Description

Oyster Acquisition Warrants (OSTRW)

Oyster Acquisition—which sounds like the top-rated activity on Nantucket TripAdvisor—is actually a SPAC sponsored by what is perhaps the most ruthless vulture hedge fund active today. This fund is detested by the nation’s print reporters and makes Elliott Management’s infamous seizure of an Argentine Naval Vessel look like a child’s play. Vanity Fair called them the “Grim reaper of American Newspapers” and the Atlantic said: “They call [them] a vulture hedge fund, and I think that’s honestly a misnomer…a vulture doesn’t hold a wounded animal’s head underwater. This is predatory.”  This apex predator is Alden Global and the warrants for their SPAC are way too cheap.  

You can read some articles here and here for more background, but suffice it to say that Alden is not well liked by the media and apparently does not care. Alden has made a fortune buying newspapers such as The Baltimore Sun, The Denver Post and the Chicago Tribune, cutting costs to the bone and milking them for cash. They are cold, calculating, and ruthless in this pursuit. They are also really good at it. 

Alden Global isn’t just a newspaper investor either: They have done this in many other sectors including real estate, coal, steel, and even pharmacies. They have made investments in emerging market debt and other distressed areas. Alden Global and the predecessor fund, R.D. Smith & Co, have a long track record going back to the 80s of generating significant returns as deep value/distressed investors. Randy Smith is considered by some to be a legend in the distressed investing world. There aren’t many SPAC sponsors with better bona fides to make money in a value driven market. 

Yet, Oyster’s warrants trade as if a liquidation is the overwhelmingly likely outcome of this SPAC and that the chances of a deal that actually makes money is slim to none. I think this is totally upside down. In fact, I think Alden is actually highly likely to find (and close) a deal and there is a good chance that this will be one of the rare SPACs with an actual positive ROI. If I am correct, then the warrants have 10x upside or more. If I am wrong, then they are worth zero. Size accordingly. 

The three main risk factors in pre-deal SPAC warrants are 1) liquidation risk, 2) deal closure risk 3) De-spac price performance. I’ll cover each in turn. 

1) Why I think Alden won’t liquidate:

Alden has until January 22, 2023 to consummate a deal in Oyster Acquisition. As with other SPACs, this can be extended by a vote of shareholders and (usually) adding more cash to the trust. Will Alden find something to buy in time?  Alden/Randy Smith have a long track record of being able to source profitable deals. To me, the question is not whether they can find a deal, but whether they still want to?  We need to understand their incentives and motivation.

To answer this question, let me provide some background on Randy Smith:

• Randy was a partner at Bear Stearns from 1975-1984. While there, he launched Bear’s bankruptcy and distressed debt division. He is generally considered one of the pioneers of vulture investing.
  
  

• In the 1960’s Randy won $20k on a gameshow which he used to start a small trading firm called R.D. Smith & Company. He ran this simultaneously while working at Bear Stearns and then on its own beginning in 1985.

• Notably Marc Lasry got his start working for Randy Smith
  
  

• In 2007, Randy Smith launched Alden Global with Heath Freeman. Alden had peak AUM of $3.5 billion

Randy is notoriously press-shy so we have to rely on a smattering of articles that have leaked out over the years about him to give us a flavor for his investing style and personality. Here are some highlights which should give you a feel for the type of investor he is:

• “By all accounts, bottom fishing in this market came easily to Mr. Smith… One Smith salesman tells his clients that Christmas always came late to the Smith family because Mr. Smith insisted on using all his spare cash to buy stocks and bonds at bargain prices in December when investors traditionally dump holdings for income tax reasons. The strategy made for a nice Christmas for the Smith family -- in the spring.”
  
  

• “Randy is so rich he’s the kind of guy who divests himself every couple of years,” so he doesn’t make the lists of the world’s richest people.”
  
  

• As a child, [Randy Smith’s son] says he once asked his father why he worked: “He said, ‘It’s a game and I love it. It’s competition.’ I said, ‘How do you know who wins?’ He told me it was whoever dies with the most money. I thought to myself, ‘That’s foolish. Why is he working when he could be playing?’“Now here I am today, 41 years old, and I’ll explain it to my girls in the same way. When they ask me why I work, I’ll say, ‘Because it’s a game. And I love it.’
  
  

• “Meanwhile, with few newsroom jobs left to eliminate, Alden continued to find creative ways to cut costs. The paper’s printing was moved to a plant more than 100 miles outside town, Glidden told me, which meant that the news arriving on subscribers’ doorsteps each morning was often more than 24 hours old. The “newsroom” was moved to a single room rented from the local chamber of commerce. Layout design was outsourced to freelancers in the Philippines.”
  
  

• “Given their decades of experience working with bankruptcy and distressed assets, [Randy Smith’s son] says he and his father like to determine a building’s “fire sale” value before deciding to buy. “
  
  

• Alden “is not a newspaper company,” says Ann Marie Lipinski, a former editor in chief of the Chicago Tribune. “It's a hedge that went and bought up some titles that it milks for cash.
  
  

• Alden is “the ultimate cash flow mercenary. They want to find cash flow and bleed it to death.”
  
  

• At Bryan Tower, [Randy Smith’s son] finally found his true calling: commercial real estate. He was given responsibility for Dallas in mid-1999. He wanted to take over the company, but his philosophy about how to run it clashed with his father’s. Smith favored a long-term-ownership approach; his father, being a lifelong trader, wanted to buy, improve, sell. After some debate, the elder Smith gave his son the reins in 2003 and the go-ahead to operate Spire as he saw fit.
  
  

• One standout research report by Smith focused on the LTV Corporation, the diversified aerospace manufacturer and steelmaker, which entered bankruptcy reorganization in 1986. Craig Davies, an analyst who became the firm's research director, wrote the report recommending LTV's senior bonds in May 1988. Although the report badly underestimated how long it would take for the troubled company to emerge from Chapter 11 bankruptcy proceedings, it is "the one you'd use if you were going to teach a class on bankruptcy analysis," said Mr. Stiles of T. Rowe Price. A Smith competitor went so far as to call the 31-page report "the Bible" on the LTV bankruptcy.

If I had to summarize what I’ve been able to ascertain about Randy Smith, here is what I’d say: He is one of the best and most successful distressed investors of all time. He’s a true deep value investor and has stuck to his knitting for more than 40 years. His modus operandi is finding distressed assets, cutting costs to the bone to generate free cash flow and then selling them for (large) profits. His internal scorecard is his net worth and his goal is “die with the most money.” He’s ruthless in his pursuit of profits and there is a large wake of people who’ve been hurt by the things he has done to further that goal. 

Now, as this is the Value Investors Club and is (purportedly) filled with a bunch of value investors, I ask you - does this sound like someone who would incinerate $6 million dollars and potentially give up many, many millions more in carry? You can make your own conclusion, but  I really don’t think so. His long history suggests that he is very capable of finding a deal and all his incentives and what we know about his motivations strongly suggest he will do so before the deadline. 

Randy Smith/Alden has invested nearly $6 million in Oyster ($5 million in warrants and $1 million in loans) and stands to make many millions more when it DeSPACs. Is someone who has a 40-year track record of doing anything legally permissible to make as much money as possible going to just throw up his hands and give up? Of course it is possible and I am not privy to any internal conversations or constraints, but the betting odds seem out of whack here. The warrants are priced as if the overwhelming probability is that Oyster liquidates whereas Randy Smith’s 40 year history suggests just the opposite. 

2) Closing the deal (Funding)? 

I think this is a layup. Alden/Oyster are not reliant on the hot-money PIPE market and can source their own funding. If they announce a deal, I think the closing risk is de-minimis. They are very experienced deal makers and rounding up funding is basically table stakes for them. Here’s why:

First, they have their own big balance sheet. Second, they have two large companies they control (Tribune and MNG) which they can (and have) leveraged for cash to fund other investments. Third, they also have a longstanding relationship with Cerberus which provided funding for Alden’s takeover of Tribune as well as for prior deals going back to at least 2015. 

Finally, and most importantly, Alden has (at least) twice made unsolicited offers to acquire a public company with no financing conditions. These deals are larger than Oyster Holdings so closing the SPAC transaction should not present any problems given their history. Here are some snippet’s from Alden’s press releases:

Tribune:

 “We can fully finance the Transaction with cash on hand at the Alden Purchasers and MNG, as a result of which we will have no financing conditions and will not require third party debt or equity to finance the Transaction.”

Lee Enterprises:

“Accordingly, we propose to purchase Lee for $24.00 per share in cash, representing a substantial premium of approximately 30% to Lee’s closing share price of $18.49 on November 19th, 2021. We have the ability to fully finance this all-cash proposal and the definitive merger agreement will not include a financing condition.” 

3) Will Alden find a good target (ie will the equity price appreciate post DeSPAC)?

I don’t know Randy Smith/Alden’s exact track record, but we have roughly 40 years of anecdotal evidence of them making a lot of money on distressed purchases. I expect whatever deal Oyster announces to be in the same vein. This is not going to be an electric, flying scooter company or anything of the sort. It is going to be something cheap and out of favor. It won’t be sexy, but it also won’t be overpriced. It might even be very cheap. Therefore I think whatever Oyster buys is substantially more likely to at least maintain its $10 floor price than the typical SPAC. Bought well is half sold as they say. This is important because a 5-year warrant for a De-SPAC equity that trades at $10 should be worth $1.50 to $2. This is a possible 10x return from OSTRW’s current price. 

If you need further evidence that Oyster is going to buy something distressed, take a look at the bios of the two non-Alden directors (bolding mine):

Maz Akram is a member of our board of directors. Mr. Akram’s background is in private equity investing, portfolio company management, turnarounds/special situations, financings and mergers and acquisitions. Mr. Akram is an execution specialist with deep experience in structuring and negotiating complex transactions including cross-border transactions. He has extensive experience in sourcing proprietary deal flow in a variety of business sectors including financial institutions, retail, consumer products and manufacturing/industrial sectors. Mr. Akram currently serves on the board of directors of MNG Enterprises, Inc., a company that owns media properties such as The Denver Post, San Jose Mercury News, Orange County Register and the Boston Herald. Currently at Zeus Capital, Mr. Akram focuses on alternative investments, market infrastructure inefficiencies and event-driven opportunities. He leads in sourcing and executing transactions in the United States, Europe, South America and the Middle East. He also plays a vital role in rolling out strategic goals and corporate development initiatives such as forging mission-critical partnerships, and steering entry into new markets. Previously, Mr. Akram worked at Sun Capital Partners, a $13 billion US private equity firm, and in mergers and acquisitions at Peter J. Solomon Company, a boutique New York investment bank. He was also a member of the investment banking division of Salomon Smith Barney. Mr. Akram’s experience also includes projects with several non-for-profit organizations, including affiliates of the International Federation of Red Cross and Red Crescent Societies in developing countries. Mr. Akram received his A.B. degree, cum laude, in Chemistry from Princeton University with a Minor from the Princeton School of Public and International Affairs and his MBA in Finance from The Wharton School of the University of Pennsylvania.

Martin R. Wade, III is a member of our board of directors. Mr. Wade is Partner in Residence with Catalyst Acquisition Group, an investment firm focusing on the acquisition and restructuring of distressed companies in the United States and internationally, since September 2007. Mr. Wade is the Chief Executive Officer of Broadcaster, Inc., a company engaged in the internet service provider and applications businesses, since 2006. In addition to operating roles, Mr. Wade has been a member of eighteen Boards of Directors and served as Chairman of eight and Chief Executive of three. Mr. Wade currently serves on the board of directors of MNG Enterprises, Inc., a company that owns media properties such as The Denver Post, San Jose Mercury News, Orange County Register and the Boston Herald. Mr. Wade began his career in investment banking and mergers & acquisitions in 1975 at Bankers Trust Company. In 1980, Mr Wade joined Lehman Brothers Kuhn Loeb and became Head of Exclusive Sales and Divestitures within the M/A Department. In 1992 Mr. Wade joined Price Waterhouse LLP as National Head of Investment Banking with ten offices in the U.S. In 1997, Mr. Wade joined Salomon Brothers to form a Divestiture Sales Group in the Mergers and Acquisition Department. In his thirty-year investment banking career, Mr Wade initiated and advised on over two hundred transactions. Mr. Wade served as the interim Chief Executive Officer of Payless Shoesource, Inc., from August 2017 to January 2019. Payless Shoesource, Inc. filed for Chapter 11 bankruptcy protection in February 2019. Mr. Wade graduated from West Virginia University in 1971 with a B.S. in Business Administration and was commissioned as a 2nd Lt. in the USAF. In 1975, Mr. Wade was honorably discharged from the USAF holding the rank of Captain. Mr. Wade also received an MBA degree from the University of Wyoming in 1975.

Everything I see is pointing to three things: 1) Alden is very experienced at sourcing deals 2) they have generally made money by buying distressed companies or out of favor securities. And 3) They are allergic to losing money. Therefore, I think Oyster is likely to buy a distressed asset at a cheap price, giving the DeSPAC equity a high likelihood of  at least maintaining its $10 floor and a good probability of appreciation beyond $10 over time. 

Therefore, while binary, I think OSTRW presents a very compelling opportunity. If a deal is announced, I think the warrants double or more. Once the De-SPAC happens, the warrants could trade closer to $2 which is 10x the current price. And then, there is even a chance for further upside. After DeSPAC, the warrants become 5 year options with an $11.50 strike. Considering Alden’s track record and the fact that they are likely to buy something cheap and out of favor, there is a good chance that they generate a significant ROI. If so, the warrants could go substantially in the money over the five year period. 

Catalyst

Deal announcement, De-SPAC