Two weeks ago we picked Aceto Corporation (ACET), a company that dropped significantly after announcing a Chapter 11 bankruptcy filing. While initially down on the first two days after trying to catch the falling knife, the stock price tripled to $0.43 on February 27, allowing for significant profits to be taken. We loaded up on shares last week once again which looks like another good trade as the stock rose 68% to $0.25 on Monday. ACET was a top short pick from last year in our article "Short Aceto As It Heads Into Bankruptcy" and has dropped 90% since. Now that bankruptcy has officially gotten started, we believe it is a good time to cover any short and go long because of increased speculation of a bidding war on ACET's assets. We are up to 837 followers despite not giving out a lot of alerts, a fact that we think is indicative of a successful, diligent and prudent stock picking history. If you like our picks you can follow our blog by clicking the follow button on the top of the left hand panel. You can also follow us on Twitter @StockTradePicks. We have over 3,700 followers on Twitter as well.
ACET's subsidiary, Rising Pharmaceuticals, received a bid last week. This news was initially received negatively as the stock price went down, but what some investors may not realize is that this is just the first bid in a process that could lead to a bidding war:
"On February 19, 2019, Aceto Corporation (“the Company”) and certain of its U.S. subsidiaries (collectively with the Company, the “Debtors”) each filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of New Jersey (the “Bankruptcy Court”). The Debtors have proposed to jointly administer their chapter 11 cases under the caption In re Aceto Corporation, et al. (the “Chapter 11 Cases”).
In connection with the Chapter 11 Cases, on March 7, 2019, Rising Pharmaceuticals, Inc., a wholly owned subsidiary of the Company (“Rising”), and the wholly owned subsidiaries of Rising (collectively, the “Sellers”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Shore Suven Pharma, Inc., a Delaware corporation (the “Buyer”), an affiliate of Shore Pharma Investments, LLC, a Delaware limited liability company (“Shore”), and Suven Life Sciences, Ltd., an entity organized under the laws of India (“Suven”), pursuant to which the Buyer agreed to acquire substantially all of the assets and assume certain liabilities of the Human Health segment, excluding the Nutritional Business Sub Segment, of the Company’s business (the “Pharma Business”) for gross cash proceeds of approximately $15 million plus the assumption of certain liabilities (as set forth in the Asset Purchase Agreement).
The Asset Purchase Agreement is intended to constitute a “stalking horse” bid for the Company’s Pharma Business that is subject to higher and better bids by third parties in accordance with bidding procedures to be approved by the Bankruptcy Court in the Company’s pending Chapter 11 Cases. The Asset Purchase Agreement provides for the payment of a termination fee of $672,500, and reimbursement of Buyer’s expenses up to $750,000, in the event that the Asset Purchase Agreement is replaced by a higher and better bid."
The fact that ACET got a bid so quickly in this process increases the probability that more bids will follow. With an $8 million market cap, the share price could swing violently as speculation increases that the bids could get to the point where they exceed total liabilities and shareholders could get a potentially substantial payoff upon liquidation. A $0.50 stock price leads to a $16 million market cap. A $1.00 stock price leads to a $31 million market cap. That's a double to 4x gainer from here but only $8-23 million extra added to the market cap when we are talking about numbers in the $10's or $100's of millions of dollars during the bidding process for these assets.
This risk is that any bidding war still results in the debtholders not being made whole, and the shareholders receiving nothing. But if the debtholders are made whole, the excess goes straight to the shareholders which could result in a return much higher than the $8 million market cap. Think of it like a lottery ticket with better odds than one-in-a-million. And even if you don't feel like holding that lottery ticket someone else will, making for good spike potential on speculation.
Take a look at what happened to Synergy Pharmaceuticals Inc. (SGYP) when it first got bids during its Chapter 11 process. The stock tanked as low as $0.08 in December, and shot up to over $0.40 in January on the very same speculation that we think will happen to ACET. SGYPQ is down under $0.03 after being delisted, so this illustrates what happens when a bidding war doesn't materialize as hoped. But this has no bearing on the success or failure of ACET's bidding war. Just on the potential short term upside of massive speculation that should occur.
Shore Suven Pharma, the company that bid on Rising, could not contain the excitement:
"This potential acquisition of Rising's assets would transform Shore Suven Pharma into a strong US generic pharmaceutical company. Leveraging Rising's extensive product portfolio to become vertically integrated with our already world class API and finished dose manufacturing capabilities will enable us to better serve US customers," Suven Life Sciences CEO and Chairman Venkat Jasti said.
Vimal Kavuru, who will serve as CEO of Shore Suven Pharma said the opportunity to work with Rising's suppliers and employees to ensure continuity of product supply to customers in connection with this proposed integration will be the company's top priority.
"We have an exceptional generic pharmaceutical management team ready to facilitate a smooth transition while maximising the value of these assets. We look forward to working towards a successful closing," he added.
This was a dumb move by Suven to promote this bid before closing this deal, but very good news for Aceto. Competitors in the generics space will look at this and be prompted to put in a bid themselves. Why wouldn't a U.S. generic pharma company be willing to place a bid just to stop the Indian company from trying to expand to the United States? If Rising has value to one company at this first low-ball price, certainly it has value at a higher price to someone else. Rising isn't even the company's most valuable asset to be sold during this process.
One piece of good news is that ACET received a NASDAQ delisting notice that would have delisted the stock on March 4, but the company requested a hearing to delay that ruling. This is a good sign that management is still willing to fight to keep the stock alive.
ACET initially dropped three weeks ago after announcing the following:
ACET has accumulated a lot of deferred tax assets from years of operating losses. ACET has accumulated $82 million in deferred tax assets which currently all but $5 million is offset by a valuation allowance. If ACET was to sell all of its operating assets and exist as a shell, that shell's tax assets have value in the instance of a reverse takeover that is done in a way to not invalidate them. This article gives a good overview of this process.
2019 got off to a reasonable start in January for microcap stocks as the market in general was bullish for the month. There were a lot of stocks that spiked 100-500% in a matter of one or a few days. As we look towards the rest of 2019, we have to figure out what's next for microcap stocks? TradeMiner identifies seasonal trends and market cycles, the Penny Stock Prophet and Microcap Millionaires finds the next big small cap plays in various industries while Addicted to Profits makes trades from a Canadian perspective.
There are also some good books available on microcap stocks and day trading such as:
Mastering Microcaps: Strategies, Trends, and Stock Selection (Bloomberg Professional Library)
The Little Black Book of Microcap Investing: Beat the Market with NASDAQ/AMEX Microcap Stocks, OTCBB Penny Stocks, and Pink Sheet Stocks
Microcap Magic: Why The Biggest Returns Are In Stocks You've Never Heard Of
How to Day Trade for a Living: A Beginner’s Guide to Trading Tools and Tactics, Money Management, Discipline and Trading Psychology
How to Day Trade: A Detailed Guide to Day Trading Strategies, Risk Management, and Trader Psychology
A Beginner's Guide to Day Trading Online (2nd edition)
Stock Investing for Beginners: Marijuana Stocks
Here are some other good stock market resources. This includes technical analysis and day trading, dividend stock investing, gold and commodities, sector rotation, options trading and microcap trading strategies:
The dividend stock report from dividendstocksonline.com
ACET's subsidiary, Rising Pharmaceuticals, received a bid last week. This news was initially received negatively as the stock price went down, but what some investors may not realize is that this is just the first bid in a process that could lead to a bidding war:
"On February 19, 2019, Aceto Corporation (“the Company”) and certain of its U.S. subsidiaries (collectively with the Company, the “Debtors”) each filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of New Jersey (the “Bankruptcy Court”). The Debtors have proposed to jointly administer their chapter 11 cases under the caption In re Aceto Corporation, et al. (the “Chapter 11 Cases”).
In connection with the Chapter 11 Cases, on March 7, 2019, Rising Pharmaceuticals, Inc., a wholly owned subsidiary of the Company (“Rising”), and the wholly owned subsidiaries of Rising (collectively, the “Sellers”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Shore Suven Pharma, Inc., a Delaware corporation (the “Buyer”), an affiliate of Shore Pharma Investments, LLC, a Delaware limited liability company (“Shore”), and Suven Life Sciences, Ltd., an entity organized under the laws of India (“Suven”), pursuant to which the Buyer agreed to acquire substantially all of the assets and assume certain liabilities of the Human Health segment, excluding the Nutritional Business Sub Segment, of the Company’s business (the “Pharma Business”) for gross cash proceeds of approximately $15 million plus the assumption of certain liabilities (as set forth in the Asset Purchase Agreement).
The Asset Purchase Agreement is intended to constitute a “stalking horse” bid for the Company’s Pharma Business that is subject to higher and better bids by third parties in accordance with bidding procedures to be approved by the Bankruptcy Court in the Company’s pending Chapter 11 Cases. The Asset Purchase Agreement provides for the payment of a termination fee of $672,500, and reimbursement of Buyer’s expenses up to $750,000, in the event that the Asset Purchase Agreement is replaced by a higher and better bid."
The fact that ACET got a bid so quickly in this process increases the probability that more bids will follow. With an $8 million market cap, the share price could swing violently as speculation increases that the bids could get to the point where they exceed total liabilities and shareholders could get a potentially substantial payoff upon liquidation. A $0.50 stock price leads to a $16 million market cap. A $1.00 stock price leads to a $31 million market cap. That's a double to 4x gainer from here but only $8-23 million extra added to the market cap when we are talking about numbers in the $10's or $100's of millions of dollars during the bidding process for these assets.
This risk is that any bidding war still results in the debtholders not being made whole, and the shareholders receiving nothing. But if the debtholders are made whole, the excess goes straight to the shareholders which could result in a return much higher than the $8 million market cap. Think of it like a lottery ticket with better odds than one-in-a-million. And even if you don't feel like holding that lottery ticket someone else will, making for good spike potential on speculation.
Take a look at what happened to Synergy Pharmaceuticals Inc. (SGYP) when it first got bids during its Chapter 11 process. The stock tanked as low as $0.08 in December, and shot up to over $0.40 in January on the very same speculation that we think will happen to ACET. SGYPQ is down under $0.03 after being delisted, so this illustrates what happens when a bidding war doesn't materialize as hoped. But this has no bearing on the success or failure of ACET's bidding war. Just on the potential short term upside of massive speculation that should occur.
Shore Suven Pharma, the company that bid on Rising, could not contain the excitement:
"This potential acquisition of Rising's assets would transform Shore Suven Pharma into a strong US generic pharmaceutical company. Leveraging Rising's extensive product portfolio to become vertically integrated with our already world class API and finished dose manufacturing capabilities will enable us to better serve US customers," Suven Life Sciences CEO and Chairman Venkat Jasti said.
Vimal Kavuru, who will serve as CEO of Shore Suven Pharma said the opportunity to work with Rising's suppliers and employees to ensure continuity of product supply to customers in connection with this proposed integration will be the company's top priority.
"We have an exceptional generic pharmaceutical management team ready to facilitate a smooth transition while maximising the value of these assets. We look forward to working towards a successful closing," he added.
This was a dumb move by Suven to promote this bid before closing this deal, but very good news for Aceto. Competitors in the generics space will look at this and be prompted to put in a bid themselves. Why wouldn't a U.S. generic pharma company be willing to place a bid just to stop the Indian company from trying to expand to the United States? If Rising has value to one company at this first low-ball price, certainly it has value at a higher price to someone else. Rising isn't even the company's most valuable asset to be sold during this process.
One piece of good news is that ACET received a NASDAQ delisting notice that would have delisted the stock on March 4, but the company requested a hearing to delay that ruling. This is a good sign that management is still willing to fight to keep the stock alive.
ACET initially dropped three weeks ago after announcing the following:
PORT WASHINGTON, N.Y., Feb. 19, 2019 (GLOBE NEWSWIRE) -- ACETO Corporation (ACET), an international company engaged in the development, marketing, sale and distribution of Human Health products, Pharmaceutical Ingredients and Performance Chemicals, announced today that it has entered into a “stalking-horse” asset purchase agreement with an affiliate of New Mountain Capital, a leading growth-oriented investment firm with over $20 billion in assets under management, to sell its chemicals business assets for gross proceeds of $338 million in cash, plus the assumption of certain liabilities and subject to certain adjustments, on a cash-free and debt-free basis.
The sale will be conducted under Section 363 of the U.S. Bankruptcy Code. To facilitate the sale and satisfy its debt obligations, Aceto and its U.S. subsidiaries have filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of New Jersey (Newark). Aceto’s foreign chemicals business subsidiaries are not included in the filing but will be included in the sale. In addition, Aceto intends to enter into a stalking horse agreement for its subsidiary, Rising Pharmaceuticals. Aceto expects to complete the dispositions of its chemicals and Rising businesses before its fiscal year end on June 30, 2019.
The sale will be conducted under Section 363 of the U.S. Bankruptcy Code. To facilitate the sale and satisfy its debt obligations, Aceto and its U.S. subsidiaries have filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of New Jersey (Newark). Aceto’s foreign chemicals business subsidiaries are not included in the filing but will be included in the sale. In addition, Aceto intends to enter into a stalking horse agreement for its subsidiary, Rising Pharmaceuticals. Aceto expects to complete the dispositions of its chemicals and Rising businesses before its fiscal year end on June 30, 2019.
“For the past several months, the Board has been conducting a comprehensive evaluation of strategic alternatives to address the Company’s debt burden in consultation with its financial and legal advisors while continuing to work cooperatively with its lenders. After assessing its options, the Board has determined that Court-supervised sales of Aceto’s chemicals business assets and its subsidiary Rising Pharmaceuticals are in the best interest of the Company and its stakeholders,” said William C. Kennally III, Chief Executive Officer of Aceto. “This decision provides stability and deep capital resources to the Company and, importantly, ensures the continuity of customer, partner and supplier relationships critical to the Company’s businesses operations and success.”
Aceto will operate its business in the ordinary course while it completes the sales of its chemicals business assets and its subsidiary Rising Pharmaceuticals. To that end, Aceto has received a commitment for debtor-in-possession (DIP) financing of $60 million from a syndicate of lenders led by Wells Fargo Bank, N.A. The DIP financing will finance Aceto’s working capital needs through the completion of the sales transactions and support payments to vendors and suppliers for post-petition purchases in the ordinary course.
The proposed sales will be conducted through Court-supervised processes under Section 363 of the Bankruptcy Code, subject to Court-approved bidding procedures, potential receipt of higher and better offers at auction and approval by the Court. PJT Partners LP is acting as Aceto’s financial advisor and investment banker to lead the sales processes under the bid procedures and Lowenstein Sandler LLP is serving as legal advisor. AP Services, an affiliate of AlixPartners LLP, is also serving as Chief Financial Officer and advisor to the Company.
The bid for the chemicals business is $338 million. This "stalking horse bid" is a minimum bid like what you see on an eBay auction. This bidding process will last for another three months so there is lots of time to hear more bids for both divisions. ACET's total liabilities are $702 million so it is not unfathomable to think that the total combined bids for both divisions could exceed that amount if things go well. ACET's total market cap is only $8 million. This is a very low valuation to bet that the bids will increase substantially from here. Any stock has risk to it, especially one that is in bankruptcy proceedings so investors should trade accordingly.Aceto will operate its business in the ordinary course while it completes the sales of its chemicals business assets and its subsidiary Rising Pharmaceuticals. To that end, Aceto has received a commitment for debtor-in-possession (DIP) financing of $60 million from a syndicate of lenders led by Wells Fargo Bank, N.A. The DIP financing will finance Aceto’s working capital needs through the completion of the sales transactions and support payments to vendors and suppliers for post-petition purchases in the ordinary course.
The proposed sales will be conducted through Court-supervised processes under Section 363 of the Bankruptcy Code, subject to Court-approved bidding procedures, potential receipt of higher and better offers at auction and approval by the Court. PJT Partners LP is acting as Aceto’s financial advisor and investment banker to lead the sales processes under the bid procedures and Lowenstein Sandler LLP is serving as legal advisor. AP Services, an affiliate of AlixPartners LLP, is also serving as Chief Financial Officer and advisor to the Company.
ACET has accumulated a lot of deferred tax assets from years of operating losses. ACET has accumulated $82 million in deferred tax assets which currently all but $5 million is offset by a valuation allowance. If ACET was to sell all of its operating assets and exist as a shell, that shell's tax assets have value in the instance of a reverse takeover that is done in a way to not invalidate them. This article gives a good overview of this process.
Disclosure: We are long ACET
2019 got off to a reasonable start in January for microcap stocks as the market in general was bullish for the month. There were a lot of stocks that spiked 100-500% in a matter of one or a few days. As we look towards the rest of 2019, we have to figure out what's next for microcap stocks? TradeMiner identifies seasonal trends and market cycles, the Penny Stock Prophet and Microcap Millionaires finds the next big small cap plays in various industries while Addicted to Profits makes trades from a Canadian perspective.
There are also some good books available on microcap stocks and day trading such as:
Mastering Microcaps: Strategies, Trends, and Stock Selection (Bloomberg Professional Library)
The Little Black Book of Microcap Investing: Beat the Market with NASDAQ/AMEX Microcap Stocks, OTCBB Penny Stocks, and Pink Sheet Stocks
Microcap Magic: Why The Biggest Returns Are In Stocks You've Never Heard Of
How to Day Trade for a Living: A Beginner’s Guide to Trading Tools and Tactics, Money Management, Discipline and Trading Psychology
How to Day Trade: A Detailed Guide to Day Trading Strategies, Risk Management, and Trader Psychology
A Beginner's Guide to Day Trading Online (2nd edition)
Stock Investing for Beginners: Marijuana Stocks
Here are some other good stock market resources. This includes technical analysis and day trading, dividend stock investing, gold and commodities, sector rotation, options trading and microcap trading strategies:
The dividend stock report from dividendstocksonline.com
The dividend stock report from Dividend Stocks Rock
Goldmasterinvesting.com Ocean Of Gold Report for the top 15 gold mining companies
Trader Review
The Trader's Academy Club
The Wealth Builder's Club from beatthemarketanalyzer.com
MyBB: A Forum For Investors and Traders
Spartan Trader Forex Academy Live Daily Trading Room
And try the Z Code System if you're looking for other ways to make money systematically outside of the stock market.
Goldmasterinvesting.com Ocean Of Gold Report for the top 15 gold mining companies
Trader Review
The Trader's Academy Club
The Wealth Builder's Club from beatthemarketanalyzer.com
MyBB: A Forum For Investors and Traders
Spartan Trader Forex Academy Live Daily Trading Room
And try the Z Code System if you're looking for other ways to make money systematically outside of the stock market.
For those who are interested in trading bitcoin and other cryptocurrencies, here are some links to valuable reports and strategies:
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