DOW - AgroFresh Solutions: Still ~1% Upside On A Deal That Could Close Within Weeks

Summary

• AgroFresh Solutions, Inc. is being taken private by a private equity party.
• There were other bidders involved in the process.
• In my opinion, the deal is unlikely to fail from here on out.
• The spread is relatively wide, given the fact the deal could wrap up in a matter of weeks.

AgroFresh Solutions, Inc. ( AGFS ) is being acquired by Paine Schwartz Partners. AgroFresh is a company that's specialized in keeping produce fresh (apples, avocados, berries, and bananas) from farm to store. The acquirer is a private equity firm specializing in sustainable food chain investing.

Paine Schwartz is paying $3 per share in cash, and AGFS stock is currently trading at $2.97. There is around ~1% of upside left to the closing price. At first glance, this kind of upside looks limited, but in my experience, this merger could close sooner rather than later and is unlikely to fail at this stage. Theoretically, it could close as soon as 10 - 20 days from now. In general, my experience with mergers that aren't contested heavily by regulators tend to close before the end of the quarter they're supposed to close. In this case, the companies are guiding towards Q1 2023, and I would be surprised if it closed end of March 2023. Even if it closes at the end of March, the current spread equates to an annualized return above ~6%. That's not great, given the 3-month yield is ~4.7%. But at least in an absolute sense, it isn't horrible.

I think scenarios where it closes much sooner are much more likely. If it closes in 10 days, which is highly unlikely as well, the annualized return is ~45%. At 20 days, the annualized return has dropped to 20.46%.

The reason I believe the spread is relatively large is that the stock will likely drop 50% in the unlikely event the acquiring party walks away. My broker, Interactive Brokers ( IBKR ), also charges high margin requirements. High margin requirements also tend to result in slightly higher spreads.

This company actually came to market through a SPAC back in 2015. The SPAC acquired a segment from Dow ( DOW ). Dow is still a major shareholder, was involved in the negotiations, and will vote for the transaction.

One of the reasons I'm inclined to like the risk here is that there was actually a bid of higher monetary value by a "party A"(from the paragraph background of the merger ):

despite repeated interactions with Party A to obtain a more concrete proposal, Party A's indication was materially less certain, as compared to PSP's proposal, because, among other reasons, the last written communication from the Party A Investors ((I)) stated only that the Party A Investors hope to begin preliminary discussions with the Special Committee on an acquisition of all outstanding shares of the Company's capital stock "in the $3.15 per share range"; ((II)) stated that, assuming such preliminary discussions are successful, the Party A Investors would only then present a letter of intent to facilitate further discussion and permit them to finalize diligence, engage in initial discussions with the Company's institutional investors, and negotiate a Merger Agreement; and ((III)) was premised on the Series B Preferred Stock remaining in place until a subsequent merger between the Company and Party C could be completed, which would not be possible without PSP determining not to accept the Change of Control Redemption Offer that would be mandated pursuant to the terms of the Series B Preferred Stock in connection with an acquisition of the Company by Party A; and

It appeared from the background of the merger that Dow really did try to get a bit more than $3 per share and somewhat reluctantly gave in around this level.

There is also a break fee of 3%, although I think that's a mixed blessing here. It does little to cushion a blow if the deal breaks (given the large downside). But it likely does work to discourage others from coming over the top of the acquirer.

In the deal presentation, there were also slides included with an overview of a bunch of valuation models. The presentation serves to "sell" the deal, so take these with a grain of salt.

My expectation is for HSR to run out soon. Then we'll see a special meeting date set quickly after that, and the transaction then closes in days after said meeting. This can all happen quickly, as the company entered its HSR filings in early December. The sooner it closes, the better the return. The risks seem limited (high probability of closing), although an actual break should result in a whopping 50% downside. As long as the deal closes, the annualized return will likely be between ok and amazing.

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