There have been a number of requests for more short ideas, and fortuitously a stunningly asymmetric opportunity has cropped up in this vein. This is a very simple idea, and most timely, so I will try to keep the write-up as brief as necessity allows and answer any questions in the Q&A.
Casper Sleep (Nasdaq: CSPR) – last price 6.68 – $280mm market cap, $10mm ADV
Thesis Summary: Casper Sleep, a cash-burning, dumpster fire of a direct-to-consumer bedding and mattress company, is in the process of being acquired by Durational Capital, a small/unknown PE firm, for $6.90 a share. CSPR equity currently trades at 6.68, meaning there is a 3.5% gross spread to a deal purportedly going to close in the very near term (late January/early February). Despite the market pricing in a ~95% chance of deal closure, I believe this deal has quite a large chance of either being recut much lower, or perhaps abandoned entirely. Firstly, the acquiring firm is opaque, unknown, and with almost no pedigree in deals of this nature; more importantly, they do not have the required capital to close, and are thus relying on equity commitments from LPs who may well baulk at taking on a highly distressed business at an irrationally high price. Secondly, the proxy statement makes clear that absent an immediate transaction, CSPR would be essentially bankrupt and in need of restructuring – indeed the other two ‘offers’ received for the business were hugely dilutive and/or basically out-of-court restructuring transactions. Such is the distress of CSPR today that even if the purported deal goes through, they are likely to need another large financing later in 2022. Thirdly, even if the deal does manage to go through in some form, since basically all CSPR’s direct D2C comps have declined 40-50% since this deal was announced, Durational has both the negotiating leverage, and a very reasonable argument, that the deal’s valuation needs to be recut, significantly.
The attraction of this trade is the huge asymmetry at play. If the deal goes through at terms, we lose a few percent and simply move on. But if the deal breaks in some fashion – either recut, or all the way – we could make a small fortune. The stock traded at $3.2 before the deal was announced, but this price did not reflect horrendous 3Q numbers, nor the atrocious 4Q implied guidance; ongoing cash burn; lack of other alternatives for the business; and the massive derating faced by these kinds of stocks in recent sessions. I believe the stock would fall >70% if the deal breaks in the next month. Even a recut of the deal to something more palatable (for the buyer) would suggest something like 40% downside In other words I think the set-up is about as ‘option-like’ as one could hope for in a setup like this.
As a special situation/event trade, I will focus most of my attention on the set-up and event path, and outsource most of the fundamental discussion.
Background
Casper is a direct-to-consumer bedding/mattress company based in NYC. Founded in 2014, it was originally an e-commerce only business, but has since expanded into other channels as the e-commerce channel has been beset by huge difficulties (too many competitors; large and increasing CAC; the nature of mattress purchases being once every 8 years, ie not lending itself to paying up to acquire essentially a one-time customer). This excellent report on VIC (in the public domain) gives you a flavor for the fundamental short case. Most of the analysis turned out to be spot on: the business has burned increasing amounts of cash; missed estimates consistently by a large margin in recent quarters; and, as recently as mid-September, was laying off basically half the C-suite.
The market was therefore SHOCKED in mid-November when Durational Capital, an unknown NY-based private equity fund, announced a deal to acquire CSPR for $6.9 a share – a 115% premium to the then-price, with no financing conditions. Since announcement, the stock has traded up, basically close enough to the deal price to imply a very high likelihood of deal closure in the near-term. This is where our story begins.
Who is Durational? And do they have the money to close?
There were a number of oddities about the deal from the jump. For one, Durational Capital is not a name that anyone I knew – and I know a fair few people in this demimonde – had heard of. A quick check of their website shows only three total investments since founding in 2017, of which only one was a completed takeout (the other two, Churchill Downs and Sanderson Farms, were simply public market purchases). Said completed purchase – the acquisition of Bojangles in 2019 – was in partnership with The Jordan Company – an actual PE shop with pedigree, a 40 year track record, and a huge amount of ample capital at its disposal.
By contrast, you may be struck by some of the details on the Durational Capital site (or lack of them). There is no disclosure of AUM. Moreover neither of the founders appears to have any direct PE experience or background at all. Bizarrely, the lead left founder, Matthew Bradshaw, was previously a long/short equity fund manager at Millennium, a pod shop best known for short-term tactical trading (hardly the province of a soon-to-be PE dealmaker). The other founder (and apparent lead on the CSPR investment), Eric Sobotka, also came from a long/short equity background at Eminence, and while he apparently had leveraged finance experience at Lehman and Lazard, it would similarly be a stretch to call him a PE type as well, prior to this venture. I am not attempting to denigrate their skills or background; it is simply a rather odd look for an acquirer and well beyond the norm. This led me to further digging, as I wanted to understand how much capital they were managing, and what they had been doing with it.
Luckily, as an SEC-registered vehicle, there is a decent amount of data available. You can see here, for example, that as of September last year, Durational had zero active positions. This struck me as somewhat strange, given they list the Bojangles investment as ‘live’ on their site and still have two members on the board (but perhaps that investment is housed in a separate vehicle or something and thus not reportable under the Durational Capital Management banner). In any case upon further digging and examination of the latest Durational ADV and brochures, it appears they are managing only ~$240mm in assets, and zero outside accounts (SMAs). In fact it appears the sum total of their assets may simply be an allocation from a single account:
This (relative) lack of experience and financial resources bears considering as we now think about the financing structure, and needs, of the CSPR deal. Per the Merger Proxy, the CSPR acquisition will require a total financing commitment of $415mm, comprising $375mm of equity and up to $100mm of debt financing. The key point, I believe, is that Durational is NOT providing the equity check: they have rather furnished an ‘Equity Commitment Letter’, meaning they essentially guarantee they will be able to source the equity check upon closing (presumably from their LPs or network, etc). From the Proxy:
I apologize for this strong dose of ‘legalese’, but the essential point is, CSPR’s board is trusting that Durational’s Equity Commitment Letter is money good (it is not included in the Proxy, of course, so we as investors have no way of assessing its quality or the ‘terms and conditions’ attached to it). The $100mm debt financing from is probably good (even though there are ‘outs’ there too for KKR, if the Equity Commitment doesn’t close). But the rub of the deal is simply this: will whoever Durational got to sign the Equity Commitment Letter stick to their commitment and actually provide $372mm of capital to close this deal? Because Durational (the GP) certainly can’t cut that kind of check, looking at their AUM and apparently very limited other resources.
In sum, before even looking at the business and its current state, I was scratcing my head wondering what exactly was going on.
The Proxy tells a tale of a business teetering on the brink of insolvency
As in any merger document, there is a fascinating section of the proxy that describes the ‘play-by-play’ negotiations and events that led up to the current deal (see pp 26-36 of the Proxy, ‘Background of the Merger’). Without taking you through every twist and turn, suffice to say that the main takeaway from reading these 10 pages is that CSPR was, and is, in serious financial distress. Consider some of the following points (again, all drawn from the Proxy):
- CSPR looked at doing a PIPE in late 2020 and again in 1H’21; then decided to try to sell themselves, reaching out to PE in late July’21, a process that went nowhere;
- Durational first showed interest in August (when the stock was in the high $5s);
- Original Durational bid was $8.1 versus a $5.25 stock price; which prompted a full process by CSPR, who reached out to 25 parties. 16 rejected, 9 moved forward to get info; 5 graduated to do more work;
- By mid-October, CSPR had defaulted on its debt covenants and was granted a waiver by its lenders;
- One other sponsor offered ‘toxic’ converts for $105MM with 8.5% interest + warrants to get 30% of the equity (non-binding); meanwhile other parties dropped out, and the stock went to $3.84;
- Another sponsor offered a $200MM convert and an expensive bridge loan but with significant contingencies including a new 10% senior loan commitment with 15% warrants (this is basically a DIP financing by another name since they’d be priming all other lenders AND taking a big chunk of new equity);
- Subsequently (early November), Durational looked at terrible Q3 numbers and said they would lower the price and went to $6.40; CSPR needed cash and then announced an ATM program (to potentially sell shares on the open market, a clear sign of deep distress); Party B (who had offered the DIP-type deal) dropped out on seeing the horrid Q3 numbers;
- Durational revised their bid to $7 but then new cash flow projections were sent in November and Durational dropped the price to $6.75 then went to $6.90 vs. $3.19 current price. Another bidder emerged but soon dropped out. Final price was $6.90 which is where we stand today.
Reading all the detail, it appears striking to me the contrast between the bids in this auction: Durational is willing to not only offer zero dilution to the existing equity, but offer an insane premium on top as well, whilst other (presumably sophisticated) bidders were only willing to offer DIP-like financing or highly-dilutive AND top of the capital structure toxic converts. It is almost as if Durational is bidding on a different company than the other bidders!
At the same time, I get the impression Durational was ‘played’ by Jefferies, in a sense, being led to believe there was competitive tension in the process when in reality there was daylight between all these structures and the Durational bid. I wonder how Durational feels today, reading through this Proxy – they were the only real bidder all along and may well demand a price cut on that basis, at the very least…
More importantly, however, the document makes crystal clear the financial jeopardy CSPR finds itself in today. Management projections as of the original proxy date – early December – suggest the business would burn a huge amount of cash ($30mm) in the pre-merger period:
We also know, for a fact, that covenant waivers were only granted by the lenders because of the pendency of this transaction – meaning without this deal, CSPR would most certainly be a going concern risk:
Finally, and perhaps most crucially for the event path we are most interested in, Management’s near-term cash flow projections suggest CSPR will run out of cash, entirely, in late January:
Note also that these numbers have likely deteriorated given the weak operating environment, and increasingly deleterious credit card data for CSPR in recent months. But even so, the fact that CSPR – even before the deal closes – may essentially be tapped out, gives Durational a HUGE amount of leverage should they even threaten to try to pull out of, or express a wish to recut, this deal. What exactly are CSPR’s other options at this point?
Durational’s choices: close, recut, or break?
At this point you may be thinking, ‘it certainly seems like CSPR is in a rough state, but a Merger Agreement is binding, and given the tight Material Adverse Change clause how exactly could Durational break the deal if they wanted to?’ Well, putting aside the reality that in a situation like this, often the letter of the law is less relevant than the leverage of the parties involved, and merely the threat of walking away would be enough to force a recut of the price, in this specific case, I do think there are reasonable grounds to break the deal (or at least demand a renegotiation) on its merits. Here is why.
- Solvency clause in the Reps & warranties: as is customary in any merger deal, as part of the closing process, CSPR will have to guarantee they are solvent. See below (clause 4.13 of the merger agreement, p. A-41):
Given the parlous state of CSPR’s finance at year-end, let alone the end of January; the lack of obvious financing alternatives; and the ongoing violation of CSPR’s covenants, I think Durational (or their LPs) could make a very strong argument that CSPR fails the solvency test and thus refuses to close the transaction on current terms.
2. Inability to close Debt/Equity financings: as I have discussed, the dilemma facing Durational’s LPs – the ones on the hook for the equity commitment, at least – is that even a cursory look at the deal in light of the company’s fundamentals (and what is going on in the market for similar companies) will show they overpaid by >100%. Thus they will be forced to make a choice, do we honor our commitment to Durational (f they demand we do) and take an immediate 50-70% haircut on our investment (and likely need to put up $50-100mm more capital in 2022); or do we baulk and wait to see if Durational tries to sue us to complete?
This brings up the obvious next question – would Durational sue to compel completion? At this point Durational GPs – Messrs Saunders and Sobotka – would have to weigh the perceived benefits of closing (financial or reputational), against the immediate (and gargantuan) financial and reputational losses of completing a deeply-underwater deal. While of course anything is of course possible, given Durational is a very young firm, with nary a deal under its belt, minimal resources, and not much of a reputation as it stands, I would be SHOCKED if they attempted to compel LPs who wanted to back off at closing to honor their commitments. It would essentially burn their reputation, for good, and to what benefit? They wouldn’t even make much in terms of fees on the deal since 1) the deal would be immediately massively underwater (and may file anyhow later on); and 2) the closing fees, per Durational’s fee template, are not significant, either in absolute or relative terms:
In this case, EV at closing would be something like $350-400mm (depending on cash burn, etc) meaning 1% would be say $3-4mm, but only 1/3 of that – so maybe $1-1.5mm – would be available at close as the completion fee to the GP. Would Durational blow its reputation and future earnings potential for $1mm now and putting its LPs 70% in the hole on Day 1? Of course they theoretically could…but it seems a dastardly move to actually go through with.
The case for a big recut (the most likely outcome?)
It seems to me, then, the most likely outcome of all is perhaps a significant recut of the transaction price. CSPR desperately needs the deal to close (it needs cash!); Durational, for all its effort and notwithstanding all of the above, still probably wants to close a deal of some kind. The issue is simply the business has deteriorated, the original price was wrong (thanks, Jefferies!) and the market environment has changed. The proxy demonstrates a willingness on both sides to renegotiate; why wouldn’t both sides simply agree to cut the deal lower again?
CSPR is growing revenues but strongly negative EBITDA and burning cash, so it is hard to benchmark valuation against anything ‘real’. One way to think about what is reasonable, though, is what a control premium would look like, today, against where the stock would have possibly been had the deal not been announced. In this vein, if we consider that CSPR stock was $3.2 when the deal was announced; that they then cut Q3 and 4Q numbers, aggressively; that most all other loss-making D2C consumer brands like WRBY, BIRD, SDC, PRPL, etc, are -40-50% or so since the CSPR deal was announced; and that CSPR is the biggest going-concern risk of the lot, I think its reasonable to consider a $2 stock price as the standalone extant price. Frankly I think CSPR may well have already filed, or be in the process of filing without this deal, but in any case – even if we applied a similar premium that Durational was willing to pay (115%) to that new, lower, level, we would still only get a $4.2 stock…or ~38% downside from current. In other words, I believe in a deal recut scenario this trade would payoff, in the base case, something like 10-to-1 (risk 3.5%, make 35-40%). And clearly I am not precluding the possibility that Durational simply refuses to close and tries to walk, saying something like ‘sue us then’ to a company that, in a couple of months, would likely land in bankruptcy court in any case. And if Durational truly walks away, the equity probably falls 75%+ given the obvious deep distress.
Obviously, this is a ‘negative carry’ trade in that if the status quo prevails, we will lose a few percent. But given the huge asymmetry and event path as I see it, this seems a hgihly attractive proposition and thus I am entering it as short position in the book.
Disclosure: short CSPR
Thanks Jeremy. Apologies for the naive question here but would there be any disadvantages with buying put options instead of shorting the stock (i.e., $5 strike expiring in March 2022 after q4 earnings, or giving yourself more cushion and purchasing a june 2022 put)? Thanks!
dont do that, this deal will either close or not by Feb. so no need to look at such long-dated options. you could def look at buying $5 Feb puts (for example) but given the total risk from shorting it at 6.68 is 22c, paying 10c for a deep out of the money put didn’t seem that great a trade off. still, it’s up to you! i just shorted the common stock.
The only reason to buy puts would be if you broker takes a large margin haircut on the outright short. One of my brokers use 100% for the margin requirement on short CSPR. If I put a position on with that broker, I may end up buying the $7.5 strike puts. I’ll have essentially the same economic return and risk as being short the stock, but it won’t use as much of my available margin.
Thanks jeremy!
I like the change of pace and the clear event path. Also decent volume too.
Do you know which merger arb guys are involved here ie who are you betting against?
afraid there have been no ownership disclosures. this is a pretty small name though so I doubt any one fund is too large in it – probably explaining why the spread is so (in my view) lazily tight and mispriced. i think this should trade at a 15% spread, today…
Thanks again Jeremy!
Don’t want to start anything and I have likely misunderstood, but from what I see a sub has immediately posted the ticker in a reply under your tweet. I wonder if this is absolutely necessary or respectful to you, regardless of liquidity, given how conscientious you have seemed to be in limiting subs to your site.
Agreed – also pretty disrespectful to other subs who spend thousands of dollars for access and now get to wake up and see a completely different trade on the table with the name down 10%.
not only this, someone leaked my work, in its entirety, to Seeking Alpha (seeking alpha quoted directly from my write-up so i know they saw the whole thing).
I am investigating and will try to put a stop to this, realistically its impossible for me to stop a subscriber sharing a screenshot or something once I publish. Obviously, it hurts all other subs (and myself) so I will do everything in my power to stop it occurring.
Ohhh… sh*t. This changes things for those of us who waited to buy 😔. Dont think it’ll recover the 6.6 range.
I don’t understand the motivation to do this.
Why would someone hose us all collectively?
Only thing I can imagine is if they already happened to be short and just wanted to accelerate selling in the name. But that doesn’t make a lot of sense here given the event driven nature of the idea.
I’d hope that SA would be more respectful of an analyst’s copyright, especially when that analyst has been a respected contributor on that site.
I pay for SA. I am going to write them to express my disappointment. I’m sure what they did is legal but it’s not ethical.
the reason someone would do it is, presumably, it would drive the stock down (temporarily) allowing them to cover at a quick gain (at the expense of all other subscribers who are either not positioned yet, or were considering putting a position). it is certainly a big problem and i’m hopeful SA will come back to me with the name of the source.
Total BS to leak this to seeking alpha . The person who did this is stealing from Jeremy.
The obviously smarter choice would have been not to send it to SA, but to Durational 🙂
Thanks for the great work Jeremy!
Thanks, Jeremy!
If we did this as an EV calc what probability would you assign to a higher offer?
I take it since it wasn’t covered you have it at <5%? Potential of a bump affects position sizing so just wanted to tie this up
zero. the go shop period has ended. there is no higher offer coming.
Reading through the proxy statement, the odds are great but I can’t help think it reflects low probability of the trade working?
IIUC, the solvency paragraph above is a representation of parent and merger sub (i.e. the acquirer, Durational). It’s about Durational’s side being legally obliged to have enough cash to pay liabilities. So it’s not for CSPR to pass or fail that test as Durational also signed saying it’s had opportunity to “[conduct] its own independent review and analysis of the business, operations, assets, Contracts, Intellectual Property, real estate, technology, liabilities, results of operations, financial condition and prospects of the Company Group”.
They agreed the 6.9 figure when stock was trading terribly, having already dropped figure from much higher, made after a poor trading update, and had every opportunity to know about continued poor trading. So do they have a plausible way of getting out of this (do they even want to?). You mention the few million dollar fees, but they would also have termination fee of over 24m$ and surely also real risk of reputational damage of breaking an agreement, which could potentially be a real sh* show?
Do you or anyone know of any relevant precedents of similar situations? Thanks again
whilst you are right that Durational makes similar representations, ultimately CSPR’s board cannot deliver an insolvent company to the deal closure, and if Durational believes CSPR is insolvent, they would (I believe) be well within their merits to push back and do anything in their power to close.
your point about Durational being aware of the parlous state of CSPR, even when they made the $6.9 bid, is an interesting one. I agree that, in the strictest legal sense, they couldn’t go to a court and argue they didn’t know CSPR was distressed. but in situations like this it rarely, if ever, gets to court. The acquiree simply walks, and uses their financial leverage to extract a better deal. This happened a lot post COVID (Metlifecare, for example, which I traded and wrote up on this blog; Tiffany/LVMH was another example; you could also google the Abano Health takeover (which was similarly negotiated during COVID, then the acquirer backed out, then the deal was recut).
In most all of the above, the acquiree probably would have won in court…but it never went to court (it rarely does). keep in mind that CSPR is far, far more distressed than any of those examples – which were mostly about simply getting a better deal for the acquirer. here, I think the acquirer’s LPs face huge real capital impairment, immediately, if they close on current terms.
a further point would be – even if we agreed with your contention that Durational went in ‘eyes wide open’, the proxy details a huge amount of new information that Durational was not privy to during the bidding: namely that Durational’s bid was insanely too high relative to other bids; that Durational was bidding against themselves; and that CSPR’s 4Q and January cashflow needs would be even worse. Further, the price performasnce of other similar D2C businesses since the deal was negotiated – clearly relevant information – has been so abysmal as to demand a recut (in my view).
as to your point re the risk/reward: yes, these deals with no financing contingency and zero antitrust risk always look and feel money good – until they aren’t. if it looked a lot more obvious to break/recut, the spread would already be 25%…that’s why the payoff is so high.
sorry i forgot to mention they could theoretically argue a Material Adverse Effect given CSPR’s business likely fell off a cliff in Nov and Dec (looking at CC data), when Apple changes their policy on ID tagging for online advertising.
also – I think the $24mm break fee is a bit of a red herring because in reality what would happen is the both sides would get in a room and recut this to $4 or something (in my base case).
Thank you, great points and yes can imagine what certain people were thinking after reading through the proxy.
Thanks!
Thanks!
Does “priming all the other lenders” mean taking the most senior position in the debt stack? I’m not familiar with bankruptcy terminology.
yes that’s exactly right 🙂
one further thought I forgot to expand upon in the write-up. since this deal, timing wise, is liekly to close aorund the end of January, it kind of functions as a very cheap ‘crash put’ because I believe, if the Nasdaq continues getting destroyed in the next week or so, it will be almost impossible for Durational to justify asking their LPs for money using a November mark (plus huge premium) on a name like this. Thus, every day the growth/value blowout continues is a day closer to this deal getting recut or abandoned, in my view. Paying 3% or so for a shot at 40-75% return for that kind of outcome – is far, far juicier than any market put payoff and seems highly attractive viewed through this lens alone.
Thank you very much Jeremy – that is a quite interesting situation indeed!
One very naive question – right now it looks like short interest is 10% – at what point would you become concerned about a ‘short squeeze’? Is this even a possibility you worry about?
Having done some work on this over the weekend, there really seems to be a very low possibility of losing money on this.
Apart from Durational actually going through and buying CSPR at $6.90, all alternative loss-scenarios seem wildly implausible and, as Jeremy mentions in the comment above, just the option of a “crash put” in itself would be a nice addition to the book.
I’m inclined to take on a decently sized short position here, so I was wondering if anyone else was able to find additional risks that Jeremy and the other comments so far have been missing? The setup almost seems too good to be true 😉
I’m curious as to what (% of portfolio assets) you (and others) think constitutes a “decently sized position” in this instance. Looks like something you could take something fairly chunky in… apart from any tail risk (hence your question!).
Feel free not to answer if that’s private information :D.
Well, Jeremy doesn’t talk about portfolio composition, so I’m somewhat inclined to follow the “house rules” and not do so either.
But given the low downside, stellar payoff ratio, and short timeline (and the fact that IB takes 100% margin to short CSPR) I am considering things like liquidating my MBR position, which is a core holding for me, to put into CSPR since they won’t report until April and I don’t expect them to move much in the next few weeks.
Also, as many others here, I have a decent amount of dry powder after exiting HDG recently and felt disinclined to go as long as I’ve been in the past few months again, so having a great short setup is attractive to me as well.
Another question: What are the mechanics for us as short sellers in case the deal goes through? Specifically, I’m trying to understand what happens to the shares and our requirement to deliver them (close the short) in case the merger goes through? Aren’t the shares canceled/delisted then, how and from whom would we be able to buy them back? I’d appreciate any pointers around this.
Choubris,
I’ve been short cash merger deals in the past and held the position thru the merger. On closing the cash value is simply taken out of your account and the short is removed. However, if there is a future company liability (say, from a class auction lawsuit) they may come back to you later for more cash. This happened in the Dole take-private transaction in which it was later determined that the take-over price was unfair. If you were short the deal at closing, years later they came back and took funds out of your account.
Thanks for explaining! Having the cash taken out means the downside case is really fixed at 6.90 USD precisely, that is great?
The Dole situation rings a bell – I think I read about this situation recently because of a link to Money Stuff: https://www.bloomberg.com/opinion/articles/2017-02-17/dole-food-had-too-many-shares
What are your thoughts on covering (T+2 I assume) before the shareholder meeting on January 19, in case we get no news until then? I think the likelihood of something where we have to pay up later is rather low, so I’m assuming the scenario would more probably play out after Jan 19th, when Durational doesn’t deliver?
Notifs.
Notifications
Please relax a bit with the selling, the bid aint falling today at lunch US time…….
Take it the other way and smile! as long as that kind of investor(?)/behaviour exists, rest assured you gonna make money in the market 😉
By the way, at this point I’m pretty sure many arbitrageurs are wondering whether someone knows something about this deal falling apart 😉 😉
Well your certainly right on both points :).. Just covered the few shorts i got at 6.46 now in low teens… Hoping for a bounce 😉
You’ve been more clever than me 👍
This selling by subscribers here was a gift provided to others. The posting-induced sell-down was a great buying opportunity. The shares are now north of where Jeremy posted the idea and are back as a selling opportunity.
True but there are no shortable shares at the moment.
Those who FOMO-shorted the first day should question themselves whether acting that way is helping their P&L at all.
Temperament is needed in markets. Waiting for the price coming to you instead of rushing with every fad or idea..
Hmm… https://seekingalpha.com/news/3786801-casper-sleep-drops-after-new-short-report-questions-durational-deal-financing
yes as i mentioned someone leaked my work, fully, to Seeking Alpha. Obviously, I am really not happy about this, and am trying to get to the bottom of it.
Careful now. Because if the idea gains traction and the short interest goes too high, it could be detrimental for all subs (including the gilipollas who leaked it) if the outcome does not play out as expected and shorts need to cover
Not familiar with the law jurisdiction SA falls under, but would probably be helpful to make them disclose their source, as they are publishing an article which is based on copyright infringement. If it happens once it might happen again.
Caspar filed an 8-K today – any thoughts whether it impacts the short thesis? https://ir.casper.com/reports-and-filings/sec-filings-details/default.aspx?FilingId=15473256
Also, Jeremy, I hope you find out who leaked your writeup. I learned a lot from and profited significantly from the work you have done here, and it saddens me that someone here doesn’t value the work you do.
thank you very much for your support and also pointing out this 8-K. it contains some pretty damning new information. despite the fact that CSPR is claiming the disclosures in the proxy were adequate, from a legal perspective, the main new disclosures in what they voluntarily provided in this 8-k, to potentially thwart these ongoing lawsuits, is the following:
1) none of the 9 potential bidders who signed an NDA returned with an offer to purchase the company (this was not explicitly stated in the first proxy). This is an important disclosure because it adds further heft to the idea that Durational was the only credible bidder, and was bidding (unknowingly) against themselves. No doubt they would be aggrieved to read this, just now…
2) MOST IMPORTANT: the valuation methodology Jefferies used to justify the deal price was a mix (as per normal) of methods but largely DCF. In the correct paragraph, they disclose they were using an $8mm net debt balance as of Dec’21 to derive a $5-6.7 fair value range for CSPR. This $8mm number was NOT disclosed in the original Proxy…
This is also extremely curious because 1) as of Sep’21, net debt was already $24mm; 2) the proxy is full of graphic detail (from mid-Nov) re the extent of cash burn, capital needs in the business, with ‘$30mm interim cash needs’ repeatedly mentioned; 3) the Cash Flow Projections section of the proxy suggests $19mm of gross cash at year-end (Dec’21) which, since gross cash was $43mm at 3Q, implies $24mm of cash burn in the quarter (assuming no change in W/C which is probably generous as normally in 4Q you would draw down inventories, thus creating cash).
In other words, I believe Jefferies is MATERIALLY mis-estimating/mis-stating year end net debt. I think YE net debt – again per November projections, which were probably missed – was really closer to mid-$30s mm. With 41mm shares outstanding this takes around 85c or more off the valuation of the stock, meaning even on Jefferies’ funny DCF math the equity would only be worth $4 to $5.7.
Again – this is new information not to us but probably also to Durational. I can’t fathom how they don’t demand at least a recut…
Thanks for elaborating. Who do you (others) think might be bringing the lawsuits (11 in total)?
the lawsuits themselves are not unusual, really – oftentimes a number of shareholder lawsuits are brought against mergers (most of the time arguing the value is too low, the directors sold out the co, etc), which could well be the case here since most of the additional disclosures serve to highlight how good of a deal this is for current shareholders.
the takeaway (for me) is that Durational is simply getting hosed, I thought this originally, but some of these supplemental disclosures add fuel to that thinking (if Durational is already considering their options), in my view. having said that, i ran these additional disclosures past a friend who is v experienced in mergers, he thought these disclosures were really that much additional ammo (even tho he also agrees Durational would be crazy to close on current terms)
I absolutely love this idea. It was a wonderful find Jeremy, and i’m super pissed on your behalf that someone would leak it.
I think the article was open access for a few minutes when first released which may account for the SA leak rather than someone in this community.
Just picked some up now via ibkr so must be some extra borrow becoming available. Hopefully the borrow cost doesn’t blow out, but obviously it’s a short period so not such an issue
Seems very reasonable. When giving it some thoughts,
Why would a sub immediately answer the tweet with a question instead of a comment here?
So that happens and also SA gets the same thesis, doubt that’s a coincidence.
Thirdly there has been issues before with the tweet giving away the thesis/lock didn’t work properly.
And lastly the volume seems a bit high/aggressive for just being some subs shorting.
1) the article was open access for a very short period of time due to upload error (matter of minutes). possible for someone to tweet the ticker in that time but no way they could forward to SA the whole article (mkt was closed and SA wouldn’t comment on CSPR until 3 days later).
2) this behavior hurts all subs. i obviously am limited in what I can do, once i publish an idea anyone can screenshot it/PDF it, but again, if i find out who then clearly i will revoke membership and they’ll be kicked out.
Just don’t want to think of the worst of one of us! Could have been a twitter follower who pdf’d the article while open access and then sent to SA. Anyway hope you find out more info from them.
thanks David for your support!
is there any chance that our money will be blocked while we pay interest here?
no i dont think so. if the deal goes through at 6.9, then that amount will be debited from your account when the deal closes (at least, that is what has happened to me when i’ve been short other deals that have closed in this fashion).
I had been waiting patiently on offers in the 60’s and 50’s but woke up just now to a message from IB saying they cannot locate any shares to short currently and they will be allocated on a first come first serve basis…. 😫
Fee rate is 0.51% and shortable shares about 2M . You can add the stock to your watchlist in IB and then you add columns so you can monitor % etc 😉
Also waiting in the 6.50s. Lets see
Yeah I saw they said they had that many… but I got this email.
Dear Client,
You recently attempted to sell one or more securities short but we were unable to locate the particular security to complete your short sale.
We would like to inform you that shares of the following securities are now available to be sold short:
Stock Accounts
CSPR U****97
Note that available shares for shorting are on a first-come, first-served basis.
But then the price had moved
I got the same email, but my order was subsequently filled without me touching it.
So must be some returned stock available to short again.
I feel it’s productive to post here a professional investor’s (locked account) counuter arguement here and what is your thoughts jeremy.
Matt Rosen
@given2tweet
1/ Note: I am doing nothing here but find this situation fascinating. Initially, I bought yesterday but unwound this morning for no gain/loss. $CSPR had a short report yest. It’s a cash deal from a PE firm closing in 2-3 weeks at $6.90. Deal signed Nov 15th.
10:04 AM · Jan 11, 2022·Twitter Web App
4
Likes
Matt Rosen
@given2tweet
·
Jan 11
Replying to
@given2tweet
2/ I think the short report is crazy. Basically says the PE firm is a no name firm who drastically overpaid for the business and since the market/spec stocks down huge since Nov 15th, might not close. $CSPR
Matt Rosen
@given2tweet
·
Jan 11
3/ Facts: PE firm no name: True. But it’s a domestic firm with real people and they have done a couple deals. Did they overpay? Sure seems so. Can they just walk? No they cannot. Do they even want to? No reason to think so. No new numbers have come out.
Matt Rosen
@given2tweet
·
Jan 11
4/ It’s highly highly likely this deal closes. The short report hinges on that it was “lose 35 cents, make $5” if it doesn’t kind of thing. I understand the sexiness in that but I think the odds it doesn’t close <5%. It's one thing if this was signed in July & biz blew up.
Matt Rosen
@given2tweet
·
Jan 11
5/ It was signed in Nov the same day they reported Q3. There have been no new numbers. Short is counting on info from Proxy showing nobody else wanted to buy as why they massively overpaid. He could be right! But that's not how these things work. They have a contract.
Matt Rosen
@given2tweet
·
Jan 11
6/ Short thinks the LPs could decide to not fund when the time comes. I have no idea the legality there but $CSPR would prob sue the LPs and the PE firm. But the most important point is we have NO reason to believe the PE Firm or the LPs want out!!! They signed 8 weeks ago.
Matt Rosen
@given2tweet
·
Jan 11
7/ I'm passing cause I just hate this kind of arb. If it breaks, you fucked, cause the biz sucks. I don't need to lose more sleep. But I was very excited to buy this yesterday. Might be right for you, check it out. /end
Matt Rosen
@given2tweet
·
Jan 11
8/ Got a couple DMs asking about recut. This deal was signed 60 days ago. ALL buyers would love to pay a lower price after they see the proxy and see nobody else wanted to buy the turd they bought. It doesn't work that way. $CSPR
Midwestern Hedgie
@MidwestHedgie
·
Jan 11
Replying to
@given2tweet
this is the right take. had thought about shorting this at like $6.70, but can't believe this nearly went as low as $6.00 yesterday. people who didn't know there was a short report were probably selling b/c they were afraid actual bad news had leaked. [we have no position]
Matt Rosen
@given2tweet
·
Jan 11
exactly. and the report behind paywall so people thought he knew something. he did/does not.
thanks. nothing he says is new, he just disagrees w me. obviously he is incorrect about the Proxy disclosures (esp the latest update in the 8-k), and as i argued in the piece, its kind of irrelevant if they can legally walk away, the fact is if they wanted to walk/recut, CSPR would be forced to renegotiate or file before the court case was even papered. all that said – of course, there is a chance the deal closes at terms…i just think his understanding of the chances (<5%) is incorrect
It seems like his main point is that Durational and/or its investors haven’t publically voiced any complaints. Why would they? If they want out of the deal, they won’t say anything publically until after the vote. Until then, they can work on building their legal arguments. If you think “iron clad” legal agreements always hold, you should review the Simon Properties/Taubman deal. There was absolutely no legal reason for the deal not be forced through, but it got recut from $52 to $43.5 because a troubled company (Taubman) needed to get the deal done and Simon wouldn’t pay.
I don’t know if this deal will be recut (I sure hope so), but I’m confident that if there were 10 deals like this at least 4 or 5 would and that’s more than enough to make this a great opportunity.
agree w everything Tom said. even if you believe there is minimal legal basis to scupper the deal – which I don’t, i think there is decent grounds – its really about negotiating leverage. whether or not this works, given the facts on the ground and the payoffs as i understand them, i would make this trade 100 times out of 100 and expect to come out substantially ahead. far, far better companies/deals have broken, with much better sponsors/deal structures, over far less, than CSPR/Durational here. it remains to be seen if this one breaks or is recut, but to me these are the kinds of bets worth taking (especially when we have tons of other positive carry dividend paying, long positions in the book as it is).
Notifs
Well, I wasn’t aware of all this S.A. stuff until I read the comments thread. SA knows who it was and should censure this person for life. They also need to have some damned standards that they’re not publishing bootlegged reports.
Given there were no other bids it seems impossible that Casper could argue any damages if buyer backs out. I like this trade although would have preferred to have basis closer to buyout
Notify
Any idea what spooked the market today and moved the stock under $6.20? I’m fairly new to these types of trades but didn’t expect much price action until after the shareholder vote.
This is one of the (sad) cases one Raper’s idea escapes. 🤷🏻 Trying to sell at $6.50 was too much for a leaked play..
Congrats to all who get short, it’s playing superwell.
Thanks for the great find. I see that CSPR has already moved down by a bit. Do we know why? Is it worth entering still?
Risk reward now not the same.
Given the opening trade opportunity is gone and that this was blasted to the world by some a-hole I expected to see puppeyeh talking his book on twitter but not so
Fidelity still has >400k borrows. This has to be mostly pre-existing longs or arb longs blasting out their shares
update: the stock is now 5.4, and at current prices ostensibly more accurately prices the risk of deal failure. if you think break price is $2 (probably lower but let’s use $2), and completion price is $6.9, then the market is implying a 70% chance of deal closure using the market close price.
of course this precludes the third possibility – a recut lower, much lower – which I actually think is probably the base case outcome at this point, meaning the probability math is difficult, and different. given i am still quite convicted this is a (near) zero if it breaks, and even a deal recut will be <$5, I'm inclined to let it run for now. the question i have for subs involved is this - do you want me to make this writeup open access in the coming days, and discuss via Twitter? Obviously the original asymmetric setup has gone, and Seeking Alpha did us no favors (they still haven't replied to me)...also a ton of volume has traded ($50mm+) meaning I assume all subs who wanted to get involved are now involved. as such, it appears we are all better served if Durational and their LPs have time to read the analysis, and digest, in advance of the shareholder vote (Jan 19). please let me know either via email or comments here, your views, and I will act according to the majority of responses received. thanks!
I managed to get some sold @6.45 but less than I would have liked to. Either way I think you go as loud and as public as possible. Cheers, Chris.
You should publish … I got a piece in the 6.4’s but way less size than I wanted but that’s life.
Given the time line in your writeup (late Jan early Feb) I dont see a compelling reason to stay quiet in the hopes the stocks drifts up next week or 2 so that more subs can pile in … that ship has sailed and the math and evaluation is different now.
agreed
Congratulations to those who did get a fill – I did not. Maybe you can see how the stock moves in the next few days so that those who did not get a fill could potentially get a fill.
On second thought given that the meeting is fast approaching, going public might make most sense.
My vote is for definitely going public. Given the timeline involved, I think it’s unlikely that anyone will be able to add to their short position at a good price, so for all of us here who managed to get a short position there’s IMHO only upside to Jeremy going public.
I personally count myself very lucky, I managed to get filled at 6.50, though only a small position.
Another yes from me.
Yours is potentially very impactful analysis on the real talks
Yep I think it won’t hurt to put a bit of pressure on Delusional and their LPs. Not quite the feel good minority activist campaign of HDG, but I think it should be a net positive for us.
I’m letting it run too.
Cheers
Yes
Jeremy, you have my permission to go “hunter douglas” on them. Feel free to make public.
I concur with going public. Timeline dictates quicker than normal “sharing” of opinion.
I’m also fine with going public. Thanks again for the great idea.
If going public can help the case, Im also in favor of it.
Everybody had a chance the 1st day to get the trade in between 6.2-6.4
yes go for it, all-out, shock and awe campaign so that the Durational LPs realize that they are self-incinerating their cash with this deal.
Hi Jeremy, I am ok with going public. Unfortunately, I was able to get 1/3 of the position that I originally planned for this idea. But, it’s better than nothing. Thanks again for your great work.
Scream it from the rooftops!
you have my vote. Go public. Great call.
No problem with going public Jeremy. Great trade so far
update: stock bounced a lot today after CSPR said the vote went through (zero surprise) and expect the deal to close sometime next week – with the important caveat, ‘subject to closing conditions.’ to reiterate, the shareholder vote was never at risk, we still do not know entirely what closing conditions are other than solvency, meeting reps and warranties, and of course, funding commitments coming through from equity commitment letter and the debt commitment. again, we do not know the status of either of those two financing lines, and so we are basically where we started (minus the recut potential which now seems unlikely given that would have happened pre-vote).
basically this closes at 6.9 or is a near-zero if Durational walks, in my view. stock at 6.4 in the aftermarket, suggests a very high likelihood deal gets done at terms, in my view. am sticking with it to see what happens.
With the price going back up to 6.4ish on the vote going through, would it have been a smart play to buy back below 5? (I did with half my position myself).
I understand that Rapercapital cant be expected to send out alerts to day-trade, because of the volatility and volume and so on.
Just curious, and maybe bit result oriented. But was it a nobrainer to act, when the stock price were so low just before the vote coming up? Or was the possibility of a recut pre-vote baked into that price?
I feel inclined to chime in … I implemented a quick take profit on CSPR- in at 6.4, out a 5.4, back at 6.5 for a third of the initial position. I acted because over the years I grew convinced I needed some “hard-earnt deterministic rules” governing my allocations, not just passively waiting for my best outcomes in a binary way.
you ask, ” would it have been a smart play to buy back below 5″? sure, backtrading always feels wonderful.
– shorting requires to put the big pants on…I would not rely on Jeremy’s updates, but rather watch the shorts ” like milk on the stove ” as we say in France. Remember the atrocious negative skew those shorts have…short squeezes anyone? you can’t short without a pre-defined risk management roadmap
– everybody single position big or small is always about risk/reward and what is priced in and that’s why money management (take profits, stop losses, ladder orders etc ) and position sizing are key, but you may read as many books as you want and get a degree in Kelly’s formula and what have you, those are very personal choices. An art and not a science and highly depending on one’s experience, risk appetite, amongst many other drivers .
– the topic of money management is probably the less written-upon, most underrated skill. PBIT or BWMX are offerring excellent cases studies where multibaggers can de-rate quite steeply, thus people without some stable, time-honed frame to implement exits maybe be today regretting the swings that they did not quite act on (to reduce, add, trade around core position , etc).
sorry if I am a bit vague, but again, money management and sizing are really tricky!
great comments Laurent. I generally cannot comment on tactical trading as this is an ideas blog/newsletter, i never attempt not promise portfolio/risk management, nor do I think its helpful as its extremely personal and up to the individual. i tried to explain how and why this was an extremely interesting setup (and still think it is), of course I would have loved to cover below $5 as well (for now, let’s see how it plays out with the market collapsing), but even if I end up losing on this particular trade, i would have put this on 100/100 times given the setup as I understood it. this is somewhat the nature of the beast (investing that is).
Have you seen any news this morning to suggest the deal is closing as planned? Curious what’s driving the +7%. Thanks.
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Cspr not available for trading in IB this morning.
Yeah, now how to get out of the position! IBKR support interactions will be fun
You will probably be allowed to sell only. Maybe there’s news coming soon.
Despite the outcome I think this was a brilliant idea.
thank you!
Asked IB about the process now, for short positions. Seems to be as expected.
The position will be removed and borrow fees may continue to be charged.
Operational Risks of Short Selling:
When a company is delisted from the public markets or trading in that stock is halted by the listing exchange, traders may be unable to cover their short positions because the stock no longer trades. However, the original loan to the borrower is still on record, and can only be closed after shares are cancelled and DTC removes all positions in the shares from participants’ accounts or, in the case of a trading halt, the halt is lifted. That process can take anywhere from a few days to months
Thankfully TDameritade covered my position automatically on the 26th.