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To avoid any confusion – this is the TREC doing work as a potential buyer of an asset (as opposed to the presumed upcoming sales process). The 3rd quarter earnings release from last week was certainly interesting in many aspects, but the most consequential update, in my opinion, was the disclosure that the Company spent $4mm of cash on a potential M&A process. The waxes business surprised to the upside by generating $2mm of EBITDA in 3Q’21, which bodes well for a potential sale if the underlying improvements are sufficient to treat this as the go-forward quarterly run-rate earnings power (unclear, but possible)įinally, the activists and supportive shareholders could easily have bought more shares in the open market since 9/30, which would only tip the balance further into their corner. Management has committed a terrible blunder of squandering $4mm of cash on a busted M&A process, throwing their competency into question, and wasting precious dollars that could have been utilized for buybacks Given current stock price of $8.46/share, any reasonable process is likely to result in bids significantly greater than this priceĪ sale provides a clean exit for any holders who wanted out but found themselves handcuffed due to daily liquidity reasons Shareholders have a long history of suffering, with any buyer since 2012 likely underwater on their position, while most benchmark indices are up several hundred percentĮquity markets are frothy and corporate credit is readily available at record low yields, creating excellent M&A market conditions in the seller’s favor I am not privy to those conversations, but I think all the circumstantial evidence points to most sophisticated shareholders rushing into activists’ arms, given the following facts: And I would be extremely surprised if the activists have not already reached out to each of the big holders and pitched them the go-forward plan for maximizing value. Going down the list, it seems to me that between the chunky holders mentioned here, and maybe a couple others, a majority bloc could easily be created to support the proxy contest. We can see that the two activists combined already own 18% of the company, which is a healthy amount to start off with, when considering a proxy contest.

This investor group’s intentions are very clear, from the language in the 13D filing: Bradley Radoff and his affiliates have purchased over 7% of total shares in the open market, and is currently the 3rd largest holder behind Ortelius and Wellington. Otherwise the whole situation does not make much sense to me, that a sharp-elbowed activist investor is remaining docile in a situation where value could easily be maximized beyond the current share price.īut just as important, since the publication of my original writeup, a second activist investor has joined the fray. My personal theory is that there is already a “wink and a nod” between Ortelius and the mgmt./board, in that they have agreed in principle to begin strategic alternatives in an acceptable time frame. Ortelius folks certainly are not shy – they have been extremely vocal in certain situations, such as the Capital Senior Living (NYSE: CSU) debacle, where they ran a very public campaign. It is very curious to me why we haven’t heard a peep from them in terms of what their goals are with their TREC investment (even in their recent 13D/A filing, the language was completely boilerplate). We have already discussed the involvement of Ortelius Advisors in my last writeup. Reason (2): Incremental Activist Involvement For these reasons, the obvious value-maximizing path is a sale of the business, whether in whole or by parts, especially at the part of the cycle where asset valuations are frothy (i.e. This is further exacerbated by daily liquidity limitations, as the dollar volume is only ~$300k per a day, which blocks out the majority of real-money institutional buyers. larger chemical processors due to lack of purchasing power.Īlso, it is very difficult to achieve significant multiple rerating on a status quo basis, even with improved earnings, because the shareholder base for a micro-cap chemical processing business with asset concentration risk (only 2 distinct plants) is quite limited. The profitability of the enterprise is crimped by almost $10mm of corporate costs which would be low hanging fruit for any strategic acquirer, not to mention the fact that the Company probably has an inflated cost base vs.

The business is subscale with only two plants, in an industry where scale really makes a difference.

I think most investors would agree that TREC really has no business of remaining a standalone public company for the long term.