On May 3, 2017, we put out our first article about Adeptus Health Inc. (OTC: ADPTQ). The share price was in the price range of $0.4 to $0.6 and several facts were pointed out indicating that the potential upside was substantial. On one side, we had the fund Deerfield Management, which was acquiring the company at an unfair price. On the other side, many activist funds had acquired large stakes and were claiming that the company was not treating previous shareholders well in its proposed Plan of Reorganization. Additionally, we checked the company's financial statements and saw that the company was undervalued. In a period of just one month, the share price went to $1.14. Thus, many of our email subscribers obtained approximately 90% return in this short time period. Have a look at the share price action:Why did we see the sudden movement? There are several reasons to explain the returns, which we will assess in this article. The most important is the arrival of new activist funds. This is the most evident one. But, there may be some other causes that some analysts may have not seen.Recent DevelopmentsThe company did not put out any other press release on its corporate website. Thus, this time we had to look in the hidden documents of the SEC website to find new information. We found out a lot of new information about the sale of stakes by the big boys. The first one to move on was BlackRock, Inc., which announced that it had liquidated its position in ADPTQ. In our previous article, we saw that the fund had 7.32% returns as of December 30, 2016. In addition, we found that Deerfield sold a large amount of shares thanks to a Share Purchase Agreement. Have a look:
"On May 9, 2017, each of Deerfield Partners and DIMF entered into a Stock Purchase Agreement (the “SPA”) pursuant to which it agreed to sell 353,128 shares and 449,434 shares of Common Stock (collectively, the “Subject Shares”), respectively, for an aggregate purchase price of $500, in order to liquidate a significant portion of its equity investment in the Company for a sum certain. Pursuant to the SPA, the purchaser agreed to certain limitations on the resale of the Subject Shares. The sale of the Subject Shares was completed on May 12, 2017." Source
Finally, a new player bought large amount of shares making substantial returns, similar to that our email subscribers could obtain. MatlinPatterson Global Advisers LLC bought the following shares; some of them were bought after our article was published:
Date
Number of Shares
Weighted Average Price Per Share
April 26, 2017
803,000
$0.3475
May 10, 2017
12,500
$0.4926
May 11, 2017
794,500
$0.5976
SourceThis amount of shares represents approximately a 9.8% ownership in ADPTQ Why? The purpose of the transaction disclosed was the following one:
"The Fund purchased Common Stock for investment purposes because the Reporting Persons believed that the shares were undervalued and represented an attractive investment opportunity. On April 19, 2017, the Issuer and certain of its affiliates filed a joint plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas. The Reporting Persons' preliminary view is that with an appropriate capital structure, the Issuer should have substantial equity value. To achieve this, the Reporting Persons believe that the Issuer should use the tools available under the Bankruptcy Code to restructure its debt and to maximize the value of its estate for the benefit of creditors and interest holders." Source
Our take and ValuationOur interpretation of the last developments is the following. Deerfield saw the large amount of funds that were going to be against the Plan of Reorganization and decided to reduce its exposure in the company. These opportunistic fund bought the liabilities of the company and wanted to convert it to shares diluting the previous shareholders. In our opinion, they saw that the transaction was not going to be that easy. Now they will have to negotiate with the other shareholders to obtain a deal.The new fund, MatlinPatterson, has already seen big returns, but it is still inside. It seems that they want more money for the 9.8% acquired last month. We believe that, since the negotiations are not over, the fair price was not yet obtained. Hence, the fund may be correct waiting a little bit more inside the company.We want just to remind investors that the company seems at this point in time still undervalued. Have a look at the following financial figures with the share price in mind; $1.14:
- Profit Margin: 20.98%
- Return on Equity: 59.51%
- Book Value Per Share: $15.86
- Total Debt per share: $10.04
- Total Cash Per Share: $0.37
- Shares Outstanding: 16.4 million
ConclusionIt seems that Deerfield now believes that the large amount of equity holders may stop its acquisition of ADPTQ, thus it decided to reduce its position in the company. In addition, another fund, MatlinPatterson bought shares imitating our performance in the stock. The two events are both positive for shareholders. In our opinion, the negotiation process will take some time, but it seems quite clear that this is a good stock to follow closely. At the end of the day, ADPTQ still looks to be currently undervalued by the market. We will be updating our subscribers as soon as we know more. For the latest updates on ADPTQ, sign up below!Disclosure: We have no position in ADPTQ and have not been compensated for this article.
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