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Posts Tagged ‘Activist investment’

Guest post update 2: Farukh Farooqi, Marquis Research on Silicon Storage Technology Inc (NASDAQ:SSTI)

Posted in Activist Investors, Silicon Storage Technology Inc (NASDAQ:SSTI), Stocks, tagged , on February 24, 2010| Leave a Comment »

Farukh Farooqi, a long-time supporter of Greenbackd and the founder of Marquis Research, a special situations research and advisory firm (for more on Farukh and his methodology see The Deal in the article “Scavenger Hunter”) provided a guest post on Silicon Storage Technology, Inc (NASDAQ:SSTI) a few weeks back (see the post archive here). At the time of the post, SSTI was trading around $2.70. The stock is up 15.6% to close yesterday at $3.12.

SSTI has announced an amended merger, increasing the bid to $3.00 per share in cash. Here’s the announcement:

Silicon Storage Technology Announces Amended Merger Agreement with Microchip

SST Shareholders to Receive $3.00 Per Share in Cash

SUNNYVALE, Calif., Feb. 23 /PRNewswire-FirstCall/ — SST (Silicon Storage Technology, Inc.) (Nasdaq: SSTI), a leading memory and non-memory products provider for high-volume applications in the digital consumer, networking, wireless communications and Internet computing markets, today announced that it has entered into an amendment to its previously announced merger agreement with Microchip Technology Incorporated (Nasdaq: MCHP) (“Microchip”), a leading provider of microcontroller and analog semiconductors. Pursuant to the amendment, the purchase price for each share of SST common stock has been increased from $2.85 to $3.00 per share in cash. The amended termination fee payable in the circumstances and manner set forth in the merger agreement remains at 3.5% of the total equity consideration.

The amended agreement has been unanimously approved by SST’s Board of Directors acting upon the unanimous recommendation of its independent Strategic Committee. Microchip proposed the revised terms in response to a proposal received by the Strategic Committee from a private equity firm.

As previously announced, the Microchip transaction, which is expected to close in the second calendar quarter of 2010, is conditioned on approval of a majority of the outstanding shares of SST common stock as well as customary closing conditions. The transaction, which will be funded with cash on hand, is not subject to financing.

Houlihan Lokey is serving as the exclusive financial advisor to the Strategic Committee of the SST Board of Directors in connection with the transaction.

Shearman & Sterling LLP is serving as legal advisor to the Strategic Committee of the SST Board of Directors in connection with the transaction.

Cooley Godward Kronish LLP is serving as legal advisor to SST in connection with the transaction.

Wilson Sonsini Goodrich & Rosati, PC is serving as legal advisor to Microchip in connection with the transaction.

Says Farukh:

Subsequent to the MCHP $3/sh cash bid, Cerberus and SST Full Value Committee (actvist group) came up with a competing bid.

This competing bid is very interesting. It offers shareholders to either (1) take $3.00 per share in cash or (2) $2.62 in cash (via a special dividend) and an equity stub, thus giving shareholders the ability to participate in future upside.

I am in the process of valuing the stub but just wanted to make you aware of the development.

This is getting really interesting in that we now have two competing bids and it remains to be seen how, if at all, MCHP counters.

[Full Disclosure: I do not hold SSTI. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Benihana Inc. (NASDAQ:BNHN and BNHNA) Schedule 13D

Posted in About, Activist Investors, Stocks, tagged , on February 22, 2010| Leave a Comment »

As I indicated in the first post back for 2010, I’m going to publish some of the more interesting 13D letters filed with the SEC. These are not situations for which I have considered the underlying value proposition, just interesting situations from the perspective of the activist campaign or the Schedule 13D.

Benihana Inc. (NASDAQ:BNHN and BNHNA), the operator of the Behihana teppanyaki restaurants, is the subject of a campaign by founder Rocky Aoki’s widow and eldest children (who control around 32% of the common stock via a trust called “Benihana of Tokyo”) to thwart a proposal by Benihana Inc. to increase the number of its shares of Class A common stock, which would significantly dilute existing shareholders. The campaign seems to have found some support among other large shareholders, notably Blackwell LLC and Coliseum Capital Management LLC, who filed a joint 13D on Wednesday last week. Here is the text of the letter attached to the 13D filed by Blackwell and Coliseum Capital Management:

February 17, 2010

Richard C. Stockinger, Chief Executive Officer & Director
Benihana Inc.
8685 Northwest 53rd Terrace
Miami, Florida 33166

Re: Benihana Inc. – February 22, 2010 Special Meeting of Stockholders

Dear Mr. Stockinger:

On behalf of Coliseum Capital Management, LLC (“Coliseum”), the holder of 9.9% of the Class A Common Stock of Benihana Inc. (the “Company”), I am writing to express concern over the proposed Agreement and Plan of Merger (the “Proposal”) by and between the Company and its wholly-owned subsidiary BHI Mergersub, Inc.

This Proposal (scheduled for shareholder vote on February 22nd) would give the Company the ability to issue 12,500,000 millions shares of Class A Common Stock under their Form S-3 covering the sale of up to $30,000,000 of securities.  Compounded by the anti-dilution provisions contained in the Company’s Convertible Preferred Stock, an equity issuance of this magnitude would be significantly dilutive to existing shareholders.

Thus far, the Company has not provided compelling rationale to affect such a potentially dilutive fundraising; as a result, Coliseum is not supporting the Proposal.

Specific concerns are outlined below:

1. The Company has not provided compelling rationale to affect a potentially dilutive fundraising.

The Company appears to be generating positive cash flow with which to invest in the business and/or amortize debt. Conservatively, the Company appears to produce $25-$35 million of run-rate EBITDA, require approximately $9 million in maintenance capital expenditures and have $4-$8 million of taxes, interest and preferred dividends in total, leaving $12-$18 million of positive free cash flow annually with which to further invest in the business and/or amortize debt.

It would appear that there is sufficient liquidity with which to run the business. The Company disclosed availability of over $11 million for borrowing under the terms of the Wachovia line of credit (“LOC”), as of October 11, 2009. The Company’s positive free cash flow should more than offset the $8 million of scheduled reduction in Availability under the LOC before its March 2011 maturity.

The Company does not appear to be over-levered. In the most recent 10-Q, the Company justified the now-proposed action to authorize the issuance of additional equity by highlighting concerns regarding the March 2011 maturity of the LOC. Before taking into account the positive free cash flow generated between October 2009 and March 2011, the Company is levered through its LOC at less than 1.5x its run-rate EBITDA. In our experience, similar restaurant companies are able to access senior debt in this environment at 1.5x (or more).

2. In combination with the anti-dilution provisions contained in the Convertible Preferred Stock (the “BFC Preferred”), an equity issuance at current levels would be significantly dilutive to existing shareholders (even if completed through a Rights Offering).

Depending upon the issue price of new equity, the BFC Preferred could see a reduction to its conversion price of 15%-25%, and thereby gain an additional 300,000-500,000 shares upon conversion.

3. The process through which the company is evaluating alternatives has been opaque.

We find it troubling that the Company has been unwilling to provide further details relating to Proposal, including rationale, alternatives, process and implications.

4. To date, management has been unwilling to engage in a discussion relating to key questions (below) that any shareholder should have answered before voting in favor of the proposed merger and subsequent fundraising.

What are the Company’s long term plans for each of the concepts?

What assumptions would be reasonable to make over the next several years regarding key revenue and cost drivers, investments in overhead, working capital and capital expenditures, and other sources/uses of cash from operations?

What is the framework for a potential recapitalization?

– What is the rationale for a $30 million capital raise?

– Why raise capital through an equity offering versus other sources?

– What process has been followed (i.e. advisors engaged, alternatives considered, investors/lenders approached)?

– Why change the approach from an amendment of the certificate of incorporation to the current merger proposal?

– What is BFC’s potential role?

– How is the Board dealing with potential conflicts of interest?

It may well be that the Company should undertake a recapitalization, including the issuance of new equity. However, having not been provided information with which to assess the rationale and evaluate the alternatives, Coliseum is not supporting the Proposal.

We look forward to our further discussions.

Very truly yours,
Coliseum Capital Management, LLC
By: Name: Adam L. Gray
Title: Managing Director
BNHN management responded swiftly to the 13D, releasing the following statement on Thursday:

Benihana Inc. Responds to Public Statements of Certain Shareholders Concerning Forthcoming Special Meeting of Shareholders

MIAMI, FLORIDA, February 18, 2010 — Benihana Inc. (NASDAQ: BNHNA; BNHN), operator of the nation’s largest chain of Japanese theme and sushi restaurants, today responded to public statements made by certain shareholders concerning the forthcoming special meeting of shareholders to consider and act upon a proposed merger (the “Merger”) the sole purpose of which is to increase the authorized number of shares of the Company’s Class A Common Stock by 12,500,000.

Richard C. Stockinger, President and Chief Executive Officer, said, “The increase in the authorized shares was one step in a series of actions being taken to ensure that the Company had the flexibility and capability to take advantage of opportunities and or to respond to rapidly changing economic conditions and credit markets. Although the Company’s sales and earnings have been softer than management would have hoped over the past year, we are confident that our recently implemented Renewal Program will help to mitigate or reverse these trends. Still, we remain vulnerable to fluctuations in the larger economy and other risks.”

As previously announced, one result of last year’s sales was the Company’s failure to meet required ratios under its credit agreement with Wachovia Bank, N.A. as at the end of the second quarter of the current fiscal year. That in turn led to amendments to the credit line which will materially reduce the funds available to the Company — what began as a maximum availability of $60 million has been reduced to $40.5 million, will be further reduced to $37.5 million effective July 18, 2010, and further reduced to $32.5 million effective January 2, 2011, with the outstanding balance under the line becoming due and payable in full on March 15, 2011. In addition, the Company expects the judge hearing the Company’s long running litigation with the former minority owners of the Company’s Haru segment to issue a decision in the case shortly which will require the Company to make a payment of at least $3.7 million (the amount offered by the Company) and as much as $10 million (the amount sought by the former minority owners). And while the Company has substantially reduced its capital expenditures allocated to new projects, it continues to have significant capital requirements to maintain its extensive property and equipment and to execute upon its renewal plan.

In the face of these developments, the Board does not believe it would be prudent to do nothing and accordingly has taken a series of steps (all of which have been previously publicly announced) to ensure that the Company is in the strongest possible position to meet any unanticipated challenges it may face.

The Company has detailed in its periodic filings the broad range of operational changes that have been and continue to be made to improve efficiency and increase sales. At the same time, and in support of these operational changes, the Company has taken a series of steps in support of the Company’s financial condition. These included forming a special committee of independent directors (which has retained its own investment bankers and attorneys) to undertake an analysis of the Company’s capital requirements and to evaluate the various alternatives (in the form of both debt and equity) for meeting those requirements. That analysis is ongoing. The Committee has made no recommendation, and the Board has made no decision with respect to the Company’s future capital needs or the best manner of satisfying them. The Company also filed a “generic” registration covering a broad range of alternative financing options (again, both debt and equity) so that, if it determined to do so, it would be in a position to quickly effect a capital raise, and it moved to increase the authorized number of shares of Class A Common Stock for the same reason.

The Board is very much aware of concerns with respect to potential dilution raised by various shareholders and those concerns will certainly be seriously considered in the decision making process. But the Board believes it would be foolhardy not to take the actions it has taken which are designed to give management flexibility in responding to changing circumstances, continue to execute against its renewal plan and have the ability to take advantage of selective growth opportunities as they arise. For these reasons, the Board continues to unanimously urge all shareholders to vote in favor of the proposed Merger.

As to the reasons for the proposed merger (as opposed to a simple amendment to the Certificate of Incorporation): Section 242(b) of the Delaware General Corporation law provides that a class vote is ordinarily required to approve an increase in the authorized number of shares of that class. This would mean that an increase in the Class A stock would require a vote of the holders of Class A stock and an increase in Common stock would require a vote of the holders of Common stock. Delaware law permits a company to “opt out” of this class vote requirement by so providing in its Certificate of Incorporation, and the Company has done just that. Thus, to approve an amendment to increase either the authorized Class A or the authorized Common stock, the Company’s Certificate of Incorporation requires the affirmative vote of a majority of the votes cast by all of the holders of the Company’s common equity. The Certificate of Incorporation was adopted at a time when no other voting securities of the Company were outstanding, and although the Series B Preferred Stock generally votes on an as if converted basis together with the Common Stock, the Certificate of Incorporation does not expressly deal with the voting rights of the Series B Preferred Stock in the context of the “opt out” provision relating to amendments to increase authorized stock. Accordingly, and because the Board believed this was an issue as to which the holders of the Series B Preferred Stock had an interest and as to which they should be entitled to vote, it unanimously elected to proceed under the merger provisions of the Delaware statute rather than the amendment provisions in order to avoid any possible ambiguity.

[Full Disclosure:  No holding. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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List of activist investments for December

Posted in About, Activist Investors, Stocks, tagged on February 3, 2010| 2 Comments »

The Official Activist Investing Blog has published its list of activist investments for December:

Ticker Company Investor
ALCO Alico Inc. Atlantic Blue Group
ALOG Analogic Corporation Ramius Capital
ALOY Alloy Inc. SRB Management
BASI Bioanalytical Systems Inc Peter Kissinger
CNBC Center Bancorp Lawrence Seidman
COBR Cobra Electronics Corp Timothy Stabosz
CTO Consolidated Tomoka Land Co Wintergreen Advisers
DGTC.OB Del Global Technologies Steel Partners
DHT DHT Maritime Inc MMI Investments
DPTR Delta Petroleum Corp. Tracinda Corp
DVD Dover Motorsports inc Marathon Capital
ENZN Enzon Pharmaceuticals inc. DellaCamera Capital Management
EVOL Evolving Systems Inc. Karen Singer
EZEN.OB Ezenia! Inc North & Webster
EZEN.OB Ezenia! Inc Hummingbird Management
FACT Facet Biotech Corp Biotechnology Value Fund
FACT Facet Biotech Corp Baupost Group
FFHS First Franklin Corp Lenox Wealth Management
FGF SunAmerica Focused Alpha Growth Inc Bulldog Investors
FGI SunAmerica Focused Alpha Large-Cap Fund, Inc. Bulldog Investors
FMMH.OB Fremont Michigan InsuraCorp Steak & Shake
GSIGQ.PK GSI Group Stephen Bershad
GSIGQ.PK GSI Group JEC II Associates
GST Gastar Exploration Ltd Palo Alto Investors
HBRF.OB Highbury Financial Inc. Peerless Systems Corp
HFFC HF Financial Corp Financial Edge Fund
IMMR Immersion Corp Ramius Capital
JTX Jackson Hewitt Tax Service JTH Tax Inc.
KYN Kayne Anderson MLP Investment Co Karpus Management
LM Legg Mason Inc. Trian Fund
MZF MBIA Capital Claymore Man Dur Inv Grd Muni Western Investment
OSTE Osteotech Inc. Heartland Advisors
PMO The Putnam Funds Karpus Management
PTEC Phoenix Technologies Ltd Ramius Capital
RIC Richmont Mines Gregory Chamandy
RRGB Red Robin Gourmet Burgers Clinton Group
RRGB Red Robin Gourmet Burgers Spotlight Advisors
SLTC Selectica Inc Lloyd Miller
SMTS Somanetics Corp Discovery Capital
SSE Southern Connecticut Bancorp Inc Lawrence Seidman
TFC Taiwan Greater China Fund City of London Investment Group
TRA Terra Industries Inc CF Industries Holdings
TTWO Take-Two Interactive Software Carl Icahn
TUNE Microtune Inc Ramius Capital
UAHC United American Healthcare Corp Lloyd Miller
UAHC United American Healthcare Corp John Fife
USAT USA Technologies Brad Tirpak; Craig Thomas
UTSI UTStarcom Inc Shah Capital Management
VRX Valeant Pharmaceuticals Value Act Capital
WXCO WHX Corp Steel Partners
YORW York Water Co GAMCO

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ASPN announces distribution of cash proceeds from Venoco sale

Posted in Activist Investors, Aspen Exploration Corporation (OTC:ASPN), Greenbackd Portfolio, Liquidation Value, Stocks, Tymothi O. Tombar, tagged , , , on November 5, 2009| 15 Comments »

Aspen Exploration Corporation (OTC:ASPN) has announced that it will pay a cash dividend of $0.73 per share to stockholders of record on November 16, 2009 from the proceeds of the sale of its California oil and gas assets to Venoco, Inc. $0.73 per share represents $5.3M, which is just over the mid-point of the $5.0M to $5.5M range estimated by the company.

We’ve been following ASPN (see our ASPN post archive) because it’s trading at a discount to its $1.17 per share liquidation value and there are several potential catalysts in the stock, including a 13D filing from Tymothi O. Tombar, a plan to distribute substantially all of the net, after-tax proceeds from the completion of the Venoco sale to its stockholders ($5.3M), and the possibility that the company will dissolve. The stock is down 0.2% since we initiated the position to close yesterday at $0.983. This values the remaining stub of ASPN at $0.253 ($0.983 less $0.73) against a liquidating value I estimate at $0.44 ($1.17 less $0.73). I still think there’s obvious value here, and there might be another interesting play in the stub after the dividend. This is worth watching. It’s should also be noted, as reader bellamyj has pointed out, that, regardless of outcome of the upcoming shareholder vote, ASPN may not liquidate. This is not necessarily a bad thing if the controlling shareholder plans on monetizing the shell and its remaining cash. He owns 20% of the stock, so he’s got some incentive to do so, and he’s paying out a big cash dividend, which is a shareholder-friendly act. That said, it’s not clear whether that dividend was as a result of Timothy O. Tombar’s agitation or a spontaneous effort on behalf of the board. I’ve been wrong about managers before, but hope springs eternal.

Here’s the 8K filing:

On November 2, 2009 Aspen Exploration Corporation (“Aspen”) declared a cash dividend of $0.73 per share. The dividend will be paid to stockholders of record on November 16, 2009, with the dividend being paid on or about December 2, 2009. A copy of the news release describing the dividend is attached hereto as Exhibit 99.1. The distribution follows the final settlement of the sale of Aspen’s California oil and gas assets to Venoco, Inc., at which the parties made a number of immaterial adjustments to the purchase price paid at the June 30, 2009 closing, and made certain other payments that were not determined until after the closing. At the final settlement date Aspen received a net payment from Venoco, but was required to make various payments to third parties which ultimately resulted in a cash outflow from Aspen in an amount not considered to be material.

Aspen expects that after the payment of the dividend, and its anticipated operations through the end of the current calendar year, on December 31, 2009 it will have more than $3 million of working capital remaining. Aspen currently intends to utilize its remaining funds to maintain its corporate status as a reporting issuer under the Securities Exchange Act of 1934 and to explore other business opportunities. Pending developments with respect to any business opportunities Aspen identifies, Aspen may later reevaluate its status and plans and consider alternatives to wind up its affairs. Aspen’s projections and future plans described in this report are “forward-looking statements” (as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended) which are dependent upon a number of factors. There can be no assurance that Aspen’s projections will prove to be accurate or that Aspen will be able to successfully execute or implement its operations as described herein.

Hat tip Joe G.

[Full Disclosure:  I do not have a holding in ASPN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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VXGN Q3 10Q out; Greenbackd exits, dammit

Posted in Activist Investors, Stocks, VaxGen Inc (OTC:VXGN), tagged , , on November 4, 2009| 9 Comments »

VaxGen Inc (OTC:VXGN) is all over. The latest 10Q has come out and, while not much has changed, it’s irrelevant in light of the pending deal with OXGN. The liquidation value remains around $23.6M or $0.71 per share. Whether that deal is consummated or not, VXGN shareholders will be worse off. The stock price is in no man’s land at the moment. It’s not cheap enough to buy more, and it’s still trading at a big discount to liquidation value. In this instance, it’s probably justified given the malice the board seems to have towards its shareholders. I’m closing Greenbackd’s position out at yesterday’s closing price of $0.53. Greenbackd is up 12.5% on VXGN on an absolute basis, which is off 13.0% relative to the S&P500. It’s a shame because I had plenty of chances to read the writing on the wall and get out at a decent profit. I didn’t, so more fool me. I hung around for too long, hoping that something would happen. Nothing did. The end.

Post mortem

We started following VXGN (see the VXGN post archive here) because it was trading at a substantial discount to its net cash position, had ended its cash-burning product development activities and was “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” VXGN had other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. I initially estimated the liquidation value to be around $0.84 per share, although that reduced over the holding period to yesterdays $0.71 per share. The authors of a letter sent to the board on July 14 of this year adjudged VXGN’s liquidation value to be significantly higher at $2.12 per share:

Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.

On the catalyst front, management had said that, if the company was unable to identify and complete an alternate strategic transaction, it proposed to liquidate. One concern of mine was the lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, at which point the path for VXGN to liquidate appeared to clear. Unfortunately the board dragged its feet on the liquidation, which, given their relatively high compensation and almost non-existent shareholding, was not difficult to understand.

This state of affairs drew two competing alternate proxy slates seeking nomination to the board of VXGN, Value Investors for Change and the VaxGen Full Value Committee. Value Investors for Change, led by Spencer Capital, filed preliminary proxy documents in August to remove the board. In the proxy documents, Value Investors for Change called out VXGN’s board on its “track record of failure and exorbitant cash compensation”:

VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.

The VaxGen Full Value Committee, comprising BA Value Investors’ Steven N. Bronson and ROI Capital Management’s Mark T. Boyer and Mitchell J. Soboleski, intended to replace the current board with directors who would focus on the following objectives:

1. Returning capital to [VXGN]’s shareholders, including an immediate distribution of $10,000,000 in cash;

2. Terminating [VXGN]’s lease with its landlord, Oyster Point Tech Center, LLC, and settling with the landlord the obligations of [VXGN] on the remaining lease payments;

3. Exploring ways to monetize [VXGN] as a “public shell,” including the utilization of [VXGN]’s Substantial Net Operating Losses; and

4. Protecting for the benefit of shareholders royalty payments receivable from the sale of [VXGN]’s intellectual property.

BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”

For a while it looked like a decent outcome was possible, but then VXGN threw a spanner in the works, striking an appalling deal with OXGN at a discount to VXGN’s $0.70 close the prior day. It is also priced at a discount to VXGN’s net cash and liquidation values, and payment is to be made in the watered scrip of OXGN, a speculative biotech play (see our more detailed take on the terms of the VXGN / OXGN deal). BA Value Investors and VaxGen Full Value Committee exited the stock shortly thereafter. Value Investors for Change has also been conspicuously silent, so I think we can assume they’ve thrown in the towel.

Disgruntled shareholders have now initiated several class actions against the board of VXGN over possible breaches of fiduciary duty in the sale to OXGN. The board certainly deserved the suit, but a successful outcome in any litigation will be a Pyrrhic victory for participating VXGN shareholders. As I understand it, VXGN’s board is indemnified out of VXGN’s assets and so as any damages award will return to VXGN plaintiffs VXGN’s assets less legal fees and the break fee.

It’s also possible that the merger will not survive the shareholder vote. As reader bellamyj noted, in November 2007 VXGN announced another disastrous merger with Raven Biotechnologies. Over the next few days VXGN stock fell almost 50% and the merger was terminated the day before the special meeting, apparently due to shareholder opposition. Perhaps that will happen again. If it does, OXGN will still tear out ~$2.5M from VXGN, but it may be a better outcome than the deal on the table. If that happens, we’ll revisit VXGN, but for now, we’re going to say, “Good riddance.” VXGN directors, hang your heads in shame.

Hat tip garp.

[Full Disclosure:  We don’t have a holding in VXGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Tom “Net Quick” Evans

Posted in About, Activist Investors, Greenbackd, Liquidation Value, Stocks, tagged , , on October 29, 2009| 4 Comments »

Following my Simoleon Sense interview with Miguel Barbosa, I’ve had a few requests for a post on Tom Evans. Here it is, hacked together like Frankenstein’s monster from all the public information I could track down:

Thomas Mellon Evans was a one of the first modern corporate raiders, taking Graham’s net current asset analysis and using it to wreak havoc on the gray flannel suits of the 40s and 50s. He’s not particularly well-known today, but he waged numerous takeover battles using tactics that are forerunners of those employed by many of the takeover artists of the 1980s and the activists of the 1990s and 2000s. Proxy battles? Check. Greenmail? Check. Liquidations? Check.

Born September 8, 1920 in Pittsburgh, and orphaned at the age of 11, Evans grew up poor. Despite his famous middle name (his grandmother’s first cousin was Andrew Mellon), he began his financial career at the bottom. After graduating from Yale University in 1931 in the teeth of the Great Depression, he landed a $100-a-month clerk’s job at Gulf Oil.

While his friends headed out in the evening, Evans would stay home reading balance sheets and looking for promising companies: those he could he could buy for less than the assets were worth in liquidation. Evans found such companies by calculating their “net quick assets,” the long forgotten name for “net current assets.” His friends teased him about his obsession and gave him a nickname: “Net Quick” Evans. From the 1944 Time Magazine article, Young Tom Evans:

With only some fatherly advice from Gulf’s Board Chairman, W. L. Mellon, Tom Evans made his way alone. For six years he saved money, like an Alger hero; and played the stockmarket, unlike an Alger hero. Thus he collected $10,000. He wanted to find and buy a family-owned business that had gone to pot. In the down-at-the-heels H. K. Porter Co., in Pittsburgh’s slummy Lawrenceville section, he found it. Once a No. 1 builder of industrial locomotives, Porter Co. was down to 40 workers.

Tom Evans bought up Porter bonds at 10 to 15 cents on the dollar, reorganized the company under 77B, and became president at 28.

From then on, Evan was the chief terror of the sleepy boardrooms of the era, much like Icahn would be 30 years later. As a connoisseur of deep value on the balance sheet, one has to admire his methods (From the New York Times obituary, Thomas Evans, 86, a Takeover Expert, Dies):

‘He was never really an operator; he was a financial guy — a balance sheet buyer,” one of his sons, Robert Sheldon Evans, told Forbes magazine in 1995. ”He would buy something for less than book value and figure the worst that could happen was he would liquidate it and come out O.K. What he didn’t want to do was lose money on the deal. If he knew his downside was covered, then he figured the upside would probably take care of itself.

”It was a very shrewd policy in the 50’s and 60’s, when there were highly inefficient markets: buying undervalued assets, running them for cash and selling off pieces. The 80’s leveraged buyout guys were just taking a lot of his deals to their logical extension.”

The book The White Sharks of Wall Street: Thomas Mellon Evans and the Original Corporate Raiders by Diana B. Henriques is an excellent biography on Evans. More than that, it describes many of the battles for corporate control in the 40s, 50s and 60s. In contradistinction to the takeover battles of the 80s, the dogfights in the 40s, 50s, and 60s were largely proxy fights, and in as much, should be familiar to today’s “activist investors.” James B. Stewart’s Let’s make a deal, his review of Henriques’ book, does it justice:

There are surely few phenomena more remarkable in American business than the periodic ability of cash-poor but swashbuckling newcomers, using little or none of their own money, to seize control of some of the country’s most valuable corporations. In its most recent, frenzied incarnation, dot-com entrepreneurs have exchanged stock in companies with few tangible assets and even fewer profits for control of established, profitable companies. Fifteen years ago, the currency was junk bonds rather than inflated stock. And before that, it was bank loans using a target’s assets as collateral.

Wall Street greets each wave of takeovers as the dawning of a new era. But the proposition that nothing has fundamentally changed is convincingly set forth in ”The White Sharks of Wall Street,” an engaging and thorough history of early corporate takeovers by Diana B. Henriques, a financial reporter for The New York Times. Her central character is Thomas Mellon Evans, who surfaces in what seems like nearly every trendsetting corporate battle from 1945 until his retirement in 1984, and whose tactics remain essential to practitioners of corporate warfare. Junk bonds? Greenmail? Scorched earth? Evans had been there long before investment bankers coined a catchy vocabulary to describe the maneuvers of people like T. Boone Pickens, Carl Icahn and Saul Steinberg.

Though Evans seems to have escaped the widespread public resentment and envy the others generated, and Henriques’s portrait is carefully nonjudgmental, it is difficult for a reader to work up much sympathy for him. He was ruthless, bad-tempered, usually indifferent to workers and communities. He repeatedly displayed what appears to be a criminal disregard for the antitrust laws (though he was never prosecuted). He divorced two wives (the second later committed suicide), and both times a replacement was conspicuously at hand long before any legal proceedings had begun. He betrayed two of his own sons in his quest for corporate dominance and wealth.

…

Yet as a deal maker Evans displayed a natural audacity and genius. In 1935, 24 years old and lacking any money to speak of, he decided he wanted to gain control of Pittsburgh’s struggling H. K. Porter Company, a manufacturer of steam locomotives. Inspired by a Fortune magazine account of Floyd Odlum, who became rich by using borrowed securities as collateral for loans to buy undervalued stock, Evans borrowed shares from a Mellon mentor, took out a loan and invested in Gulf Oil stock, then a Mellon enterprise. When Gulf’s stock rose handsomely as the nation emerged from the Depression, Evans used his profits to buy Porter bonds, then selling for a small fraction of their face value. When Porter finally had to declare bankruptcy and was reorganized, Evans, as the largest creditor, traded his bonds for equity and became the largest shareholder. Porter, essentially acquired for junk bonds, would be Evans’s vehicle for most of his life.

I highly recommend The White Sharks of Wall Street: Thomas Mellon Evans and the Original Corporate Raiders by Diana B. Henriques for fans of deep value and activist investment.

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A way a lone a last a loved a long the riverrun

Posted in About, Activist Investors, Greenbackd, Liquidation Value, Stocks, tagged , , on October 28, 2009| 6 Comments »

We’ve just completed an interview with Miguel Barbosa of the wonderful Simoleon Sense. Go there now, and get trapped in an endless loop as you are recirculated back here and so on.

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VXGN board sued by shareholders over OXGN deal

Posted in Activist Investors, Net Cash Stocks, Net Net Stocks, Stocks, VaxGen Inc (OTC:VXGN), tagged , , , on October 22, 2009| 24 Comments »

Disgruntled VaxGen Inc (OTC:VXGN) shareholders have initiated a class action against the board of VXGN over possible breaches of fiduciary duty in the sale to OXGN. The board certainly deserves the suit because of the appalling deal struck with OXGN. Priced at a discount to VXGN’s net cash and liquidation values, and payment in the watered scrip of a speculative biotech play, it’s a real dud for VXGN shareholders (see our more detailed take on the terms of the VXGN / OXGN deal). A successful outcome in any litigation may be a Pyrrhic victory for participating VXGN shareholders. As we understand it, VXGN’s board is indemnified out of VXGN’s assets and so as any damages award will return to VXGN plaintiffs VXGN’s assets less legal fees and the break fee. Perhaps someone more knowledgable can illuminate the situation for us in the comments. It’s also possible that the merger will not survive the shareholder vote. As reader bellamyj notes, in November 2007 VXGN announced another disastrous merger with Raven Biotechnologies. Over the next few days VXGN stock fell almost 50% and the merger was terminated the day before the special meeting, apparently due to shareholder opposition. Perhaps that will happen again. If it does, OXGN will still tear out ~$2.5M from VXGN, but it may be a better outcome than the deal on the table.

About our VXGN position

We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.

There are two competing alternate proxy slates seeking nomination to the board of VXGN, Value Investors for Change and the VaxGen Full Value Committee. Value Investors for Change, led by Spencer Capital, filed preliminary proxy documents in August to remove the board. In the proxy documents, Value Investors for Change call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:

VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.

The VaxGen Full Value Committee comprising BA Value Investors’ Steven N. Bronson and ROI Capital Management’s Mark T. Boyer and Mitchell J. Soboleski, intends to replace the current board with directors who will focus on the following objectives:

1. Returning capital to [VXGN]’s shareholders, including an immediate distribution of $10,000,000 in cash;

2. Terminating [VXGN]’s lease with its landlord, Oyster Point Tech Center, LLC, and settling with the landlord the obligations of [VXGN] on the remaining lease payments;

3. Exploring ways to monetize [VXGN] as a “public shell,” including the utilization of [VXGN]’s Substantial Net Operating Losses; and

4. Protecting for the benefit of shareholders royalty payments receivable from the sale of [VXGN]’s intellectual property.

BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”

VXGN is up 25.0% since we initiated the position. At its $0.60 close yesterday, it has a market capitalization of $22.5M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. The authors of a letter sent to the board on July 14 of this year adjudge VXGN’s liquidation value to be significantly higher at $2.12 per share:

Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.

Here’s the press release announcing the litigation:

Levi & Korsinsky, LLP Investigates Possible Breach of Fiduciary Duty by the Board of VaxGen, Inc. – VXGN.OB

Levi & Korsinsky is investigating the Board of Directors of VaxGen, Inc. (“VaxGen” or the “Company”) (OTC BB: VXGN) for possible breaches of fiduciary duty and other violations of state law in connection with their attempt to sell the Company to Oxigene Inc. (“Oxigene”) (NasdaqGM: OXGN). Under the terms of the transaction, VaxGen shareholders will receive 0.4719 Oxigene shares for every VaxGen share they own which, based on the $1.42 per share closing price of Oxigene stock on October 14, 2009, the day prior to the announcement, is valued at approximately $0.67. In addition, Oxigene is to place approximately 8.5 million common shares in escrow to be released to VaxGen shareholders contingent upon the occurrence of certain events over the two-year period following the closing.

The investigation concerns whether the VaxGen Board of Directors breached their fiduciary duties to VaxGen shareholders given that (i) the Company has approximately $1.07 per share in cash with no debt; (ii) the Company has a book value of approximately $0.99 a share; (iii) at least one analyst has set a $2.00 price target for VaxGen stock; and (iv) and the Board agreed to a non-solicitation provision and a termination fee up to $1,425,000 that will all but ensure that no superior offers will ever be forthcoming.

If you own common stock in VaxGen and wish to obtain additional information, please contact us at the number listed below or visit http://www.zlk.com/vxgn1.html.

Levi & Korsinsky has expertise in prosecuting investor securities litigation and extensive experience in actions involving financial fraud and represents investors throughout the nation, concentrating its practice in securities and shareholder litigation.

Hat tip JM.

[Full Disclosure:  We have a holding in VXGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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VXGN gifted to OXGN; VXGN directors abandon shareholders, senses

Posted in Stocks, VaxGen Inc (OTC:VXGN), tagged , , on October 16, 2009| 93 Comments »

VaxGen Inc (OTC:VXGN) is to be sold to Oxigene Inc (OTC.OXGN) for $22M in OXGN stock. The summary terms of the deal announced by OXGN are as follows:

  • OXGN will issue ~15.6M common shares in exchange for all outstanding VXGN common shares (~33.1M).
  • For each VXGN share held, VXGN shareholders receive 0.4719 OXGN shares.
  • OXGN closed yesterday at $1.37, valuing each VXGN share at  $0.65.

At closing OXGN will place an additional 8.5M shares of common stock in escrow to be released to VXGN stockholders contingent upon certain events over the 2 year period following the closing. Those events are the settlement of VXGN’s obligations under its lease of facilities in South San Francisco and the awarding of a procurement contract by the U.S. government to Emergent BioSolutions for which VXGN is eligible to receive certain milestone and royalty payments.

Of the 8.5M shares placed in escrow 2.7M shares are for the settlement of VXGNs lease facility obligations. The remaining 5.8M shares will be released if within two years following the closing of the transaction VXGN becomes entitled to receive a $3M milestone payment from Emergent BioSolutions. If the milestone is achieved VXGN shareholders will receive a further 1.9M shares plus additional shares based on the size of the contract awarded to Emergent up to a maximum of approximately 3.9M shares. Note that OXGN will be entitled to receive additional milestone payments and royalties from Emergent  for a period of 12 years from commercial sale with no obligations to issue additional shares to VXGN stockholders.

The fact that the deal was done at a discount to VXGN’s $0.70 close Wednesday and at a substantial discount to its $0.77 – $2.00 value in liquidation is frustrating. Perhaps most concerning, though, is the restriction on VXGN seeking a superior deal, clearly inserted to hamstring Value Investors for Change and the VaxGen Full Value Committee, the two competing alternate slates of directors for election to VXGN’s board. Here is the restriction in full:

The Merger Agreement contains certain termination rights for both VaxGen and OXiGENE, and further provides that, upon termination of the Merger Agreement under specified circumstances, including by VaxGen to pursue a superior transaction, as defined in the Merger Agreement (including a liquidation), or by OXiGENE to pursue a financing transaction with net proceeds of least $30 million, either party may be required to pay the other party a termination fee of $1,425,000 and to reimburse the other party’s expenses up to $325,000. In addition, in the event that VaxGen effects a liquidation within 180 days of the VaxGen special meeting of stockholders, it will be required to pay a termination fee of $712,500 and reimburse expenses.

If the merger doesn’t go through, the board of VXGN has committed VXGN to throwing away $2.5M of cash. It’s an appalling outcome for VXGN shareholders.

About our VXGN position

We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.

There are two competing alternate proxy slates seeking nomination to the board of VXGN, Value Investors for Change and the VaxGen Full Value Committee. Value Investors for Change, led by Spencer Capital, filed preliminary proxy documents in August to remove the board. In the proxy documents, Value Investors for Change call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:

VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.

The VaxGen Full Value Committee comprising BA Value Investors’ Steven N. Bronson and ROI Capital Management’s Mark T. Boyer and Mitchell J. Soboleski, intends to replace the current board with directors who will focus on the following objectives:

1. Returning capital to [VXGN]’s shareholders, including an immediate distribution of $10,000,000 in cash;

2. Terminating [VXGN]’s lease with its landlord, Oyster Point Tech Center, LLC, and settling with the landlord the obligations of [VXGN] on the remaining lease payments;

3. Exploring ways to monetize [VXGN] as a “public shell,” including the utilization of [VXGN]’s Substantial Net Operating Losses; and

4. Protecting for the benefit of shareholders royalty payments receivable from the sale of [VXGN]’s intellectual property.

BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”

VXGN is up 41.7% since we initiated the position. At its $0.68 close yesterday, it has a market capitalization of $22.5M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. The authors of a letter sent to the board on July 14 of this year adjudge VXGN’s liquidation value to be significantly higher at $2.12 per share:

Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.

The sale to OXGN in detail

The terms of the deal were announced by OXGN in the following press release:

OXIGENE TO ACQUIRE VAXGEN IN A STOCK-FOR-STOCK MERGER

Acquisition to Add Approximately $33 Million in Cash to OXiGENE’s Balance Sheet

Conference Call Today at 9:00 AM Eastern

SOUTH SAN FRANCISCO — OCTOBER 15, 2009 — OXiGENE, Inc. (NASDAQ: OXGN, XSSE: OXGN), a clinical-stage, biopharmaceutical company developing novel therapeutics to treat cancer and eye diseases, and VaxGen, Inc. [OTCBB:VXGN], a biopharmaceutical company, announced today that they have entered into a definitive merger agreement pursuant to which OXiGENE will acquire VaxGen in exchange for common stock of OXiGENE. Upon closing of the transaction, VaxGen will become a wholly-owned subsidiary of OXiGENE, and VaxGen stockholders will become stockholders of OXiGENE.

At the closing of the transaction, OXiGENE will issue approximately 15.6 million shares of common stock in exchange for all outstanding shares of VaxGen’s common stock. The number of shares issued at closing will be subject to adjustment if VaxGen’s net cash, as of a date shortly before the closing, as agreed by both parties, less certain expenses and liabilities, is greater or less than approximately $33.2 million. Based upon the shares of common stock of OXiGENE and VaxGen currently outstanding and assuming net cash at closing equals the target net cash, the stockholders of VaxGen would receive approximately 0.4719 shares of common stock of OXiGENE for each share of VaxGen common stock. VaxGen currently estimates that its net cash at closing may be below the target amount of net cash, depending on the timing of the closing and the amount of VaxGen expenses.

In addition to the initial shares issued to VaxGen stockholders, OXiGENE will also place approximately 8.5 million shares of its common stock in escrow to be released to VaxGen stockholders contingent upon the occurrence of certain events over the two-year period following the closing. These events relate primarily to settlement of VaxGen’s obligations under its lease of facilities in South San Francisco, and to the potential award of a procurement contract to Emergent BioSolutions (NYSE:EBS) by the U.S. Government for which VaxGen is eligible to receive milestone and royalty payments in connection with Emergent BioSolutions’ May 2008 acquisition of VaxGen’s recombinant protective antigen (rPA) anthrax vaccine product candidate and related technology.

Immediately after the closing, VaxGen stockholders prior to the merger are expected to own approximately 20% of the outstanding shares of the combined company and OXiGENE stockholders are expected to own approximately 80%. If all of the contingent shares are released, OXiGENE anticipates having approximately 87 million shares outstanding. Under these circumstances, VaxGen stockholders prior to the merger would be expected to own approximately 28% percent of the outstanding shares of the combined company and the current OXiGENE stockholders would be expected to own approximately 72% percent, assuming no further issuances of stock by OXiGENE.

“OXiGENE’s mission is to develop new and improved therapeutics based on our vascular disrupting agent (VDA) technology that has the potential to deliver significant medical benefits to patients with cancer and sight-threatening eye diseases and conditions. We believe these programs will be significantly strengthened by the addition of approximately $33 million of cash,” said Peter Langecker, M.D., Ph.D., OXiGENE’s interim Chief Executive Officer. “This transaction represents a timely and efficient strategy to strengthen our cash position and fund operations into 2011. In addition to the benefit of an immediate infusion of significant cash which strengthens our ability to fund our clinical development programs, we believe that there is potential upside in this transaction in the form of milestones and royalties should the rPA anthrax vaccine be selected for government stockpiling. We want to welcome our prospective new stockholders and board members and look forward to their support and sharing our progress with them.”

“We believe that this merger transaction with OXiGENE represents an excellent strategy to maximize the value of VaxGen’s remaining tangible and intangible assets and to provide our stockholders with the opportunity to participate in OXiGENE’s potential success as a leader in the development of promising new agents for cancer and eye diseases,” said James Panek, President of VaxGen.

The merger agreement has been approved unanimously by the boards of directors of both OXiGENE and VaxGen. The merger is subject to customary closing conditions, including approval by both OXiGENE’s and VaxGen’s stockholders. As of June 30, 2009, VaxGen’s unaudited cash, cash equivalents and marketable securities balance was approximately $36 million and its liabilities and contractual obligations consisted primarily of costs and expenses of its outstanding leases related to its former biopharmaceutical manufacturing operations located in South San Francisco, CA.

Upon the closing, two members of VaxGen’s board of directors will be appointed to OXiGENE’s board of directors: Lori F. Rafield, Ph.D., a consultant to the biotechnology industry, and Franklin M. Berger, a former biotechnology analyst.

The transaction is expected to be completed in the first quarter of 2010. OXiGENE is receiving a fairness opinion in this transaction from Houlihan Lokey, and VaxGen is receiving a fairness opinion from Aquilo Partners.

Details of the Proposed Stock-for Stock Transaction

Upon closing of the transaction, based upon the anticipated net cash balance of VaxGen at closing and the current number of OXiGENE’s common shares outstanding, OXiGENE will issue approximately 15.6 million shares of newly issued common stock, subject to adjustment as set forth in the merger agreement, in exchange for all of VaxGen’s outstanding common stock. All of VaxGen’s outstanding stock options will be canceled immediately prior to the closing and all of VaxGen’s outstanding warrants, to the extent not terminated prior to the closing, will be assumed by OXiGENE. OXiGENE will also place an additional approximately 8.5 million shares of newly issued common stock in escrow to be issued contingent upon certain occurrences over the two-year period following the closing.

Of the 8.5 million shares placed in escrow, approximately 2.7 million shares relate primarily to the potential settlement of VaxGen’s lease facility obligation. If the outstanding lease obligation and related costs are reduced either before the closing or during the two-year period following the closing, OXiGENE will release additional shares from escrow to the VaxGen stockholders depending on the amount of the lease settlement arrangements.

The remaining 5.8 million shares to be held in escrow will be released to VaxGen’s stockholders in the event that VaxGen (as a subsidiary of OXiGENE), within two years following the closing of the transaction, becomes entitled to receive a $3 million milestone payment from Emergent BioSolutions in connection with the award of a procurement contract to Emergent by the United States government for supply of rPA anthrax vaccine. In the event this milestone is achieved, OXiGENE will release from escrow approximately 1.9 million shares, plus additional shares based on the size of the contract awarded to Emergent. OXiGENE will be entitled to receive additional milestone payments based on net sales as well as royalties from sales of rPA anthrax vaccine for a period of 12 years from commercial sale, with no obligation to issue additional shares to VaxGen stockholders. If the award of the procurement contract is announced prior to the closing, VaxGen will receive credit for the $3 million milestone payment in calculating net cash at closing, and OXiGENE will issue to VaxGen stockholders at the closing additional shares based on the size of the contract awarded to Emergent.

In connection with the Merger Agreement, VaxGen entered into voting agreements with OXiGENE and certain executive officers, directors and stockholders of OXiGENE, and OXiGENE entered into voting agreements with VaxGen and certain executive officers and directors of VaxGen pursuant to which these parties agreed to vote in favor of the adoption of the merger agreement and against approval of any proposal opposing or in competition with the consummation of the Merger.

The terms of the Agreement and Plan of Merger show how badly OXGN outnegotiated the directors of VXGN.

If you’re into self-flagellation, read the transcript of the call and weep over the lack of questions about the terms of the deal or whether it’s good for VXGN’s shareholders.

Hat tip Jim Hodges.

[Full Disclosure:  We have a holding in VXGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Greenbackd exits ACLS position up 170%+

Posted in Activist Investors, Axcelis Technologies Inc (NASDAQ:ACLS), Spencer Capital Management, Stocks, tagged , , on October 14, 2009| Leave a Comment »

Axcelis Technologies Inc (NASDAQ:ACLS) has had an amazing run over the last few weeks, up more than 50% since the end of September to hit a 52-week high yesterday. We’ve decided to close our position because it’s trading at a substantial premium to our estimate of its liquidation value and we don’t think the underlying business is all that great (not that we have any particular insight into these things). At its $1.63 close yesterday, our position in ACLS is up 171.7% on an absolute basis. The S&P500 closed at 906.65 on the day we opened the position, and closed yesterday at 1,073.18, an 18.4% gain, which means we’ve outperformed the S&P500 over the same period by 153.3%.

Post mortem

We started following ACLS on January 8 this year (see our post archive here) because it was trading at a discount to our estimate of its liquidation value with an activist investor, Sterling Capital Management, holding 10.7% of its outstanding stock. The picture for ACLS looked fairly grim at that stage. We noted that it had been “making substantial operating losses that have widened over the last five quarters” that had prompted “Sterling Capital Management to detail to ACLS management an aggressive restructuring strategy to salvage for stockholders what value remains.” Shortly after we opened the position ACLS failed to make a payment required under its 4.25% Convertible Senior Subordinated Notes, which meant that the company was required to repay the outstanding principal amount of the notes plus a maturity premium and accrued interest (a total payment of approximately $85 million) on January 15. On February 26, in a remarkable deal given the extremely difficult conditions, ACLS managed to sell to Sumitomo Heavy Industries, Ltd. (SHI) of its 50% interest in SEN Corporation, its joint venture with SHI, for proceeds of $122.3 million. ACLS received around $35.9M in cash after applying $86.4M of the proceeds to meet its obligations to the Convertible Senior Subordinated Noteholders. The company hit its low of $0.17 on Feburary 25, at which point our position was down over 70%. From its February 25 nadir, ACLS is up approximately 860% to close yesterday at $1.63, which gives the company a market capitalization of $170M.

We last estimated ACLS’s liquidation value at around  $113.6M or $1.10. Its net current asset value at the last reporting date was a little higher at around $180M or $1.77 per share. We still think that cash burn is a significant issue for ACLS, and we suspect that both the liquidation and net current asset values will be lower at the upcoming reporting date. At the rate of cash burn prevailing at the last reporting date, we estimated the company had around six months before its liquidation value was around $0.60, and around a year before it was worthless. We think that’s an improbable – but not impossible – outcome.

ACLS’s recent run-up may be attributable to attention it has now started receiving from the mainstream media and larger investment banks. Citi thinks ACLS could be worth $3, noting that “while we are far from bullish on business prospects and we acknowledge that there’s risk to ACLS’ ability to raise much-needed cash in the next several months, we think the company will be able to raise sufficient capital w/o going to the public markets.” The Wall Street Journal also ran an article yesterday in which it quoted an analyst as saying “the stock is undervalued, since there were concerns about whether the company would survive. It was one of the hardest hit in the downturn … partly because it had market-share losses amid a cyclical semiconductor decline before the financial crisis even hit. … Now it looks like the company will probably make it, so there’s a correction in valuation.” That may be so, but we’ve got no particular insight into the business or the industry, and so we’re closing the position.

[Disclosure:  We don’t have a holding in ACLS. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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