I acquired shares in Input Capital the last few weeks, after reading a post about a potential liquidation and the company subsequently launching a significant tender offer.

Input Capital – Liquidation Finally Makes it Interesting?

When I started acquiring shares I was convinced that the tender offer wouldn’t get filled and that I would therefore be able to tender my shares at the maximum of the range. In case I was wrong, I would have to be more patient and see how the liquidation scenario would play out. The shares trade at a significant discount to book value and the tender offer would amplify this.

The tender offer is priced at $0.60-$0.70. With the current turmoil I am not fully convinced anymore that the tender offer won’t get filled.

The business and the impact of Corona

The Company offers financing solutions to Canola farmers in Canada. The key products are as follows:

• Mortgage streams: a mortgage whereby the farmers can pay interest in Canola
• Capital streams:  provision of upfront capital with the right to buy future Canola production at a discount to expected market prices

Both solutions are exposed to Canola prices. The Company explains that there gross margin remains positive, even if Canola prices would drop to the marginal costs of production of farmers.

I believe the impact of Corona on the business to be limited:

• While lockdowns and travel bans are in place for people, most trade continues
• Canola is primarily used in food products, food demand is not impacted by Corona

I contacted management and they confirmed that there is no impact on the business so far and that they don’t expect a significant impact.

Scenario 1. The tender offer won’t get filled

ROI (at $0.55 acquisition price): 0.70 / 0.55 = > 25% in less than a month.

There are c. 62m shares outstanding (excl. out the money options) of which management owns c. 18m (skin in the game). Management indicated that they will not participate in the offer. So there are c. 44m that might get tendered.

In July the company bought back c. 16m shares in a Dutch tender auction at the maximum of the price range of $82ct per share for a total of c. $13m. Management did not participate in the offer. The offer was not fully subscribed as the company intended to buy back shares for a total amount of $15m. This tells us that July last year, there were no shareholders left who wanted to liquidate their position at a value of $82ct per share.

Under normal circumstances, the likelihood of the current tender offer getting filled in full would be really low. Why would you not particpate at $82ct in July 2019 and do participate at $70ct less than a year later? The business didn’t experience anything really noteworthy in the meantime. Book value per share increased from $1.15 to $1.24.

Scenario 2. The tender offer get’s fully subscribed at the low end of the range

Assuming that management doesn’t particpate you will be pro-rated and get a c. 30% fill in a “worst case” scenario, where all other shareholders tender.

ROI 30% of position (at $0.55 acquisition price): 0.60 / 0.55 = c. 9% in less than a month.

As a result book value per share will increase from $1.24 to $1.40. So you will basically own $1.40 of book value for $0.55.

• Book value mainly consists of monetizable items.
• Based on the fairly recent tender offer of $15m, management (with skin in the game) believes that the fair value is at least significantly above $0.82. Why risking $15m instead of distributing it as a dividend?

Not too bad to own shares in a company likely to get liquidated at such a discount. It might take a couple of years, but you get paid a $0.04 dividend in the meantime and likely also get the option to participate in future tender offers (in case you would like to exit).

Risks

• Management might decide to halt the liquidation and start to invest in new products /  businesses
• Management might decide to cancel the tender offer – although this seems very unlikely based on today’s update: https://ca.finance.yahoo.com/news/input-capital-corp-announces-substantial-233800500.html
• The business is severely impacted by Corona (which I don’t see at the moment)

Links

Daily Canola Prices

Input Capital – Liquidation Finally Makes it Interesting?

https://ca.finance.yahoo.com/news/input-capital-corp-announces-substantial-233800500.html