Description

Last Nov 19*, SPLP bid ~$0.70/share for STCN in cash** and SPLP pfd. STCN’s Board has yet to respond, stating in its last 10Q: 

The Company is not obligated to disclose any further developments or updates on the progress of the proposed transaction until either the Company enters into a definitive agreement or the Acquisition Proposal Special Committee determines no such transaction will be approved.

Barring an imminent market fall, which can be hedged, I think SPLP will imminently bid between $2.75 and $5 per STCN share. 

My two reasons are: 

1. SPLP’s $0.70 bid occurred when SPLP’s shares were ~$6

2. The unusually long negotiations (~9 months)

Reason (1): 

SPLP’s opportunity cost is at least buying SPLP common or pfd. 

The $0.70 bid would have required $21 million (for 30 million STCN shares SPLP does not own) that it could have used to buy back more SPLP common (at $6) or pfd. 

By choosing to buy STCN instead, SPLP revealed its belief that the rest of STCN was worth ~20% of SPLP ($21 million/(21.5 million SPLP shares * $6 per SPLP share)). My guess is SPLP was willing to pay up to $1.00 per STCN share (as SPLP raised its initial bid for SCLC 3 times because of opposition from GAMCO, also an STCN owner).

~20% of SPLP today at $33 per SPLP share implies ~$5 per STCN share. 

Reason (2): 

If the bid/ask were too far apart, the Board would have announced no transaction was possible.

Moreover, SPLP striking its two STCN converts at a ~20% premium to the STCN price then (with the more recent $15 million in Feb 2019 striking at $2.37 per STCN share) suggests that SPLP would bid a 20% premium again. In fact, SPLP’s willingness to increase its premium probably increased as SPLP’s price rose. 

As STCN has traded above $2/share, the above suggests that SPLP would have agreed on $2.50/share***, in turn suggesting the Board demanded more than $2.50/share. 

Such demand would be consistent with SPLP being a long term investor (as exemplified by its ownership of STCN and Aerojet Rocketdyne, among others noted on VIC) focused on normalized earnings and that SPLP would not have struck its last convert at $2.37/share if it did not believe that STCN’s long term value handily exceeded $3/share.

*In a 13D: https://www.sec.gov/Archives/edgar/data/914712/000143774920024240/splp20201118_sc13da.htm

**How much cash vs pfd was not specified.

***$2.50 per share is the number cited in awarding equity grants, see note 5 under Equity Grants here: https://www.sec.gov/Archives/edgar/data/914712/000092189517002887/form8k09369019_12182017.htm

Catalyst

imminent SPLP bid