INP.TO - Input Capital

[bizaro86]

So, I apologize in advance for starting a thread in the investment section for something I just sold. I'm legitimately puzzled about this firm. Input Capital is a specialty finance company in Canada's agriculture sector. Basically, they make loans where the payback is denominated in canola instead of money. They've done this a few different ways, but have come to the conclusion that without a sustainable source of low cost debt capital they aren't competitive. So for the last little bit they've been winding down their book, paying off debt, and buying back shares. They traded way below book value, which was growing because of accretive buybacks. Didn't seem like the world's best idea, but put a 100 bps in and read the quarterlies.

 

Anyway, recently they agreed to a buyout offer at $1.75, ~100% premium to the previous trading price and well over book value. That only makes sense (imo) if someone wants to re-activate their lending platform and use it to build a scale business.  A portfolio of loans and cash isn't worth more than book, so the only reason to pay > book is for the platform. Makes sense, I guess. The stock is trading at $1.55, which is a big spread for a deal that they say will close in 2 months.

 

However, the spread is big because the buyer has no credibility at all as far as I can tell. It is a US firm, publicly trade OTC with a ~$1 MM market cap, delinquent on SEC filings, and took capital in a death spiral convert earlier this year. The consideration here is a bit over $100 MM CAD - if they have access to that kind of financing why would they take a death spiral convert? The whole thing seems unlikely to work, which is presumably why the spread.

 

But the other side of that coin is why would they bother if they don't have the money or a way to get it? Just the legal fees on getting this deal as far as it is would be a significant portion of the market cap of Bridgewater, so it seems crazy to do it without a plan. Unless the plan was to use it like a stock promotion of INP and drive the price up for related parties to sell - seems pretty legally risky to me (and I'm not saying that's what happened here).

 

Anyway, no position at present, but I know there are a number of other special situation investors here so I wanted to post. If I'm missing something and the deal closes the spread is huge, so there is a potential opportunity here.

[writser]

I did some armchair research on the buyer:

[bizaro86]

Thanks for sharing that!

 

Basically, I think if Bridgewater had any way of raising this money then they wouldn't have done the death spiral capital raise.

 

Even as a tax shell RTO it wouldn't make any sense, because lNP pays Canadian taxes, so the tax assets from the pump and dump wouldn't help them.

 

The only thing that gives me pause is that management here is fairly experienced. They grew a previous farmland venture pretty large and sold it, so I would have thought they did at least some due diligence on whether the buyer had the money to close.