Towards the end of last year, I was reading my 2 year/$5 magazine subscription to Bloomberg and came across an article on Ryan Morris, a 28 year old activist investor. Featured in the article was a company by the name of InfuSystem Holdings (INFU) and how Ryan Morris came to be chairman.
But InfuSystem has just become a very interesting risk arbitrage special situation.
There are already very detailed articles and notes written by other investors so I won't get into the every detail and valuation because the thesis is simple in my case.
- A presentation on INFU's background and valuation
- A fellow value investor's valuation of $2.50 - $3.50 range
- Value investors club analysis on INFU
- Whopper just wrote about INFU too
Some Needed Background for InfuSystems
To bring you up to speed, I took a position early in the year liking the catalyst of having a hands on activist on board, an activist that kicked the old money-sucking management out of the company with plans to flip the company over and make a quick profit.
Well, InfuSystem was not able to find a buyer so on May 13, Morris delivered a letter to the board requesting access to non-public information so that he could take the company private. Morris could have access to management for detailed information until June 15. Additionally, Morris had to take a leave of absence as chairman.
June 15th passed and there was no news. I took a bet that Morris would come up with an offer so I bought some more. Turned out to be a lucky move because Morris came out with a bid for the company in the range of $1.85 - $2.00. To put this into context, Morris built his takeover position at $2.25 but now wants to buy it out even cheaper. A value investor indeed.
Thankfully, as chairman, Morris brought in good board members who recognize that he is low balling them.
The Special Committee continues to believe that the value of the Company is above your proposed offer range of $1.85 to $2.00 per share. However we are prepared to agree to a reasonable period of exclusivity for due diligence and dialogue to better understand and address your concerns regarding future risks and to help you to potentially increase the value of your proposal.
What I am confident about is that Morris does want to take the company private and knows that it is worth much more than his upper range bid of $2. Heck, he even bought his own shares for $2.25.
But let's just stick with his proposed bid for now. This is what the opportunity looks like.
INFU Outcome of Percentage Returns
The board has already rejected the $2.00 bid so the probability of the initial bid happening is now zero. That means the minimum return is going to be greater than 15% from the last price of $1.70.
Although the stock price could fall back down to $1.50, that is unlikely since the value of InfuSystem has been established to be higher than $1.50 with the offer and the rejection.
That really leaves the realistic buyout range to fall between $2.25 and $2.75. It's on the low side of the stock valuation. If it was a competitor buying out Infusystem, the premium would be much higher as it would hold more value.
But since Morris wants to take the company private to improve inefficiencies, the premium is less.
It's also strange to see the stock price hanging out at $1.70 when the minimum bid is $1.85. The market is hesitant in digesting the buyout offer or it's being inefficient with micro caps again. I took it as the latter and took my third opportunity to add more. I now have a full 10% position in InfuSystem.
In this market, a special situation with good downside protection and a strong upside is rare indeed - something that has sorely been lacking in my portfolio and which I am happy to take a chance on.
Disclosure: Long INFU