Recut Deal w/ Arq, Torpedoes Shareholder Vote

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Sometimes, I do not like to jot down about shares that I do not personal however I’ll break that gentle rule right here, as talked about within the 12 months Finish publish, I bought my shares in Superior Emissions Options (ADES) ($59MM market cap).  My unique publish outlining the thesis from November 2021 is right here, as standard, the remark part is value going by way of for a blow-by-blow of the occasions.

This afternoon, ADES printed a press launch asserting their merger with Arq Restricted had been accomplished.  That required a double take and a fast click on because the merger as initially constructed required a shareholder vote to finish, and no such vote was held.  

To take a step again, in Could 2021, ADES introduced it was pursuing strategic alternate options because the run off in a single section was producing lots of money, however that enterprise was coming to an finish as a result of expiration of a tax credit score, leaving simply their Activated Carbon enterprise (Purple River plant) which is subscale for a public firm.  In accordance with the background part within the unique deal’s S-4 submitting, ADES acquired a number of non-binding indications of curiosity from personal fairness companies shortly after publicly asserting a course of for his or her remaining Activated Carbon enterprise for between $30-$50MM.  Nonetheless, ADES flipped to being a purchaser and in August 2022, lastly entered into an settlement with Arq Restricted for a reverse merger the place ADES would purchase Arq for money and inventory.  It was a really SPAC-like deal (this is the SPAC deck) with a pre-revenue startup and rosy income outlook a number of years out.  Shareholders who have been anticipating a liquidation kind transaction revolted, sending the shares from $6.41 instantly previous to the deal announcement (to be truthful, it had spiked over the earlier week after ADES administration indicated a deal was close to on their Q2 earnings name) to a $3.86 on the shut, then drifting all the best way right down to $2.20/share in December.  For context, as of 9/30 the corporate had $86MM of money or $4.50/share, in the event that they bought the Activated Carbon enterprise to one of many PE companies, shareholders might have netted someplace within the space of $6.50/share.  A lot decrease than I initially penciled out, however nicely forward of the place shares commerce at present.

With that worth discrepancy, you’d count on an activist to come back in and try to interrupt the deal, drive a fast sale of the Activated Carbon enterprise, distribute all of the money and reap a pleasant tidy revenue.  Nonetheless, that was unimaginable as a result of ADES has a rights settlement stopping anybody from crossing the 5% possession threshold so as to keep their NOLs and tax credit.  That 5% possession restrict together with the small market cap prevented most funds from proudly owning shares (its particular person traders who’re getting screwed right here).  In an odd twist, the unique transaction with Arq Restricted would qualify as an possession change, due to this fact eliminating the NOLs and tax credit, however the rights settlement defending these tax property was nonetheless in place.  Regardless of that, there was some hope that shareholders would vote the deal down (like MTCR that was mentioned in my SESN publish feedback) or it might be terminated earlier than to save lots of the embarrassment, forcing the corporate right into a liquidation.

That brings us again to at present, ADES recut the merger with Arq presumably to avoid the shareholder vote by issuing a brand new sequence of most well-liked shares (this sort of rhymes with the shenanigans over at AMC with the APE most well-liked shares) to Arq shareholders as consideration.  

The popular shares function a 8% coupon and are convertible to widespread inventory at a $4/share conversion worth if authorised by widespread inventory holders.  Widespread inventory holders haven’t any purpose to not approve the conversion, saves the 8% coupon the corporate cannot afford (will probably be money movement detrimental for the following couple years, even beneath their rosy projections) and it might convert at an above market worth.  The debt financing can also be to a associated occasion, a board member of Arq (will even be on the brand new ADS board) that pays 11% money coupon, plus a 5% PIK.  

Whereas the deal is optically higher for ADES shareholders (not saying a lot, presumably does protect the tax asset, however questionable whether or not the mixed firm ever generates important taxable revenue), it seemingly would nonetheless get voted down, after hours buying and selling displays this as nicely, shares have been down ~16% as of final verify.  Arduous to take a position on motivation, however administration owns little inventory and doubtless needs to maintain their nicely paying jobs.  Apologies to anybody that adopted me into this example, I hope I am lacking one thing.  None of this smells proper.

Disclosure: No place

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