In the below post, I’m going to highlight

The below will be shared in that order so feel free to skip around if one pertains more to you than others.

To get our full list of research, click here to access our table of contents.

Cheers.

On December 29th, we shared our M&A arb note that we had a short position in Soho House (SHCO) intending to call their bluff on the take-private offer of $9/share announced after the bell on December 18th.

With so much limited information, we could only go on what the past had given us earlier in 2024 when they once again had an “offer” to go private but rebuked it because it was too low.

Mind you, at that time, the company just announced earnings on March 15th (Friday) and the stock sank ~14% from $5.75 to $4.97/share. Conveniently, the company announced they were in talks to get acquired on March 18th (Monday) and the stock popped 21% that day.

Even that is oddly suspicious considering the same thing just happened in December except instead of waiting over the weekend they announced it the same day as earnings.

We’re not allegedly stock manipulation or anything of the short but we’re just highlighting a trend here that seems suspect.

Besides that one callout, we also wanted to highlight that even after we rang in the new year and everyone came back from vacation and their holiday break, the market probability still hasn’t improved.

Since we published our short report on 12/29, the market probability has only improved by 70bps in ~2 weeks. The market is basically marking it as a coin toss even though there’s no regulation risk here.

This is purely execution risk and believing that a deal is a) actually on the table and, b) one that management would take.

We’ve already discussed this in the article above but we wanted to take a second to highlight the financial reason a step further than we did in our initial report.

While we highlighted that net leverage was considerably high (7.9x), we wanted to highlight what the deal mechanics could look like, making this deal even more improbable of being taken over.

As we mentioned before, if you combine Ron, Richard, and Nick’s equity stakes, that’s about ~74% of the total shares outstanding (~144 million). So if it’s just on them rolling their equity, there are arguably ~51 million shares that need to be bought in order to take the company private which doesn’t include any potential equity the buyer allegedly might have.

Assuming the buyer(s) hold no shares at the moment, this implies ~$454 million in equity that would need to be acquired to complete the deal @ $9/share.

What we put together is a table consisting of the annual payments that would need to be made on new debt taken on at various LTV’s and rates. For these calculations, we’re assuming a 7-year term on the debt, LTV’s ranging from 40% - 80%, and interest rates of SOFR + 250bps in increments of an additional 100bps (SOFR is currently at 4.29%).

This gets us to the below.

At SOFR + 550bps (8.79%) which we think is reasonable considering they have two senior secured notes at 8.5% and 8.1764%, we’re looking at ~$54 million in payments at a 60% LTV.

The reason this is a problem, any way you cut it, is because the company’s levered free cash flow (LFCF) was only $8 million in the last twelve months (LTM).

Also don’t forget that you are most likely going to need to roll the current debt over depending on what the plan is with the consortium.

Sure, you can also make the case that the company will save a few million by not being a public company but is that really worthwhile to pull yourself out of the public markets which Ron has stated in the past? Probably not.

With the additional decrease in FY EBITDA guidance to just $140 million ($21 million less than before), the company just can’t handle additional debt and it makes little to no sense for a company/fund/individual to want to put in more equity for a company that’s barely growing.

In LBO terms, it’s not like an investor is getting paid out here eventually with a dividend recap or an IPO until MUCH later down the road, if at all. The equity upside just doesn’t seem worthwhile.

So this leads us to believe a few options.

Given that the market probability has barely moved in two weeks with no risk for regulatory approval, we are inclined to think it’s more about option #2 rather than #1.

The return needed for a group to come together and buy out the company with a massive equity rollover just wouldn’t make sense. SHCO would need to double in size in just a few years to even remotely make those numbers start to work.

This is probably why they rejected the first offer earlier in 2024 because the numbers just couldn’t support it.

On January 7th, we published our long on Liquidia Corp (LQDA) and how their impending lawsuit against the FDA might allow them to sell their breakthrough Yuptrepia drug to treat PAH and PH-ILD could be worthwhile, and if not, that they’re still scheduled to launch in May.

Luckily for us, LQDA shared a presentation at the JPM Healthcare Conference last week which highlighted data from their INSPIRE and OLE study. You can find the full presentation below.

After insiders sold shares the day before, due to tax reasons and part of a 10b5-1 plan established in December of 2023, the stock has already rallied ~14% in just a few days.

Let’s go over a few points and why we’re more bullish on the stock after the release.

As you read in our note, Yutrepia still uses the active ingredient treprostinil in a dry powder inhaler (DPI) form which competes directly with Tyvaso DPI made by United Therapeutics (UTHR) but had much better tolerability amongst the patient base.

This was shown by the number of patients who discontinued their treatment in the INPSIRE study from 2022. However, the newly released study from the summer of 2024 shows that the tolerability is better than we could have hoped for.

Below I’m going to share a few screenshots and respective commentary for each.

First off, for PAH patients, Yutrepia was able to deliver 3x more breaths per session (BPH) than Tyvaso or Tyvaso DPI. Meaning that patients were able to get more of the drug into their lungs with the same tolerance level. ✅

In PH-ILD patients, Yutrepia has zero, we repeat, ZERO discontinuations through week 8 (56 days) and had no drug-related serious adverse effects (SAEs). A really big win. ✅

All of this is great news and not only reassures but further proves that Yutrepia is the superior drug to treat PAH and PH-ILD for patients via treprostinil dry powder inhalers.

Given that it’s been over a month since the trial against the FDA, we should hopefully be hearing soon whether they can get the green light to sell Yutrepia before the May 23rd date.

If you haven’t already, take a look at our initial report which highlights the math on how we get to ~2x in a matter of a few years.

If you’ve been following along since the beginning of last year, then you know that we were active in the TPR / CPRI M&A arb trade that ended in an unfortunate result.

One arguable bright spot was that we highlighted the break price would be at ~$20/share which ended up happening so we were right on something.

In our final post on the matter, we did mention that if you were to remain long the shares in the event that CPRI would divest Jimmy Choo and Versace, it would be something to weigh. Still, considering that KORS bought them to enhance their overall company, it would be tough to just assume they would do this.

I would know (Paul) because I was on the financing team at Merill Lynch when they acquired Jimmy Choo back in 2017. While I thought the chances for a turnaround for CPRI were low in its existing state, word broke out in December that they hired Barclays to potentially run a process for selling off both assets.

**For the record, I think they absolutely should divest.

This sparked our interest in the name again and if CPRI can take one last punch to the gut, and ego, there could be a trade to be made here.

So what do we mean by this?

We think CPRI has shown that their plans to become a multi-brand fashion house and join the likes of Kering and LVMH have not worked out. Can’t knock them for trying. Even back then I (Paul) thought it was a good idea because of just how diluted the KORS brand had become on its own that it needed to do something drastic to revamp itself.

For those of you who don’t know, KORS (back then) acquired Jimmy Choo for USD $1.35 billion in 2017 and then acquired Versace in 2018 for USD $2.12 billion in 2018 looping everything into the Capri Holdings (CPRI) company name.

Many will say that paying 17.5x EBITDA for Jimmy Choo and 22.0x EBITDA for Versace was pretty crazy at the time and hindsight will say that they were correct.

At the time, KORS believed that the LT potential for Jimmy Choo and Versace would generate sales over $1 billion and $2 billion, respectively.

To paint you a picture of how that has transpired, Jimmy Choo generated USD ~$558 million in sales in CY’16. Since the completion of the transaction in late 2017, we’ll assume 7 years later (CY’18 - CY’23), sales have increased to $632 million. Not bad but not great considering that CY’16 adj. EBITDA was USD $77 million and CY’23 EBITDA was USD $33 million and has been declining.

For Versace, the deal closed on the very last day of 2018 and generated USD ~$600 million in sales for CY’16 with USD $109 million in adj. EBITDA. In the 5 years that CPRI has owned them, CY’23 sales were USD $1 billion but EBITDA was down to just USD $91 million.

Not great but you could say it’s because of the luxury market, the economy, or whatever. But the fact of the matter is that KORS paid too much for both of these assets in a desperate attempt to revamp their business and ultimately have nothing to show for it.

The reason why we initially didn’t believe that they would sell these assets is because it would be a huge hit to their ego by admitting that their plans didn’t work out and they overpaid.

However, with the announcement of hiring Barclays to gauge buyer interest, it seems that their ego might not get in the way and a path forward could be interesting.

Let’s start taking a look at the math.

Now right off the bat, we’re not saying that the CPRI would get exactly what they paid for Jimmy Choo or Versace. Actually, we think what they would get paid is pretty far from it and that will be quite a blow but if they are able to offload the assets then they’ll be in a much better shape to have the capital to implement a turnaround.

Right now, based on our estimates, the CPRI has an EV of ~$4.1 billion which includes the break fee from TPR ($240 million) but excludes operating leases. That means the company is trading at 0.9x NTM sales and 10.6x EBITDA.

By no means are we saying this is cheap considering that sales keep declining but the market has really thrown it out with the kitchen sink at this point (poor sentiment prior to Barclays hiring).

If we look at just how much the sales these two assets generate, it’s roughly 1/3 of overall sales to the company (LTM $1.5 billion) but only contributes 7.5% of the overall EBITDA (LTM $47 million).

While we don’t think that CPRI would get the same multiple they paid for the assets despite their financial performance decline would still yield a lower valuation, we do think that given the situation the company has found itself in, it’s best to value these assets similarly to how Burberry (LSE: BRBY) is currently being valued.

The BRBY chart looks absolutely disgusting and rightfully so. The company has really lost touch with what made it special and the stock price reflects that. Since its peak in April of 2023, the company bottomed down 78% in September of 2024 before recovering back to GBP ~£10/share.

Based on its recovery, the company is currently trading at 8.5x NTM EV/EBITDA factoring out operating leases. However, we do want to note that BRBY is a standalone company and we think a larger strategic will be the one to scoop up these assets which we believe warrants a few turns of multiple premium to the exiting BRBY valuation.

Even at a flat 11.0x EBITDA, the assets’ value comes way down and that’s the largest pill that CPRI will need to swallow if they want to offload these assets.

Also to note, Bernstein pegs the value of just Versace at $1.75 to $2.19 billion (not including debt). We have no idea how they got there but never say never.

The below math highlights where we view CPRI (RemainCo) could land.

While we highlight that Burberry (BRBY) would make for a similar comp for Jimmy Choo and Versace, we think that a blended view of other standalone companies (like RL and Prada), along with other fashion houses (LVMH and Kering), would fit the bill.

We also want to note that Reuters highlighted 1.5 weeks ago that Prada might be a bidder for the Versace asset though it will be quite the turnaround for them.

Assuming that CPRI offloads both assets at 11.0x FY’24 EBITDA (above), and trades anywhere from 9.2x - 10.2x NTM EBITDA, the implied return could be anywhere from 28.2% to 41.6% from Friday’s prices.

This also factors in the same and EBITDA impact from RemainCo (KORS) after the assets are divested.

If this sale doesn’t happen, we think a downside retracement back to the ~$20/share level is warranted. Still, ~$4 of downside vs $7 - $11 of upside (if not more) seems worth the risk.

An interesting situation that just came across yesterday by was of The Tile Shop (TSSH). An activist fund called ‘Fund 1 Investments’ has been buying shares of the company non-stop over the last two years to the tune of ~26% of outstanding shares (below).

What makes this interesting to us is the fact that Fund 1 has been VERY active over the last month which makes us believe this could be very similar to our Sleep Number (SNBR) activist trade we shared in November that returned ~50% in 2 weeks.

In that trade, Stadium Capital was buying back shares and just crossed the 10% threshold (was over 11%) needed to file a 13D but hadn’t gone active yet. We got in, shared the idea with you all, and sure enough, they went active and the stock shot up from $12.18/share all the way to $20.41/share a month later.

(Though we sold at $18/share which still was good money in two weeks).

Anyways, Fund 1’s activity last month hints at something similar. On December 23rd, Fund 1 announced a takeover bid of Destination XL (DXLG) for $3/share. The stock shot up ~15% on the news and is up ~27% since then.

Additionally, on December 30th, Fund 1 also sent Vera Bradley (VRA) a letter to the BoD nudging them in the direction that they should look for “value-enhancing strategic alternatives.” I.e. they told them to sell.

With recent history pointing to a similar outcome, we’re tempted to take a speculative position in the name to see where it goes (take-out or activism).

Over the weekend, Scott Brunner, CEO of the Alliance for Pharmacy Compounding shared via LinkedIn an update from the FDA regarding enforcement on compounded Tirzepatide.

In his post, he said that he received email confirmation from Gail Bormel (Chief of the FDA Office of Compounding and Quality) that the agency will continue to exercise enforcement discretion until litigation in the OFA case is resolved.

In Scott’s view, this means the FDA does not plan to take action against compounders who prepare copies of tirzepatide injection, even though the drug has been removed from the shortage list.

This applies to situations where:

He also states,

Given that the FDA allowed it to be compounded during the first stint for PI, we’re surprised that the FDA has now basically said that it doesn’t matter, go ahead and compound during litigation.

Since these suits can last up to, and sometimes more than a year, it’s very puzzling as to why they’re saying this now and in this way, especially after there’s been ample supply of Tirzepatide which allowed them to resolve it in the first place.

Channel checks by us before the December 19th decision showed that pharmacies had no issues with supply, and our data pulled from the Ro GLP-1 shortage tracker also showed that issues were mute as of Dec 10th.

So it’s quite the head scratcher to us and we’re not really sure what to make of it. On one hand, this could be the FDA back-peddling on their decision because the data they’re showing the judge isn’t convincing?

Skeptical to say that because if the FDA loses this then they will have lost all credibility in defining what a shortage resolution is and then it’s just open season. That was the whole point of them delaying the announcement by a month to make sure that the data they had was correct and sufficient.

If our hunch is correct, this news will most likely affect HIMS in a positive way and potentially alter the dynamics of our short position.

We were working on providing additional raw data and context around our short call on HIMS to be shared this week but if the FDA is potentially taking its foot off the gas and even going as far as putting pressure on the brakes, then we’re not as confident as before in their ability to call an end to the shortage for Semaglutide despite supporting data.

We’ll see what the price action is for the first official trading day of Trump’s presidency but if the stock rallies too much, we’re inclined to close the HIMS short and re-evaluate when/if the FDA will act.

No sense in holding a bag despite us believing we’re right on an imminent resolution to Semaglutide.

As always, we appreciate your support of our work. If you have any questions, please make sure to message or comment below. If you think others would benefit from the research/commentary we release, we would greatly appreciate you sharing.

Until next time,

Paul Cerro | Cedar Grove Capital

Personal Twitter: @paulcerro

Fund Twitter: @cedargrovecm