ACTG - Acacia: The Long Case Is Broken But There Is Still Value

Summary

• On October 31, the company announced an agreement to streamline the company’s capital structure.
• The company expects a Book Value of $5.37.
• The private portfolio's value is higher than the cost.

Acacia: the long case is broken but there is still value

Previously here on SA Jenks Jumps and Gabriele Greco both highlighted the hidden value of Acacia ( ACTG ).

Their research was solid but unfortunately, the value did not materialize leaving investors probably in a “bagholder” situation.

The reasons for things going wrong are:

• Oxford Nanopore Technologies ( OTCPK:ONTTF ) delayed the IPO losing the “growth momentum”. Moreover, the IPO happened on the London Stock Exchange where companies are trading at discount compared to the Nasdaq.
• The company had a complex capital structure with Series A Warrants, Series A Redeemable Convertible Preferred Stock, Series A embedded and Series B Warrants with Starboard. Most of them had a strike price of $3.65 which it made difficult to evaluate the impact of dilution.
• Investment companies can trade at discount compared to the NAV .

What is left now?

Already in Q1 2022 the management understood that the complex capital structure was the problem and for this reason, in Q2 2022 they started to work on a deal with Starboard

Okay. All right. Fair enough. And one last one. I mean with -- really. you've done such a fantastic job. Why haven't we seen some institutional buying of the stock? What's holding some of these folks back?

Clifford Press

It's a complicated question, I think there are - what I would say we have a sense of what would make the stock more attractive and I think we're well aware of the issues, and well seek to address hem in the future

Source: Q1 2022 Call Transcript

Our collaboration with Starboard Value has been built on the basis of contractual arrangements that have now matured. The appreciation in value has highlighted the need to revisit and expand on the terms of that initial partnership. In particular, we believe that simplifying Starboard's ownership structure in Acacia with clarity on capital resources can better position the company for the next phase of development . We are working with Starboard on simplifying this current ownership structure.

Source: Q1 2022 Call Transcript

Finally, on October 31, the company announced an agreement to streamline the Company’s capital structure . In particular:

• Starboard will exercise its 5 million Series A Warrants at the $3.65 per share exercise price
• Acacia will commence a rights offering (the “Rights Offering”) in the first quarter of 2023, offering 0.25 new shares per fully diluted share outstanding, with a maximum of more than 38 million shares. The offering price will be $5.25 per share. Starboard has committed to purchase at least 15 million shares in the Rights Offering.
• Starboard has agreed to exercise its remaining approximately 31.5 million Series B Warrants at the $3.65 exercise price.
• Starboard has agreed to convert its $35 million of Series A Preferred Stock into common stock at the conversion price of $3.65.
• Starboard will receive $75 million in total foregone option value payments in exchange for the early exercise and early conversion of the derivatives.

The company expects a Book Value of $5.37 after the competition of the transaction.

The value of $5.37 is considering the private investments (Viamet, Amo Pharma e NovaBiotics) at cost - c.$53.1m

Regarding the other two investments: If Malin PLC is right, ACTG’s ownership should be valued at $151m.

• AMO Pharma, which has a candidate in phase 3, Avidity Biosciences and Dyne Therapeutics raised a new round in May 2022. The terms of the valuation are not public but if the round was at the same valuation the position for ACTG would be still worth around $4.5m.
• NovaBiotics did not have any new rounds and the cost was around $8m

The total value of the private portfolio would result in c. $163.5m – which is equivalent to c. $1.45 per share.

Using a simple SOTP analysis can miss a discount on the fund holdings. Holdings can trade at discount forever when investors do not have confidence in the management or the investments are not easy to value. The same companies can trade at a premium when confidence is high.

Starboard is for sure a five-star management so some investors can even think that ACTG should trade at a premium.

In my analysis, I am conservative and still use some discounts. Based on my analysis, as you can see below, ACTG’s upside is between 27% and 43%.

For further details see: