liberty Broadband (LBRDA/K) ahead of LBRD's merger with Charter Communications (CHTR).  

Alaska is a challenging market, it has a small population with a huge unforgiving geography, partially protecting GCI from competition (although satellite providers like Starlink are a threat and starting to take some share).  GCI is primarily a broadband business (70% of revenue) which also includes 3000 miles of undersea cable connecting Alaska to the rest of the country with the remainder mostly in wireless (GCI recently discontinued their video offering).  The business was founded 45 years ago by Ron Duncan who is still the CEO today at 72 years old.  Unlike other broadband businesses, GCI is skewed towards business revenue with the big exposure to healthcare and education in rural/remote villages, many of these places only have a couple medical professionals or teachers, everyday services are provided in single rooms using video conferencing.  However, their business has challenges, much of GCI's revenue is tied to government programs (Universal Service Fund or "USF" is mid-40% of revenue) under constant scrutiny and the Alaskan economy is tied to cyclical natural resource markets like oil and mining.  Population has declined slightly over the last few years, revenue growth at GCI is likely roughly flat to inline with inflation over time.

Below is a back of the envelope valuation of GCI:

GCI Liberty is cheap compared to peers (I pulled peer multiples from CapitalIQ, didn't verify or normalize), but that's not really what caught my attention in the spin.  Unlike other Liberty entities where John Malone has stepped back from the board or agreed to eliminate his super-voting rights in negotiated mergers, here at GCI, Malone is the Chairman and will be leading capital allocation decisions.  

To steal the line of another investor I chat with, this is like the old quote that Warren Buffett has stated he believes he could achieve a 50% annual return if he were managing a smaller sum of money.  The spin was taxable to Liberty Broadband shareholders which allowed Malone to achieve setup basis on the GCI assets, resetting the depreciation tax shield (which likely also benefits from the Trump administrations recent "BBB") the value of which will be based on the first 20 days of trading, but capped at $420MM per the merger agreement with CHTR.  That value is not included in the valuation above and significant given the ~$2B enterprise value.

In the investor day presentation, John Malone comments both on the valuation and capital allocation thoughts (attribution to BamSEC):

Shane Kleinstein Liberty Media Corporation – Head of Investor Relations

I think building on that, John, we got a question from a valuation perspective, building on what Ron had said, how do you suggest investors think about appropriate multiples or valuation for this asset partially in light of the recent Cox-Charter transaction, partially in light, while GCI has strategic advantages. It is -- the dynamics have changed since it last traded publicly. So curious reviews from a valuation standpoint.

John C. Malone Liberty Broadband Corporation – CEO & Chairman of the Board

Well, I would say, if you're speaking of valuation in terms of EBITDA multiple, it should trade at a premium EBITDA multiple because it's EBITDA will be fully sheltered, it has a modest debt leverage situation, so it doesn't have a lot of downside risk. It has a declining capital intensity, and therefore, its free cash flow characteristics should be superior. Now Charter is currently is trading at or around a 7 multiple EBITDA. I would think that this business should be trading at a premium to that. And if it doesn't, we've got -- we're going to have plenty of free cash flow with which to reduce equity if that opportunity presents itself, I think, the Board will be looking at returns on the free cash flow and how to deploy it.

And given the fact that we have more than enough tax shelter to shelter our own cash flow, we'll be looking opportunistically for acquisitions or investments that provides unusually high pretax returns, but that can benefit substantially from the shelter that consolidating what GCI could provide. So it's kind of an ideal core asset, around which to build some interesting incremental assets. So we certainly look forward to that. I'm hoping that it can become the beginning of a new Liberty Media and now that Liberty Media has largely gone to a single line of business focus with its spin-offs and we will have the availability, of course, of the Liberty Media management team who work for -- who will work for this enterprise under contract, providing services ranging from financial to tax accounting and public relations chain, including you.

Later on, after commenting on leverage, he goes into possible areas he'd be interested in:

John C. Malone Liberty Broadband Corporation – CEO & Chairman of the Board

Well, from my point of view, Shane, I would say 3 is a pretty nice number going up for accretive acquisitions. Sometimes you'll take it up in order to -- until you get the synergies realized from combination. We would try to stay in the 3 to 3.5 range, I would think. And if we drop below that, we might take it up in some kind of a small recap and shrink the equity. But my guess is that if we look widely enough, we're going to find lots of accretive, small but accretive acquisitions in the communications sector, looking primarily at special situations, in some cases, distress, but I think that we will find opportunities to grow the business outside of Alaska with accretive small incremental acquisitions in the -- in and around the communications industry.

Capex will be a bit muted in the next 12-18 months has GCI finishes its investment cycle as part of the Alaska Plan, but following that, as a minimal cash tax payer, Malone should have a lot of flexibility to make acquisitions and use GLIBA like his "50% return PA".  Read through the spinoff docs as well, there's a lot of talk about issuing Ventures Group tracking stock in the future which could be a turnoff to many.  I haven't seen much chatter about this spinoff, there seems to be a lot of John Malone fatigue in the last 5-10 years as some of their investments have underperformed (that might be generous phrasing).  He's 84 years old, but he's an admitted deal junkie:

Shane Kleinstein Liberty Media Corporation – Head of Investor Relations

Well, John, I'll turn a related but different one to you. A question came through, what's your expected involvement in GCI and Liberty. What are the areas that you particularly expect to be taking part?

John C. Malone Liberty Broadband Corporation – CEO & Chairman of the Board

Well, I enjoy strategy, I enjoy strategizing with Ron. I love M&A. I love deals, and I love structure and so the opportunity to rebuild what some people regard as complexity and I regard it as high return investing is what I look forward to. And I think the combination of Ron and his knowledge of the business and his team with some of the young guys within Liberty Media's management structure, who are pretty good at turning over rocks so we'll have talent available to the organization that is several steps above what an organization that size would normally have available to it in terms of finance, tax structure and clearly IR and public relations. So I think we have a little bit of a supercharger when it comes to capabilities that you wouldn't normally find in a business of the size of GCI because of the involvement with Liberty, Liberty Media, me and the rolodexes that both Ron and I have been able to develop over this long period, I think, we're going to find some very interesting opportunities, which will have exceptional financial reward associated with them.

I think it's an interesting setup, cheap asset on its own, with the call-option on Malone's deal making capabilities in a smaller, less followed entity.

Disclosure: I own shares of GLIBA/K once again

Mid Year 2025 Portfolio Review

I joke that any large recurring conference call is incomplete without the host commenting on how quickly the year is progressing, but here were are, already halfway through 2025.  My performance struggles continue as my portfolio lost -3.64% in the first half of the year, versus the S&P 500 gaining 6.20%.  My long term performance (hopefully only temporarily) dipped below my goal of a 20% CAGR, the threshold where I think the effort is worth my time.

My biggest contributors thus far have been Par Pacific Holdings (PARR), Third Harmonic Bio (THRD) and ACRES Commercial Realty (ACR); with the biggest distractors being Creative Media & Community Trust (CMCT), Mereo BioPharma Group (MREO) and 23andMe Holdings (ME).

Below are some quick elevator pitch summaries on my current positions.  As usual, some of these were written up to a week ago and could be slightly stale. 

Current Positions:

• Broken Biotechs
• Athira Pharma (ATHA) has a market capitalization of ~$12.1MM despite having $33.7MM in NCAV as of 3/31.  This busted biotech announced a strategic review back in September, hiring Cantor Fitzgerald, but didn't completely halt their research pipeline.  ATHA has one potential ALS therapy (ATH-1105) currently in a Phase 1 trial with healthy adults, the company is hoping to dose with actual ALS patients later this year.  If we assume they'll burn another $15MM (currently spending ~$9MM/quarter) chasing the drug development ghost and on any strategic transaction expenses, liquidation value comes in around $0.48/share versus a current quote of $0.31/share.  That's before ascribing anything for the public listing or IP value with ATH-1105.  Perspective Advisors is the largest shareholder with ~14% of the shares outstanding, they previously indicated in a 13D filing they have been in discussions with management on a reverse merger or other transaction.  BML owns 8% and has been more active in pushing for liquidations recently.  This situation isn't as clean as I typically like and has a significant ongoing burn, but I continue to hold a small position.
• CARGO Therapeutics (CRGX) fully waived the white flag on 3/18, did a 90% reduction in force, suspended all drug development and appointed a new CEO to run the strategic alternatives process.  The stock responded and closed much of the gap to my estimate of liquidation value, which is still a bit under $5/share ($235MM, large enough sum that it should be attractive to potential merger partners), it trades for $4.14/share today, representing a fair amount of upside still remaining.  Madison Avenue Partners and Kevin Tang each own about 6.5%.
• ESSA Pharma (EPIX) is trading for $1.75/share and my estimate of its liquidation value is approximately $2.10/share.  9.5% shareholder BML and 5.1% shareholder Soleus Capital Management have both written public letters to the board pushing for a liquidation.  Kevin Tang is also here with a 9.7% stake, but BVF Partners is the largest shareholder at 20%.  In the Q1 results (filed after the Soleus & BML letters), EPIX included the line "we have taken productive steps towards a decision and hope to share an update in the near future."  That was 53 days ago, hopefully a resolution will take place shortly.
• HilleVax (HLVX) is the oldest in the basket, having stopped development efforts last July and later announced their strategic alternatives process in August.  My estimation of liquidation value is approximately $2.50/share (HLVX still has their operating lease to clean up, I'm valuing it at a 50% haircut to the full face amount) compared to a current quote of $1.90/share.  The shareholder registry here is a little more traditional biotech centric with Frazier Life Sciences owning 21%, Takeda owning 13.5%, but Kevin Tang is lurking with just under 10%.  There is more status quo risk here compared to others, HLVX has kept the line in their press releases and filings that one potential outcome of the review is to pursue continued development of their vaccines in adults (they originally targeted infants in the failed trial).
• In late December, Ikena Oncology (IKNA) entered into a reverse-merger agreement with InmageneBio (IMA) whose lead asset IMG-007 has an ongoing Phase 2b clinical trial for the treatment of atopic dermatitis (chronic itchy / inflamed skin).  The market doesn't like this deal despite the $75MM concurrent PIPE, IKNA is targeting $100MM net cash at close or ~$2.05/share versus a current quote of $1.35.  I recently voted against the merger, but still expect the deal to go through as 25.8% of IKNA shareholders have signed on to a support agreement (although BML, 8.4% shareholder, has popped up saying they're voting against the deal).  Even in these disappointing deals, occasionally there's a little pop after close as the shareholder base turns over.
• No major news at Mural Oncology (MURA), development has been fully halted and the company is pursuing strategic alternatives.  My estimation of liquidation value is $3.25/share against a current quote of $2.50/share.  There is some good discussion in the comments about the two-year safe harbor for spins (would falloff this November) and Irish takeover rules pushing this towards being acquired or a reverse merger versus a liquidation.
• Repare Therapeutics (RPTX) is a busted biotech with a liquidation value of at least $2/share (possibly more, could be some IP value), but nothing really notable has changed since my write-up last month.  One slight positive, they did include a new line in their 10-Q making the strategic review more clear, from the MD&A section: "We plan to explore a full range of strategic alternatives and partnerships across our portfolio to maximize shareholder value."
• In April, only two short months after announcing strategic alternatives, Third Harmonic Bio (THRD) announced it would be liquidating and returning cash to shareholders.  The liquidation was approved almost unanimously (other similarly situated biotechs should take note), the initial distribution is scheduled to take place in the third quarter with an estimated total of $5.30-$5.44/share (the initial distribution will likely be 90-95% of this value).  This doesn't include any proceeds from the sale of THB335 (here's what appears to be the asset sale deck).  Along with AVTE or ABIO, a model for other broken biotechs to follow.
• M&A / Strategic Alternatives Processes
• CKX Lands (CKX) is a microcap Louisiana land bank that started a strategic alternatives process almost two years ago (August 2023), admittedly the success rate for long drawn out processes is not good.  The latest update appeared in the 2024 10-K: "As part of management’s desire to maximize value for shareholders through this process, the Company expects to seek to partition, in kind or by sale, ownership of its undivided interests in lands co-owned with others. There can be no assurance that the Company will be successful in reaching a negotiated partition of its co-owned acreage that would avoid the need to seek partition in court."  About half of their net acreage is held through a 16.67% ownership in joint venture, it sounds like the leading bidder doesn't want to be part of the JV (understandable!) and wants the acreage partitioned/subdivided which could take significantly more time or not happen at all.  There's not much else to go on here, fair value is still likely meaningfully above the current $10-$11 share price, but any failure to sell the company means CKX is likely in forgotten microcap purgatory for another decade.
• HomeStreet (HMST) is a west-coast regional lender that was caught up in the 2023 banking crisis, originally they sold themselves to FirstSun Capital Bancorp (FSUN) in January 2024, but that deal faced regulatory scrutiny over the combined entities CRE exposure and the deal was terminated in November 2024.  HMST then went about another sale process, leading to an all-stock deal with California based Mechanics Bank (MCHB) which effectively is a reverse merger, MCHB is private with limited liquidity on the OTC market, their shareholders will own 91.7% of the combined company.  The controlling shareholder of MCHB is the Ford Financial Fund, their principals are strong operators having run this playbook a few times where they chip away at the efficiency ratio and ultimately sell their bank holding company investments to larger institutions.  In the meantime, they plan to pay 90+% of net income as a dividend which should make MCHB eligible for inclusion in some dividend ETFs and attract other income focused investors.  The transaction is scheduled to close September 1st, Mechanics Bank is guiding to $1.31/share in 2026 EPS, which would equate to a 10x earnings multiple on a forward basis at today's $13 HMST share price.
• Income Opportunity Realty Investors (IOR) days in public markets should be numbered.  The company is incredibly simple, the majority of the assets are in a cash-like receivable from the external manager, with remainder in a note to an affordable housing development.  In January, the controlling family via Transcontinental Realty Investors (TCI) completed a tender offer where they were only shake out 21,128 shares of IOR at $18/share (versus a book value of $30.22/share) (if you read through the multiple tender offer amendments, it appears some shareholders backed out of the tender) to bring their ownership above the 90% level (allowing them to perform a squeeze out in Nevada).  Since the close of the tender, TCI has continued to buy shares in the open market adding another 33,524 shares, all below the $18/share tender offer.  Recently, shares have drifted closer to $19, soon the controlling family is likely going to determine they've run out of disinterested sellers (very little public float is remaining) to purchase shares from and do a squeeze out.  Hopefully at a more equitable price.
• NSTS Bancorp (NSTS) is a small converted thrift located on the outskirts of Chicago's northern suburbs.  NSTS passed its three year cooling off period in January and can now be acquired, shareholders are pushing the bank to sell itself and management doesn't appear to be standing in the way.  Tangible book value of ~$15/share seems like a nice floor on any takeout, NSTS currently trades for $12.25/share.
• Soho House & Co (SHCO) is an operator of private social clubs, late last year, the company announced it had received a $9/share cash offer from a consortium that includes Executive Chairman Ron Burkle.  In late January, Dan Loeb's Third Point (9.9% owner) sent a letter to the Soho House board pushing for a better deal.  Since then, the company has been mysteriously quiet, the debt markets seem pretty open, I'm not sure what the hold up is exactly?  I've lightened up a bit on position after adding to it during the tariff driven broad market selloff.
• Spinoffs / Asset Sales
• Enhabit (EHAB) is a home health and hospice operator that was spun-off of Encompass Health (EHC), following the spinoff the company stubbed its toe badly (as is typical for many spins) as it was behind the industry shift from Medicare to Medicare Advantage plans.  Much of that mix-shift is largely behind them, now it is more of a deleveraging story with a nice demographic and economic tailwind.  Seniors want to stay and its cheaper to care for them in their homes.  There's not an obvious near-term catalyst here, but a multiple at 9.4x EBITDA (during the last round of consolidation, industry peers were taken out at double this multiple) and levered 5.4x EBITDA, a return to steady growth should do wonders for the share price over time.  [Late edit, CMS proposed some pretty punitive rate action for 2026, including -5% temporary adjustment to recoup perceived overpayments from 2020-2025.  Not great if you're overweight Medicare and leveraged.]
• International Game Technology (IGT) is about to change their name to Brightstar Lottery (BRSL) on the closing of their deal with Apollo and Everi Holdings (EVRI), rumored to happen this week.  Brightstar "won" the Italian Lotto rebid that includes a 2.23 million Euro upfront fee, significantly higher than many expected.  We should find out more detailed capital return plans in the near future, which might spark a longer update from me including revisions to my valuation thinking after the Italian lotto bid and better accounting for the non-controlling interests.
• Seaport Entertainment Group (SEG) is a collection of real estate and entertainment assets located primarily in Manhattan (I tend to think concerns over the potential new mayor are overblown) that was spun-off from Howard Hughes (HHH) last year, Bill Ackman's Pershing Square owns just under 40% of SEG.  The company is marketing their 250 Water St land parcel which should provide a catalyst, I expect the company to participate in a JV by contributing the land and letting their partner take the development and construction risk.  CEO Anton Nikodemus and team are hard at work repositioning (again) the Seaport, signing some important leases and trying to reign in costs to bring down the cash burn but there's still significant wood to chop.  Bill Ackman's ownership percentage looms large here, there are some majority ownership restrictions on the AAA baseball team which partially drove the spinoff, but the market is likely heavily discounting SEG on the anticipation of Ackman shifting value to himself somehow. 
• Other / Legacy Holdings
• Creative Media & Community Trust (CMCT) continues to confound me a bit, this disaster of a REIT has somewhat stabilized its death spiral of preferred stockholders requesting redemption, the company then paying for in common stock (which they have elected since CMCT doesn't have the cash), then lastly the new common stockholders selling at whatever price they can.  As a preferred stock holder, the game theory would seem to suggest at this point you would not want to redeem?  CMCT has the cashflow to pay the remaining preferred dividend and has paid off the defaulted term loan at the corporate level, replacing it with new property level mortgages (done at presumed 50% LTVs?  Validating some equity value in the real estate), essentially taking a corporate bankruptcy off the table.  The company put out a cryptic 8-K this past week where they both seemed to disclose that they continue to get preferred redemption requests and that they're in the process of selling assets (my guess, the SBA loan portfolio gets sold first), which might suggest that redemptions could be paid in cash?  Office properties around the country continue to recover in value, their properties were unharmed by this year's wildfires in Los Angeles.  L.A. has the Olympics, World Cup and Super Bowl all coming in the next few years which should continue to provide some economic stimulus via additional infrastructure in the area.  The demise of the Bay Area (their other area of concentration) seems to have subsided with the AI boom.  I might be a bagholder at this point, but continue to think there might be something here if you squint, whether common stockholders see any of that value is another story (this is externally managed by a team that has previously showed they're not fully aligned with minority shareholders).
• Green Brick Partners (GRBK) is a Dallas metroplex based homebuilder, at this point I only continue to own it since it's held in a taxable account.  The company is well run, seems to have some secret sauce in sourcing infill real estate (is it possible to have a competitive advantage here?) and trades for a bit under consensus 10x NTM earnings.  I continue to hold, but if my poor performance continues and I have excess tax losses to soak up, selling some or all of GRBK might be an option.
• Mereo BioPharma Group (MREO) is charging towards a key data read out of Setrusumab's Phase 3 trial with partner Ultragenyx (RARE), either a second interim analysis in mid-2025 or a final analysis in Q4.  As usual, no real opinion on the science here, merely crossing my fingers.  Don't think I'd own this if I managed outside money.
• Par Pacific Holdings (PARR) is a downstream energy company focused on niche markets like the upper Rockies and Hawaii.  The company has benefited from increasing refining crack spreads due to a mixture of tariff concerns, military conflicts and other market factors.  This is another well run company, I like management, but don't really consider it a particularly actionable investment idea.  I've sold a little into this recent rally and have been considering sell the rest to reallocate to other new ideas.

Current Portfolio:

Quick Hits on Closed Positions:

• 23andMe Holdings (ME) has been quite the saga this year, I bought hoping for a pretty straightforward take out but didn't have conviction in the idea for all that happened since January.  ME declared bankruptcy and recently sold most of the assets to co-Founder Anne Wojcicki for $305MM (which was the original thesis but didn't take the original path).
• ACRES Commercial Realty (ACR) is a non-dividend paying commercial mortgage REIT that got in trouble during covid, new management took over and has performed their new strategy admirably.  ACR hasn't turned the dividend back on, but the stock rallied anyway at the start of the year, even though the thesis is about 80% of the way there.  I sold after holding for several years to recycle into other new ideas.
• Aerovate Therapeutics (AVTE) and AlloVir (ALVR) both closed on their reverse mergers, I sold shortly after on each.
• Elevation Oncology (ELEV) entered into a cash plus CVR buyout deal with Kevin Tang's Concentra Biosciences that acts a liquidation.  When the shares traded quickly above the $0.36 cash consideration, I sold, don't think there's much value in the CVR, not enough to justify the opportunity cost for me to continue to hold.
• Dun & Bradstreet Holdings (DNB) was a short-term trade based on buyout rumors, the buyout happened, but at a rather low price of $9/share.  The private equity buyers timed the deal well in the midst of the tariff driven selloff, I'm sure they'll do well on their investment.
• The Enzo Biochem (ENZ) saga finally ended, with a $0.70/share cash merger.  I sold.
• Keros Therapeutics (KROS) announced a return of capital to satiate activist investors but seems set on continuing with research and development.  I decided to sell as the near term event has passed and don't have conviction to own KROS for the medium term. 
• Kronos Bio (KRON) is a strange situation to keep in the memory bank, the company entered into agreement with Kevin Tang's Concentra Biosciences to be bought for $0.57/cash plus a CVR.  The CVR was overly complicated and the near term cash portion of the CVR was valued at $0.02 to $0.05 in the proxy, that's when I sold assuming I was wrong on the situation.  But a couple weeks later, the company announced they had terminated their operating lease, generating significant cost savings to be paid to CVR holders that wasn't accounted for in the original proxy.  Presumably the lease negotiations were ongoing at the time the proxy was published, great outcome for those that continued to hold, but I'm still a bit puzzled by the timeline and disclosure transparency.
• I've spilled enough virtual ink on Howard Hughes Holdings (HHH), I disagree with the direction the company is taking to become a permanent capital vehicle for Pershing Square and sold my position.
• Selling Inhibrx Biosciences (INBX) was a reaction to the tariff selloff, it was my lowest conviction idea at the time as its science based biotech where I have little-to-no edge (could argue that for most of my positions), so I sold it to raise cash / pay down margin.
• Limoneira Company (LMNR) ended their strategic process without a transaction, I thankfully sold immediately and recognized a reasonable gain, shares have slid considerably since.

Current Watchlist:

As always, thank you for reading and commenting, please feel free to share any ideas in the comment section.

Disclosure: Table above is my taxable account, I don't manage outside money and this only a portion of my overall assets.  As a result, the use of margin debt, options or concentration does not fully represent my risk tolerance.

NSTS Bancorp: Post 3-Year Thrift Conversion, Possible Sale

I apologize in advance, this one might only have a limited audience, it is a small and illiquid community bank in my backyard, maybe there are others in a similar position near you.  

NSTS Bancorp (NSTS) (~$60MM market capitalization) is the holding company for a three branch community bank, North Shore Trust & Savings, located in Waukegan, IL with $282MM of assets.  Like many other thrifts, NSTS has a fairly simple business model, they take in deposits from the local community and primarily (~90% of the loan book) make 1-4 family residential mortgages in the area.  The bank is significantly overcapitalized (Tier 1 capital ratio is 23.11%) due to their demutualization in January 2022 and three years later, still struggles to turn a profit.  The assets are pretty clean, the entire securities portfolio is accounted for as available for sale (held on the balance sheet at fair value) and the loan book has minimal credit issues, but the tangible book value would take a $1.30/share haircut if the loans were held at fair value.  Normally, this wouldn't be of particular interest, but a few things make this a likely sale candidate in the relatively near future:

• Thrift conversions need to wait out a three year cooling off period as a public company before they can be acquired.  NSTS passed that mark this past January.  Given the increased deal activity where we see credit unions acquire thrift style banks, it would make sense for a similar transaction to happen here with NSTS.  The hit rate of conversions being acquired in years 3-5 is pretty high.
• In this year's proxy statement, the following proposal was made by a shareholder, usually in these situations the company will defend themselves and recommend that shareholders vote no, but NSTS was surprisingly indifferent and almost went as far as agreeing with the shareholder despite some accusatory statements towards the board and management.  The annual meeting was yesterday, I'm eagerly awaiting the results to be posted on Edgar.

PROPOSAL III – CONSIDERATION OF NON-BINDING STOCKHOLDER PROPOSAL RECOMMENDING THE SALE OR MERGER OF THE COMPANY

 

“RESOLVED, that the Stockholders of NSTS Bancorp, Inc. recommend that the Board of Directors engage in an investment banking firm experienced in community bank mergers and acquisitions to guide the Company in promptly taking the reasonable and customary steps to merge or sell NSTS Bancorp, Inc on the best terms available so as to maximize stockholder value.

 

     Supporting Statement

 

NSTS does not have the size and scale to compete effectively in the 21st century financial world. In fact, a CEO of another Illinois thrift recently stated to me in conversation about the future of micro-cap community banks: "We are all dinosaurs!" Since the IPO in November 2021, NSTS has traded at a significant discount to tangible book value per share. The shareholder proponent believes that NSTS is worth close to or above TBVPS in a sale or merger, and that such sale or merger process to be undertaken is consistent with the Board of Directors Fiduciary duty to all shareholders.

The board of directors can recommend the highest and best offer by "running" the M+A process with their investment banker, and the shareholders will have the final vote on the best offer available.

 

Since the IPO, this BOD and management have purchased very few shares in the open market. Their economic interests are not well aligned with the shareholders as they will earn board and management fees, salaries, accumulate "freebie" shares, and vest in the ESOP plan over time. They get paid to wait. Meanwhile, the stockholders earn an inadequate return on their equity of less than the risk free rate on T bills, CDs, or money market funds of around 5% at this time of writing. For these and other reasons not included here, this shareholder asks that you vote FOR this proposal.”

 

Board of Directors Statement

 

The Board, together with Company management, regularly reviews and assesses the Company’s performance, future growth prospects, business plans, competitive position, and overall strategic direction. In connection with strategic planning and consideration of strategic alternatives, the Board has from time to time engaged investment banking firms and financial advisors. As a result, the Board currently receives, and will continue to receive, investment banking advice and information on such factors. As part of this ongoing review process, the Board evaluates and considers a variety of potential strategic alternatives available, including pursuing potential strategic transactions with third parties, with the goal of maximizing stockholder value consistent with the requirements of Delaware law and its fiduciary duties.

 

However, the Board is not recommending a vote for or against Proposal III. Rather, the Board will consider the voting results on Proposal III in its ongoing discussions and considerations, together with any additional stockholder input received in connection with the Annual Meeting and through stockholder engagement. Stockholders should note that this proposal is advisory in nature only and support of this proposal would not, by itself, result in the merger or sale of the Company as contemplated by the proposal, and would not require any action by the Company.

• Share repurchases have stopped for no particular reason, indicating they might be going ahead with a sale process.  Typically these thrift conversions will buyback shares because they're overcapitalized and usually trade at a discount to book (NSTS trades for ~80% of book).  NSTS was a pretty consistent buyer of their own shares for most of 2024, but stopped in December and haven't restarted.

This is a little bit more "reading the tea leaves" than I like, especially compared to the broken biotech basket, but the signs certainly point to the pressure being ratcheted up on NSTS to sell the bank.  What could it fetch in a sale?  I think at least TBV would be the floor, or ~$15/share, maybe more if it is bought by a credit union, it trades for $11.88 as of today.

Disclosure: I own shares of NSTS

Kronos Bio: Tang Buyout w/ Curious CVR Consideration

Kronos Bio (KRON) ($45MM market cap) was historically focused on cancer and autoimmune disease treatments, late last year, the company discontinued development of their lead asset, istisociclib, due to safety issues and announced a plan to explore strategic alternatives.  At the time, I was nervous about their large operating lease obligation and ended up passing on adding it to my busted biotech basket as there was no shortage of cleaner opportunities at the time.

On May 1st, Kevin Tang's liquidation vehicle, Concentra Biosciences, entered into an agreement to buy KRON for $0.57/share in cash plus a CVR, the CVR is structured differently than many of Tang's recent deals where the CVR is mostly just IP dispositions, here the CVR is composed of a series of potential payouts:

(i) 50% of the net proceeds in the case of a disposition of the Company’s product candidates known as KB-9558 and KB-7898 that occurs within 2 years following closing; (ii) 100% of the net proceeds in the case of a disposition of the Company’s product candidates known as KB-0742, lanraplenib and entospletinib that occurs prior to closing; (iii) 100% of cost savings realized prior to closing; (iv) 80% of cost savings realized between the merger closing date and the second (2^nd) anniversary of the merger closing date; and (v) 50% of cost savings realized between the second (2^nd) anniversary of the merger closing date and the third (3^rd) anniversary of the merger closing date, each pursuant to the contingent value rights agreement (the “CVR Agreement”).

Payouts (i) and (ii) are hard to predict and likely of minimal value, the legacy IP assets in (ii) need to be sold (but not closed) prior to the merger closing and (i) is their pre-clinical assets, who knows how much these are worth but the two year clock is pretty gameable, any value there likely accrues to Tang.

Payouts (iv) and (v) relate primarily to cost savings, subleasing or an early exit to their operating lease for a 40+k sq ft facility located in Cambridge, MA.  The lease ends in February 2031 and it has approximately $30MM remaining, given the long time frame, Tang could potential game this one by back weighting any lease amendment/termination to give him the best payout and avoid paying CVR holders.

Payout (iii) is where the potential cash is for CVR holders, it will be paid no later than 60 days following the merger closing, the savings calculation is as follows:

“Additional Closing Net Cash Proceeds” means 100% of the amount by which the Closing Net Cash as finally determined pursuant to Section 2.01(d) of the Merger Agreement exceeds $40,000,000, adjusted for any claims that arise prior to 30 days following the Merger Closing Date that are not accounted for in such Closing Net Cash. 

“Closing Net Cash” means, without duplication, (i) the Company’s cash and cash equivalents, restricted cash, and investments as of the Cash Determination Time, determined in accordance with GAAP, applied on a basis consistent with the Company’s application thereof in the Company’s consolidated financial statements, minus (ii) Indebtedness of the Company as of the Cash Determination Time, minus (iii) the Transaction Expenses, minus (iv) the Estimated Costs Post-Merger Closing, minus (v) $400,000 for the CVR Expense Cap under the CVR Agreement.

The curious part of this transaction is the $40MM threshold, why is it so low when the NCAV as of 3/31/25 is $73.5MM?  CVRs are intended to bridge the gap between buyers and sellers on how much an asset is worth, here the asset is primarily cash which should have minimal uncertainty given the quick merger close (a tender offer is required to be launched by 5/15/25).  What would Tang be protecting himself against with such a low closing cash number?  Istisociclib did have safety issues, but no legal proceedings have been disclosed that meet a reporting threshold.

Below is my attempt at a back of the envelope calculation of the Additional Closing Net Cash Proceeds value, shares trade for $0.72/share today, implying a $0.15/CVR value:

The "Estimated Costs Post-Merger Closing" is where some potential games could be played:

“Estimated Costs Post-Merger Closing” means all costs that the Surviving Corporation would incur post-Merger Closing, including costs associated with: (i) CMC Activities; (ii) clinical activities; (iii) remaining lease-related obligations (including rent, common area maintenance, property taxes and insurance); and (iv) an aggregate of $250,000 for any legal Proceedings and settlements.

While the development pipeline is paused, potentially an argument could be made that spending some money to advance KB-9558 and KB-7898 could be worthwhile to CVR holders as they'd get paid 50% of any disposition proceeds?  I don't see it, but doesn't mean management might not have an agreement with Tang to include some spend in that bucket.  In the latest 10-Q, all their R&D costs sounded like legacy expenses, not ongoing expenses:

Research and development expenses were $2.1 million for the three months ended March 31, 2025, compared to $14.2 million for the three months ended March 31, 2024. The decrease of $12.1 million was primarily attributable to a $6.0 million reduction in consulting and other outside research expenses, a $4.2 million decrease in personnel-related costs and a $1.9 million decrease in facilities, depreciation and other costs. These decreases were primarily related to the discontinuation of the istisociclib clinical trial in November 2024, reduced headcount in our research and development organization following the restructuring activities and reclassification of lease costs to general and administrative expenses. Research and development expenses for the three months ended March 31, 2025 were related to performance obligations under the Transition Agreement and continued wind down of research and development activities.

I sort of expect to be screwed here, just not quite sure how, but the opportunity for a quick buck is too tempting, I added a small position.

Disclosure: I own shares of KRON

Repare Therapeutics: Broken Biotech, Hidden Strategic Alternatives

Repare Therapeutics (RPTX) ($60MM market cap) is a clinical-stage oncology company which through a series of press releases this year announced a 75% reduction-in-force, reprioritization of their pipeline, a plan to pursue partnerships for their most advanced assets, CEO resigned (with the CFO taking over), CMO exited and most recently the out licensing of their discovery platform.  

While they haven't formally ceased development efforts and raised the white flag, that's essentially where they're at now.  Repare might be a bit of a hidden strategic alternatives name, they haven't announced a process cleanly in one press release.  In their 3/3 press release disclosing their year-end results, they included the line:

Exploring partnerships across portfolio, including for Lunre+Camo

In their 3/31 press release announcing the resignation of their CEO and founder, the language changed to:

The Company is also exploring strategic alternatives and partnerships across its portfolio, including for lunresertib and camonsertib.

Then its tweaked slightly again in their 5/1 press release announcing the sale of their discovery platform:

“We look forward to reporting initial data from our two ongoing Phase 1 clinical trials in the second half of 2025, and continue to evaluate partnering and strategic alternatives across our portfolio assets.”

It's possible that I'm reading too much into that strategic alternatives language and that it's only directly tied to the pursuing partnerships objective, but this biotech trades at a significant discount to my estimate of a liquidation value with no value assigned to their IP (which they've used puffy language like "progress is particularly promising" and "potentially best in class" in prior statements).

So we've got a caretaker CEO, skeleton staff, strategic alternatives / partnership discussions, sold discovery platform, it seems to me that this one is for sale.  BVF Partners is the anchor investor here with a 24% stake.  I bought a few shares and added it to my broken biotech basket.

Disclosure: I own shares of RPTX

Mural Oncology: Former Spin Turned Broken Biotech

Mural Oncology (MURA) (~$40-45MM market capitalization, trading has been highly volatile today) is a former November 2023 spinoff of Alkermes (ALKS), in late March the company announced they were not continuing with a Phase 3 trial of nemvaleukin in combination with Merck's Keytruda for the treatment of ovarian cancer as it didn't significantly improve overall survival rates.  The stock was already trading below cash and crashed further, but I sucked my thumb on buying it.  MURA was still pursuing a Phase 2 trial of nemvaleukin for the treatment of melanoma and was only projecting their cash runway to last into the first quarter of 2026.

Today, the company announced after reviewing the melanoma Phase 2 data, they were discontinuing all development of nemvaleukin, conducting a 90% workforce reduction and pursuing strategic alternatives.  Shares are up over 100%, but still at a reasonable discount to my estimated net liquidation value.

MURA is trading wildly today, it is not the normal setup where a drug disappoints in the clinic and science based biotechnology investors exit quickly, here they've long given up on MURA and the discontinuation of development is a welcomed surprise.

One interesting tidbit that a reader found, in the press release, MURA includes:

Mural plans to explore potential strategic alternatives including, but not limited to, an offer for or other acquisition of the company, merger, business combination, or other transaction.

This one reads less as a pursuit of a reverse merger and possibly more of an invitation for a Tang-style cash buyout as a substitute for a liquidation?  As others in the market have commented, seems like we're seeing some momentum build behind these broken biotechs doing the right thing and returning cash to shareholders, hopefully its a trend that continues here too.

Disclosure: I own shares of MURA

Elevation Oncology: Broken Biotech, Slightly Riskier

Elevation Oncology (ELEV) (~$17MM market capitalization) is a clinical-stage biotech that until yesterday was pursuing the development of their lead therapeutic candidate, EO-3021, in a Phase 1 study for the treatment of gastric and gastroesophageal cancers.  Due to a non-competitive risk-benefit analysis, Elevation is discontinuing development of EO-3021, implementing a 70% reduction-in-force and evaluating strategic options.  If Elevation Oncology sounds familiar to some readers, they bought seribantumab and other assets from Merrimack Pharmaceuticals (formerly MACK, now a non-traded liquidating trust) in 2019 for a small upfront fee and some milestone payments.  ELEV discontinued development of seribantumab in January 2023.  After that failure, ELEV switched their focus to EO-3021, so this is the second swing and miss, seems time to formally waive the white flag and return cash to shareholders.

Somewhat frustratingly, ELEV is continuing pre-clinical development of EO-1022 with a planned IND in 2026, they're guiding to their cash balance lasting them into the second half of 2026.  Hopefully this is just a cheap attempt to prove the remaining development pipeline has some value and not an attempt at a third swing at drug development.  On the positive side, Kevin Tang owns 8% of ELEV, this is likely too small for a reverse merger (and it seems like reverse merger activity has slowed recently anyway), I would encourage management and the board to consider the likely incoming cash + CVR offer from Tang.  It will probably be the best option.  A $30MM loan paired with the cash burn and risk of going forward with EO-1022 make this one a little riskier than average.

Disclosure: I own shares of ELEV

Dun & Bradstreet: Strategic Process Wrapping Up, Cheap Valuation

Dun & Bradstreet (DNB) (~$3.8B market cap) is a provider of commercial data to enterprise and government clients, they are known for their DUNS number identifier which functions as a social security number or CUSIP for commercial entities.  The DUNS number is fairly ubiquitous in business (D&B tracks roughly 600 million entities worldwide), the identifier is recommended or sometimes required by commercial and governmental organizations to do business with each other.  D&B does other things like provide credit scoring for small-and-medium sized businesses (Paydex score), data to analyze supply chains and corporate information supplying many CRM or ERP platforms.  This is a fairly good business featuring recurring revenue, high retention rates, high incremental margins on revenues, etc., all things that generally attract people to data companies, however, they're slow growing and seem to be perpetually in turnaround mode.

Last August, D&B confirmed reports they had received inbound interest from third parties and had hired Bank of America to assist with running a strategic process.  We're eight months into that process, about a month ago Bloomberg reported Veritas Capital is in talks to buy D&B for roughly the current market cap at the time, or $5.4B plus debt, which is approximately $12.25/share.  The article also hints at alternative structures where D&B sells their two units (Finance & Risk and Sales & Marketing) to strategic buyers; all along the way there have been reports or company disclosures of both strategic and financial buyers showing interest in D&B.  In the company's recent earnings call, management mentioned the process was creating a distraction (blamed it for impacting new business, leading to a slow-to-no growth quarter) and that the process would be complete by the end of the quarter.  The market didn't like the excuse and along with a broader selloff in markets, DNB now trades for $8.50/share making this an interesting event-driven setup.

D&B is no stranger to private markets and the leveraged finance community (hopefully making it easy to finance a deal), it was taken-private in 2019 by a consortium led by Bill Foley (of FNF, FIS, etc fame) via his Cannae Holdings (CNNE).  The company's time out of public markets was short lived, it was re-IPO'd the following year with Bill Foley being the Executive Chairman.  Foley's Cannae Holdings is a HoldCo of his investments which has perpetually traded at a discount to its sum of the parts value (not a bad comp for what Bill Ackman is trying to do with HHH), last year they internalized the management structure and brought Foley on as CEO formally.  D&B is Cannae's largest holding (~1/3rd of the portfolio), monetizing this investment could provide a catalyst to close the NAV gap (separately, another CNNE holding, Paysafe (PSFE) is also rumored to be sold).

The current market selloff has created an attractive entry point for D&B, the company is pretty aggressive with their adjusted financials, so while cheap, it's not quite as cheap as management or data aggregators might show.

Restructuring charges and transition costs add-backs make up almost 10% of adjusted EBITDA.  However, even using the non-adjusted EBITDA number, the company looks pretty cheap at current prices even if a deal fails to get over the finish line.  Management is guiding to $955-$985MM in adjusted EBITDA in 2025, if we back out some of these adjustments and assume some underlying growth, I think $800MM in true EBITDA is a reasonable expectation.

D&B has $3,344MM in net debt, the enterprise value is ~$7.1B, making the EV/EBITDA multiple in the 9x range, cheap for a recurring revenue data model (higher quality ones trade for double this valuation).  Who knows how far the current market fall will go, but this seems like a reasonable "heads I win (potentially a lot) and tails I don't lose much" (assuming a 6+ month holding period to churn out any broken arb selling) situation.

Disclosure: I own shares of DNB

Third Harmonic Bio: Strategic Alternatives, Keeping Options Open on THB335

Third Harmonic Bio (THRD) (~$155MM market cap) is a clinical-stage biotech that just released data on their Phase 1 study for lead candidate THB335 for the treatment of chronic spontaneous urticaria (hives).  Alongside the announcement (where the data is apparently good enough to prepare for a Phase 2 study, as usual, no opinion on the science from me), THRD disclosed they were going to evaluate a full range of strategic alternatives and implementing a 50% reduction in workforce (eliminating 27 positions).

Continuing a positive recent trend, Third Hamonic Bio is doing most of the heavy lifting for us, THRD disclosed their estimate for cash on 6/30:

Assuming no use of their ATM between 11/1 and today, I get the following back of the envelope liquidation value (again, this likely won't liquidate):

The shareholder base looks pretty good here, Atlas Ventures and OrbiMed Advisors own collectively about 25% of the company, other familiar names are present in EcoR1 Capital, BVF Partners and RA Capital.  A reverse merger is likely here, possibly with a CVR attached to THB335.  I added a small position to the growing broken biotech basket (need some more momentum in deal announcements to clear out room).

Disclosure: I own shares of THRD

CARGO Therapeutics: Broken Biotech, Significant Cash Position

CARGO Therapeutics (CRGX) (~$150MM market cap) is a clinical-stage biotechnology company that is developing CAR T-cell therapies for cancer patients.  Last night, the company issued a press release stating they're discontinuing the FIRCE-1 Phase 2 Study of their lead asset, firicabtagene autoleucel, due to a non-competitive benefit risk profile for patients.  The stock is down approximately 75% on the news.

Additionally, CARGO announced they are going to evaluate strategic options and are commencing a 50% reduction in force.  The announcement is not a full waving the white flag, they do have a Phase 1 ready asset in CRG-023 that just received an IND application approval from the FDA earlier this month.  CARGO currently plans to go ahead with mid-year launch of a Phase 1 study, but my guess is those plans could change by then depending on what happens with the strategic review.  CARGO was a late 2023 IPO and thus has a nice chunk of cash remaining on their balance sheet that could be attractive to a reverse merger partner and provides some margin of safety at these prices if the process drags out.

Above is my typical back of the envelope math on a potential liquidation value for CRGX.  The shareholder base here seems pretty vanilla, there are no cornerstone biotech investors owning more than 10%, the board is staggered and management owns very little stock.  It might need an activist or other push to get things moving here, but I like the discount to a large cash balance and added it to my broken biotech basket.

Disclosure: I own shares of CRGX

International Game Technology: Gaming Segment Sold to Apollo, RemainCo Cheap

International Game Technology (IGT) (~$3.5B market cap) is a gaming supplier, the result of a 2015 merger of IGT and Gtech that is currently being unwound.  The historical IGT business is a video gaming terminal (slot machine) business, it is being spun in Q3 2025, merged immediately with smaller peer Everi Holdings (EVRI) in a reverse morris trust and the combined IGT/Everi will then be acquired by Apollo Global.  The end result is a $4.05B cash payment, before taxes and expenses (estimated at $400MM), to RemainCo (the IGT name is going with the slot machine business) which will be a global lottery management business (itself the creation of a merger between Italian Lottomatica with U.S. based lottery operator Gtech in 2006).  The lottery business (think scratch offs, draw games, multi-state lotteries) is generally a good one, it grows at GDP+, has infrastructure like characteristics, reasonable capex requirements, high barriers to entry and stable competition. 

Assuming the deal with Apollo closes, the market is assigning a low valuation to RemainCo:

There are only a few lottery competitors, closest peer Scientific Games (now Light & Wonder, ticker LNW) sold their lottery business in 2022 to Brookfield for about 11x EBITDA, Intralot (Greek based) trades for 9.5x, La Fancaise des Jeux trades for 9x and The Lottery Corporation (2022 spin from Tabcorp in Australia) trades for 16x.  Proforma RemainCo is trading well below all of these at ~5x EBITDA.

One reason spinoffs sometimes work is they create pure plays that generally trade a premium to a conglomerate.  Occasionally there are some downsides to breaking a company up, here while RemainCo should trade at a premium to the slot machine segment, my guess is it's currently being discounted because of revenue concentration (in addition to the Apollo deal obscuring value) that becomes more apparent when you split the business up.

The Italy Lotto makes up nearly 40% of RemainCo's revenue, unlike the U.S. (where RemainCo will have contracts with 37 of the 48 states/territories that have lotteries), Italy runs its lottery at the federal level via two contracts (roughly equal in size).  One of those contracts (Italian Gioco del Lotto game) is expiring this year and the bidding process is competitive.  Lottoitalia (a joint venture that IGT owns 61.5%) has run the contract since the 1990s, good time to mention that IGT is controlled by an Italian family via their De Agostini holding company (~42% ownership, ~60% of the vote) who are the original owners of Lottomatica and generally seem to be doing right by shareholders.  One potential reason for raising a lot of liquidity this year is the Italian lotto contracts feature an upfront payment by the winning bidder, reported to be at least $1B but likely will end up being more.  IGT accounts for the upfront fee as an asset that is then amortized straight line over the 9 years of the contract (they do remove the upfront amortization in their adjusted EBITDA metric).  The request for proposal was issued a couple weeks ago with a March 17th deadline, a reported other bidder is a consortium led by Flutter Entertainment (FLUT), which admittedly is a formidable, well financed competitor (but lottery is currently a negligible piece of their business).  My guess is IGT/RemainCo will do what it takes to win the contract, even if it means overpaying on the upfront fee.  

But if they don't, the stock still seems pretty cheap to me:

By removing the $1B upfront fee and ~$250MM in EBITDA (my guess, hoping that's overly conservative), it would only take EV/EBITDA up to 5.5x.  The stock would probably fall a fair amount, but the potential for shareholder returns via a buyback would increase and potentially offset some of that decline.  They've publicly stated their plan is to paydown $2B in debt, uses for the remainder of the Apollo funds hinge on the Italian Lotto bid, but they've stated some will go to shareholders in form of a buyback or special dividend.

Incumbents are hard to beat, especially ones so deeply entrenched, I think the Apollo transaction and Italian Lotto RFP fears are obscuring a really good business that should trade at a more normal 8x EBITDA (discount to its peers for being controlled) when all the dust settles.  As always, appreciate feedback, especially if you're on the ground in Italy, please share any thoughts on the RFP process.

Disclosure: I own IGT Jan '27 LEAPs

Keros Therapeutics: Pre-SA Broken Biotech, Large Cash Position

Keros Therapeutics (KROS) (~$420MM market cap) is a what I'm labeling a pre-strategic alternatives broken biotech, the company in two separate press releases (here and here) announced the halting of all dosages in their Phase 2 clinical trial of Cibotercept (KER-012) due to observations of pericardial effusions, which is a condition where excess fluid accumulates in a membrane that surrounds the heart.  What I find interesting in this situation is:

1. KROS has a significant cash position, my estimates put it around $650MM for a reverse merger, much higher than beaten up biotechnology companies I usually highlight
2. KER-012 is described as KROS's second program, their most advanced asset, Elritercept (KER-050) was out licensed to Takeda for $200MM plus milestone payments, so this failure might be obscuring the larger story here
3. KROS doesn't screen like a classic broken biotech because of the Takeda payment and their liberal use of their at-the-market equity offering program

Below is my basic back of envelope math on a potential liquidation value (again, not predicting a liquidation, more as a base case valuation for a potential merger/reverse merger):

The company has not declared a review of strategic alternatives, hasn't recently announced a reduction in force related to the failed KER-012 trials, etc., so this a riskier situation than others, but I think the absolute cash amount and sale of their primary asset makes this an interesting broken biotech to watch.

Other thoughts:

• My ATM estimate is using their 10/31 sharecount, based on their previous cadence, they likely issued more shares well above the current price into their December data disappointment, so the above NAV might be conservative
• The Takeda deal for KER-050 includes $370MM in development milestones and $720MM in sales milestones (plus a tiered royalty structure), how much is that worth today?  I'm not including any value in my liquidation NAV

Disclosure: I own shares of KROS