Anonymous Pitch - SDIG / BITF merger arb

September 09, 2024

posted: 2024-09-09

SDIG / BITF merger arb

If you have feedback/questions/comments on this pitch, please email [email protected] (say “feedback for BITF” in the subject) or DM me on Twitter/X @joinyellowbrick. I will pass along the feedback to the author and get responses.

SDIG: Bitfarms (BITF) to acquire Stronghold Mining (SDIG)
All Stock: SDIG holders receive 2.52 BTIF shares
Premium: 81% premium over SDIG’s 90-day VWAP
Size: At deal announcement per share $ value was ~$6.00, values SDIG Equity at $125mm and EV $180mm; BITF plans to refinance or seek a waiver for SDIG’s $54.6mm outstanding debt

Business Summary
SDIG owns two mining sites in Pennsylvania, Panther Creek and Scrubgrass, operating 4.0 EH/s of BTC mining equipment and 165 MW of power generation at coal refuse reclamation-to energy facilities. Shot term power expansion to 307 MW, with additional 142 MW available from the grid through islanding via PGM interconnect. Potential HPC and AI data center markets due to proximity to metropolitan areas and fiber connectivity (no water agreements). Comes down to ~$1mm/MW of operational capacity or ~$570k/MW when including PGM interconnect.

Break Price:
Based off conversations with industry  experts including one who operates a 200 MW site in Texas and has looked at this asset extensively, the substation, fiber connectivity, and energy assets are worth $800k-1mm/MW for the active 165 MW. This would imply an EV of $130mm and an equity value of $75mm assigning no value to the power pipeline or machines. This implies a share price of $3.30 which is significantly above where the stock was trading pre deal announcement (although it traded as high as $4.75 as recently as a month ago.) I used $1.50 to be extra conservative as SDIG has been a subpar operator in the space and has significant issues meeting their interest payments.

Deal Approvals: SDIG vote, no buyer vote (sub 20% dilution), PJM approval needed, potential FERC approval, US/Canada regulators
Timing: 1Q25 guide, using 02/28/2025
Spread: ref: SDIG $5.37 BITF $2.42, 13.3% gross spread, 0.715c
Borrow Rate: BITF is +3.5 as at Aug 30th

Considerations
On May 28th 2024, Riot Platforms (RIOT) another BTC miner bid $2.30/share cash for BITF after announcing they had accumulated a 9.25% stake, a 10% premium from the prior close. Bitfarms rejected the offer “without engaging in substantive dialogue” (from RIOT). This was on the back of Bitfarms former CEO being terminated and filing a lawsuit against the company with allegations of breach of contract and damages of $27mm. BITF traded as high as $3.15 since in the month following the offer and BITF stated in a filing that the proposal “significantly undervalues the company.” RIOT has since bought an additional 10%, taking their stake to 19.9% finishing on August 21st, buying 80.8mm shares at $180mm averaging $2.23. BITF implemented a poison pill shareholder rights plan that issues a right per share to protect against unwanted acquisitions of 20% or more without a “Permitted Bid.”

Other regulatory approvals include PJM which is the regional transmission organization that coordinates wholesale electricity movements in Pennsylvania and ~10 surrounding states. It is in the interest of both PJM and the Pennsylvania Public Utility Commission to keep these assets operational. There are also FERC approvals needed although these should be satisfied as the Stronghold team plans to stay on with the new company. There are environmental considerations as well as the site is a coal refuse reclamation-to-energy facility and receives tax benefits.

Questions / Color
Main concerns are related to what if anything RIOT can do in this situation to disrupt the merger from going through. From conversations with sell side / other HF, there’s disagreement among arbs and some are choosing to just buy SDIG and others are doing spread. One shop who put a 4.99% SDIG position on Day 1 said they believe it’s unlikely that RIOT does anything and based off conversations with management they are exploring buying SDIG shares and voting through the deal. We believe there is very little that RIOT can do to get in the way of this deal and the fact that their first public communication that mentions the deal only vaguely mentions it should signaal to the market that they will not move to block this.SDIG was shopped actively all year, but feedback was people wanted just the HPC / AI assets and didn’t want to take over the coal refuse assets. RIOT mentioned they were shopped the asset and passed because they didn’t want the coal asset. Was insinuated that the regulator wanted the whole thing to stay together to keep the asset active. Cantor arb analyst says that with no buyer vote and dilution less than 20% there’s limited mechanism for BITF to walk even if RIOT launches some proposal to buy them. SDIG deal is a liability to BITF with limited outs. A premium bid for BITF would just drag SDIG higher. Break fee is $12.5mm but not unconditional. On a more general note, these are poorly run companies, and it is a real possibility (~2% or something) that SDIG has done something not kosher, hasn’t met some regulatory requirement, hiding something in the accounting etc.

Edge
This deal is going to be too small for most funds. GS merger desk said no clients were interested and hadn’t heard of the transaction, Guggenheim said most of their guys said it was too small, and buyside contacts mostly said they were passing due to size. To stay below 5% of SDIG would be a $6mm position. BITF is liquid enough to borrow and sell $6mm. Secondly, these names are heavily traded by retail that may not take the merger into consideration. It’s likely the spread has more random volatility than a typical merger and could overreact to news and headlines.

Links

RIOT / BITF Headlines

If you have feedback/questions/comments, please email [email protected] (say “feedback for BITF” in the subject) or DM me on Twitter/X @joinyellowbrick. I will pass along the feedback to the author and get responses.

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