Let’s stick to the FACTS.
On Friday, we received some great news in the form of a motion for the issuance of an approval and vesting order. Simply put, PWC is requesting approval from the judge for the sale of BioAmber in its entirety. Only in the OTC, where most blindly follow others and don’t do actual research and due diligence, could this be manipulated to provoke a panic sell.
We now know that there has been a holding company created in Quebec that is being formed by a joint venture between a Californian biotech company backed by the US Government, Visolis Inc., and a Taiwanese company, LCY Chemical Corp. LCY Chemical was just bought by KKR & Co for $1.6B this summer. Anyone who researched these companies should know that the writing very well could be on the wall.
Visolis is an award-winning company with a unique platform technology that enables production of bio-based elastomers, unsaturated polyester resins, polymers, and other products using a variety of feedstocks like agri-residues (stalks, stubble/stems, leaves and seeds), dextrose, glycerol and synthetic gas. All of these products listed require other building block chemicals to make them. This is where BioAmber’s proven product and other patented technology comes in. Bio-succinic acid serves as the bases for most biodegradable polymers, elastomers and resins. Simply speaking, those are your plastics, adhesives, sealants, some coatings and textiles, etc.
LCY Chemical is a deep-pocketed Taiwanese petrochemical manufacturer, who under new KKR ownership, is looking to diversify and invest globally in green technology. Essentially they produce all of the materials Visolis is developing, but from petroleum distillates and other fossil fuels, such as coal and natural gas.
Now this joint venture is starting to make sense. Let’s take the next step. For those unfamiliar with how NOLs (net operating losses) work: When a business reports operating expenses on its tax return that exceed its revenues, a net operating loss (NOL) has been created. A NOL can be used in some other tax reporting period as an offset to taxable income, which reduces the tax liability of the reporting entity.
BioAmber has nearly $240M in NOLs. For an acquiring company generating hundreds of millions in revenue, that has significant, positive tax implications. I’ll dive deeper into the numbers in a minute. Now in order for this newly incorporated entity between Visolis and LCY to acquire the NOLs with the rest of the assets, a couple things must happen. First, they must own more than 50% of the o/s. There are limits to the NOLs where less than 100% ownership change occurs. So naturally, in almost all the cases I looked up, the purchasing company buys all of the commons. Secondly, it requires that the buyer meet the continuity of business enterprise requirement; continuing use of the target’s historic business or a significant portion of the target’s assets in an existing business for 2 years following the transaction. If the continuity of business requirement is not met, the annual NOL limitation is zero. The continuity of business requirement, together with the annual NOL usage limitation, effectively discourage acquisitions of loss companies for their NOL alone.
NOLs are important assets for companies. It works on the pay as you earn principle. When a company earns profits it pays taxes, when it incurs loss, it gets some relief. Hence, they are valuable assets. Net operating losses can be carried forward for 20 years, and NOLs that are carried forward are recorded on the balance sheet as deferred tax assets (DTA).
The combined state and federal corporate tax rate for Delaware is 27.9%. Multiply that by the $240M NOL and will get a deferred tax asset value of $67M. That $67M can be used to offset future tax expense. People who are speculating that the purchase price is less than this figure, are not worth our time. It will likely be 3, 4, 5x that value when you consider the rest of intangible assets.
The most common type of companies that become NOL shells are biotech companies. These companies spend millions on R&D and rarely, if ever, profits. Many eventually give up on their R&D efforts and decide to liquidate. However, for savvy investors, these types of companies are exactly what you’re looking for. These companies have often incurred millions of NOLs and trade for a fraction of the related DTA value – just like we are here with BIOAQ.
All of the FACTS I just outlined now tell us that a strategic buyer has purchased BioAmber and will utilize the NOLs by buying out the commons. Furthermore, this type of transaction is only available if the target business successfully completes a
plan of compromise or arrangement under CCAA or proposal under BIA. It states that if the plan or proposal is approved by the requisite majority of creditors and then the court, the company is “cleansed” of its pre-filing liabilities and any liabilities arising from the restructuring of the business prior to plan implementation and the transfer of the shares.
Now we can speculate all day about the initial bids and how they were structured. What we do know is that both initial bids included payouts based on future earnings. That means both strategic buyers were interested in continuing operations in Sarnia and were hoping they could “pay as they go”. The problem with their bids was that the cash upfront was not nearly enough. We know that neither bid could cover both the interim financing and Comerica Syndicate ($12.5M US combined). So, as another poster already mentioned, I assume the initial bids were around $10M up front and the remainder of the purchase price was significantly weighted on the back end with payouts based on future earnings.
As many negotiations work, PWC came back with their concerns and likely emphasized their evaluation of BioAmber under the Fair Evaluation Method. I also found it very interesting that the losing bidder was upset and expressed concern with the bidding process. Sounds like some major regret! Based on some excellent DD done by this board, I assume ADM was the other bidder.
With the evidence we have, it is beginning to look like a reverse merger is a certainty. For those not familiar, A reverse merger or reverse takeover is a nontraditional way for a company to raise capital. Visolis is in need fundraising, it’s in plain sight on their website. Their new JV with LCY will have the ability to become public for a lower cost and in less time than with an initial public offering. When a company plans to go public through an IPO, the process can take a year or more to complete. This can cost the company money and time. With a reverse merger, a private company can go public in as little as 30 days. Public companies have higher valuations compared with private companies. Some of the reasons for this include greater liquidity, increased transparency and publicity and that they have a faster growth rates compared to private companies. The public company can offer a tax shelter to the private company. As I mentioned in this post, BioAmber has taken a series of losses. A percentage of the NOLs can be carried forward and applied to future income. By merging the private entity and public BIOA, it will protect a percentage of the merged company’s profits from future taxes, while also limiting the exposure by LYC/KKR.
My final thought I leave you with is that I still truly believe that behind the black box is a 9 digit purchase price around $250,000,000 – $350,000,000. It is up to you, and you only, to position yourself to make an educated and informed decision whether to buy or hold this stock.
Thanks for reading.
Good fortune to all longs.
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