Description

ELAH Holdings is a bet on the jockey idea. It is incredibly thin, but if you are patient you can build a position. That said I think a deal e.g. catalyst is imminent, and the stock will rip higher when one is announced in the next 3-6 months. Given there is no business to analyze this will be very short, and lay out just the key facts.

Background:ELAH is a post BK reorganization of Real Alloy Holdings. Real was an industrial company that went BK, and 210 Capital stewarded the company through a restructuring process while keeping their substantial NOLs ( close to 1 B) intact. ELAH is like a SPAC but ELAH is much better than a SPAC because.

·      Has substantial NOLs

·      Needs no shareholder vote to consummate a deal (certainty to close)

·      Has a reputable Auditor and could uplist very quickly to a national exchange

·      Doesn’t have perverse sponsor economics like a SPAC

·      Has a well reupdated set of players involved.

·      Has no ticking clock to get a deal done

·      Has a committed credit line from Goldman to get a deal done, and substantial access to equity capital as well. As well as Goldman Asset Mgmt as a large shareholder

The board is made up of folks from Oaktree, Fortress and Goldman Sachs. I am assuming they are seeing attractive deal flow. A few other tidbits that caught our eye…

The key risk is minority shareholders can't downvote a deal. But with the above folks that’s sort of the core of the idea, you trust them to do a good deal. 

On November 17, 2017, the Issuer, Real Alloy Intermediate Holding, LLC (“RAIH”), Real Alloy Holding, Inc. (“Real Alloy”) and certain of Real Alloy’s wholly-owned U.S. subsidiaries (collectively with RAIH and Real Alloy, the “Real Alloy Debtors”) filed voluntary petitions (the “Chapter 11 Proceedings”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). On January 17, 2018, the Bankruptcy Court entered an order approving the Issuer’s entry into a loan agreement and related ancillary documents with each of the GS Purchasers and an affiliate of the 210 Purchaser (the “210 Affiliate DIP Lender”) and pursuant to which such parties agreed to make a debtor-in-possession loan in the aggregate principal amount of $5.5 million to the Issuer on a senior secured superpriority basis (the “DIP Financing”).

Goldman Asset Mgmt group bought 25% of the equity. 210 Capital owns another 25%.

On the Effective Date (as defined below), pursuant to the Plan, the GS Purchasers entered into a Securities Purchase Agreement, by and among 210/RELY Partners, LP (“210 Partners” and, together with the GS Purchasers, the “Purchasers”), the GS Purchasers and the Issuer (the “Securities Purchase Agreement”), pursuant to which the GS Purchasers agreed to purchase 181,036 shares of Common Stock of the Issuer for an aggregate purchase price of $8.75 million (the “GS Purchase Price”), and 210 Partners agreed to purchase 181,037 shares of Common Stock of the Issuer for an aggregate purchase price of $8.75 million.

Goldman has agreed to pay 210 a 20% promote with a 10% compounded hurdle…..

Additionally, pursuant to a Letter Agreement, dated as of May 9, 2018, by and between the GS Purchasers and 210 Capital, LLC (“210 Capital”), an affiliate of 210 Partners, upon certain realization events of Common Stock owned by the GS Purchasers, 210 Capital is entitled to receive up to 20% of any proceeds in excess of the sum of (i) GS Purchase Price plus (ii) a preferred return of 10% of the GS Purchase Price, compounded annually from the Effective Date.

Further Goldman has committed to syndicate a $500m line of credit once a transaction is consummated ( or to support a transaction).

Acquisition Facility Commitment

The Private Credit Group of GSAM, on behalf of one or more of its managed funds or accounts, has committed to provide and/or use its commercially reasonable efforts to arrange a syndicate of financial institutions to provide up to $500 million of senior secured term loans to enable the Issuer to explore an acquisition or other business combination with one or more unidentified businesses after confirmation and the Effective Date of the Plan (the “Acquisition Facility Commitment”), subject to the terms and conditions in the Acquisition Facility Commitment. Pursuant to the Acquisition Facility Commitment, the Issuer agreed not to enter into, or retain any other person or entity to arrange, any equity or debt financing without first offering GSAM the right to provide or arrange any such proposed equity or debt financing. The Acquisition Facility Commitment includes customary representations, warranties and covenants and is subject to customary conditions.

From the last shareholder  letter:

In the third quarter, and currently, our deal pipeline reflects a very diverse opportunity set, including companies in the health care, energy, e-commerce, and building products sectors. While the industry profiles may differ, there is consistency across these opportunities in a number of key factors on which we focus:

•the existing business owners all seek to retain a considerable economic interest in the post-acquisition, combined enterprise

;•the operations generate strong earnings driven by competitive advantages within their markets that are defensible and should provide for continued profitability for many years; and

•Elah’s tax assets and public structure are expected to unlock additional growth and/or strategic potential.

While we are excited by the potential for the deals we are actively working on, each month brings new opportunities and even the re-engagement of prior opportunities we thought had been lost. Our steady deal flow and strong cash balance affords us the ability to be selective as we look to deliver a winning transaction for our shareholders.

From Q2 shareholder Letter:

Although COVID has affected how we network, we have not slowed our efforts to connect with business owners and their advisors to share the many ways a partnership with Elah can maximize their long term value creation and meet their other objectives, while driving a considerable return for our shareholders. In addition to our regular outreach, we are spending more time these days following three “newish” themes:

•the potential for higher corporate, individual, capital gains and estate tax rates;

•the considerable transaction volume with SPACs (Special Purpose Acquisition Companies) as an alternative path to a public listing, which Elah is similarly structured to provide; and

•an expected increase in restructuring situations where Elah can serve as a value maximizing vehicle in support of a “good business, bad balance sheet” transformation

So we think the event path will look like this….

·      Transaction gets done in next 6 months

·      Goldman supports transaction with debt facility and at least 25% of the initial equity

·      Resulting transaction is a high-quality company that is up listed, and doesn’t pay taxes

·      Goldman initiates coverage and does a secondary

·      Stock re-prices rapidly as company becomes known

·      Becomes a platform to do other deals as they have a liquid currency

Lots of unknowns here, which is why the stock is where it is at. Also there is a 5% NOL protection plan which makes ELLH unattractive to larger funds at the moment given the 55 mm market cap. Obviously we can’t take a stab at valuation given the absence of a deal, but we think these guys are astute and will create substantial value when they do pull the trigger which we think will be soon.

Catalyst

- Announcment of a deal