zhengzaishuru
zhengzaishuru
I previously wrote about Acacia Research Corporation (NASDAQ:ACTG). In its latest quarterly call, ACTG discussed numerous developments that occurred since my previous article was published. These developments cause me to remain bullish on the company and I will elaborate on them in this piece.
In Q3 of 2023 ACTG completed the recapitalization transaction that was first announced in Q4 of 2022. The idea behind the recapitalization was to level the playing field in ACTG’s capital structure. As a result of the consummation of this move, Starboard Value, a private equity fund, became the controlling shareholder of ACTG and it now holds solely common stock so that its interests are aligned with those of minority shareholders.
Shortly following the report regarding the recapitalization transaction, ACTG revealed the new plan for its future. During that year ACTG’s stock price has been rather sluggish, with occasional tides and ebbs, but moving in a relatively narrow range.
ACTG stock performance (1 year) (SA 11-30-2023)
It took approximately a year after the new investment strategy was revealed for the company to announce its first investment. As mentioned in ACTG’s latest 10-Q, the company invested $10 million in Benchmark Energy II, LLC (Benchmark) for an equity interest of 50.4%. Benchmark is in the business of acquiring and producing oil and gas resources in Texas and Oklahoma. I see the management taking the time to make its first investment as a good sign, showing that potential investments were likely examined very carefully.
The company said in its latest quarterly call about this investment that:
Where typical oil and gas models tend to rely on acquiring land and drilling wells, Benchmark's particular operating model drives returns to investors through its focus on cash flow. Specifically, Benchmark's strategy involves acquiring mature assets rather than undeveloped acreage and hedging up to 80% of its oil and gas production. The result is lower capital requirements and greater predictability of cash flows.
My guess is that the stock has been performing rather poorly since that announcement as the investing community expected, after quite a long wait since the shift in strategy was announced, to hear about a much larger investment and was disappointed to learn that of an investment of merely $10 million, which constitutes a very small portion of the company’s substantial cash and cash equivalents position of ~$344 million as of the end of Q3 2023. However, by listening to the latest quarterly call, it sounds as if that investment would likely serve as a stepping stone for follow on investments in the oil and gas industry through a platform management seem to have confidence in.
On November 1, 2023, RTW Biotech Opportunities Ltd (RTWG.L) announced a scheme to purchase all shares of Arix Biosciences plc (ARIX.L), except those owned by ACTG, for an exchange rate of ~1.46 new share of RTW for each share of Arix. That scheme is subject to regulatory and Arix shareholder approval. RTW’s announcement also mentioned that it expects to enter that same day into an agreement to purchase, for cash, ACTG’s position in Arix for 1.43 British pound per share. As mentioned in ACTG’s latest 10-Q, which confirms the agreement with RTW, the total purchase price of ACTG’s shares in Arix is ~$57 million. That price reflects a premium of 27% to Arix stock price as of the close of trading in London on November 30, 2023.
The purchase of ACTG’s shares is subject to the approval of the UK Financial Conduct Authority (FCA) by March 31, 2024. The agreement will terminate if by that time the regulatory approval is not obtained (according to ACTG’s latest 10-Q, there are other termination triggers in the Agreement). Based on the latest quarterly call, it seems most likely the required FCA approval will be obtained by then. It should be noted that there is criticism about the deal because only ACTG is expected to receive cash for Arix shares, while the other shareholders of Arix are expected to receive shares of RTW.
Should the sale of Arix shares indeed take place, under the assumption that ACTG’s cash and cash equivalents position as of the end of Q3 2023 (~$344 million) is reduced by $10 million alone (for the investment in Benchmark), that position would jump to ~$391 million, making just ACTG’s cash and cash equivalents greater than its entire market cap (as of close of trading on November 30, 2023) by ~7.5%. It should be noted that a buyback of shares by the company would reduce its cash position but would also reduce its outstanding number of shares.
According to the company’s latest 10-Q, on November 9, 2023, ACTG’s board approved a stock buyback plan for up to $20 million. That plan is limited to a maximum of 5,800,000 shares. There is no time limit to the plan and it does not require any minimum number of shares to be bought back. Given the notes made by the company on the latest quarterly call, I believe that there is a good chance that the utilization of the repurchase program will not be left hanging in the air for long and rather soon the company would start making use of it in a meaningful way. ACTG has a low trading volume - roughly around ¼% of the outstanding, on average, is trading daily. Based on the market price as of the close of trading on November 30, 2023 the average dollar value trading daily in ACTG stock is ~$932,000.
Given that low average daily trading value, a substantial use of the repurchase program at a relatively short period of time may provide a tailwind to the price of the stock in the market. I believe management would want to utilize the current market price, which I believe to be depressed, to start executing on the buyback program. Based on the maximum number of shares authorized to be repurchased under the program, the average purchase price per share for the entire plan may not go below ~$3.44. Given the company’s remarks on the latest quarterly call, I think it is likely that in the near future it will buy back its shares for the full amount of $20 million, or at least a substantial part of it.
As of the close of trading on November 30, 2023, ACTG market price reflected a ~26% discount to its book value as of the end of Q3, 2023.
Price-to-Book chart (1 year) (SA 11-30-2023)
As of September 30, 2023, cash and cash equivalents constituted ~68.5% of ACTG’s book value, and the company is expected to get a boost of ~$57 million to its cash position by the end of Q1, 2024 through the sale of Arix shares.
The company mentioned in its latest quarterly call that:
…interest income has covered Acacia's fixed parent costs in the first 9 months of the year, and we expect this to continue through the rest of this fiscal year. A key part of this was the elimination of approximately $6 million in annualized parent G&A costs compared to the prior fiscal year. We expect Printronix to generate free cash flows on an annual basis.
Therefore, it does not seem as if the company will bleed cash while it continues its search for additional investment opportunities. Just based on the foregoing, without even assigning any value to the company’s ability to generate long-term attractive returns, I see no reason for the stock price to reflect such a deep discount to book value.
I believe Starboard is in ACTG for the long run, but there is always a chance that it may decide at some point to no longer be involved in the company - should that happen, ACTG will lose access to Starboard's valuable network, resources and experience. Another risk is that ACTG's first investment under its new strategy and future investments it will make (or most of them) will not yield the expected returns. In addition, should no substantial use of the recently adopted repurchase plan be made in the near future, the potential tailwind of such plan on ACTG's stock price in the short term may become irrelevant.
After a long wait, ACTG finally starts to execute on its new strategy. The adoption of the repurchase program along with notes made by the company in its latest quarterly call signal to the market that management sees the stock price as being undervalued. I view ACTG as a long term play, but I think that significant use of the new buyback plan in the near future and additional announcements of new investments, which I believe will start happening more often, along with the company's current low market value (as discussed in this article) would lead to improved stock price even in the short term. Following the recent developments described in this piece, I continue to rate ACTG a buy.