Acacia Research Group (ACTG) 'Quickie' Trade

Low risk arbitrage play based on investments on the balance sheet

I have stolen from some structure from Andrew Walker at yetanothervalueblog.com and dubbed this idea a 'quickie'. It's a simple thesis and a short term trade rather than a long term hold of a fundamentally sound business. The idea is a simple arbitrage opportunity in Acacia Research Group (Nasdaq: ACTG) using a sum of the parts valuation on their investments. While Acacia may look expensive on paper, the investments are far more valuable than noted on their books. With recent clarity on the valuation of the now public ImmunoCore and the soon to be public Oxford Nanopore, we can break down their investments which points us to a ~20% discount to book value.

The Operating Business

Acacia research group's operating business is an IP licensing business where they buy the rights to various IP assets and license these rights out to others. The operating business did $30M in revenue last year with $5M in net income, but we can put it aside for the valuation of acacia. It represents a negligible amount of total value when compared to the rest of the assets and it is simpler to value Acacia based solely on the investments they have on their books.

The Story: how did Acacia purchase these investments?

I'll keep this part brief. In 2019, Neil Woodford's fund, Woodford Investment Management, collapsed and had to sell of its assets. Acacia, due to a relationship with Woodford was able to purchase the healthcare assets for £224M, selling off many of the assets for cash immediately after acquiring them. Acacia entered into a partnership with Starboard Value to provide the financing for the terms. Acacia continues to liquidate its holdings and is planning to use the cash to fund further investments. For those interested in the collapse of the Woodford fund, there is a book, 'Built on a lie', detailing it (I haven't read the book).

The Assets:

Acacia holds a stake in 4 public companies: ARIX bioscience (LSE:ARIX), Sensyne Health (AIM:SENS), Induction Healthcare (AIM:INHC), and the recently public ImmunoCore (NASDAQ:IMCR). In addition to their public stakes investments, Acacia also holds a position in 4 private companies: Oxford Nanopore, Viamet Pharma, AMO Pharma, and Novabiotics. Although Acacia has been floated as a play on Oxford Nanopore in the past, an announcement from Oxford Nanopore saying they are planning to IPO in London later this year provides a clear catalyst for unlocking value and clarity on valuation. Oxford Nanopore was recently valued on the books of IP group at £2.3B($3.18B). (source).

Acacia's stake in Viamet Pharma is also significant (26%) and can be valued based on a recent valuation in the annual report of Malin. They value their 15% stake at €83M, which puts the total market cap of Viamet at €553M ($650M).

For their other private investments (AMO pharma and Novabiotics), the valuations are unclear, so I assigned $20 million to them based on the cost of their purchase.

Putting it all together and adding the cash, we get the following valuation for their investments (numbers are in millions):

Their current Market Cap is ~325 million. At first glance, the upside looks to be 100%, but due to investments from Starboard Value which financed Acacia last year, there are a large number of dilutive securities on the books.

Taking into account the dilutive shares and warrants, Acacia would add an additional 114.6 million shares (vs 49.2 million now) and $590 million in cash. This increases the book value to 1.236 billion with 163.8 million total shares outstanding. At a P/B of 1, this is a share price of $7.84.

At $6.40/share, Acacia is priced at only 82% of Book Value (21% upside). In addition, Oxford Nanopore may IPO at a higher price and at a valuation similar to PacBio (at $6B), a comparable company in the sequencing space. For every billion in additional value for Oxford Nanopore, Acacia's BV/share increases by 35 cents. At a $6B value for Oxford Nanopore, The BV/Share = $8.90.

In addition, the cash on the balance sheet protects against too much downside from their public investments. If all of their investments tank 50% in value, Acacia's BV/Share is still $6.24, a 2.5% downside to the current price, thus offering protection against a potential market crash.

Acacia Research Group is a low-risk arbitrage play with some upside with assets on its balance sheet that aren't properly valued by the market. In addition, the assets aren't a boring piece of land in the Midwest, they are exciting biotech companies. The simplicity of the thesis and the exciting nature of the investments on the balance sheets makes realization of the value much more likely.

I am long ACTG and hold a small position (1-2%). If the stock drops to < 6, I will be buying with both hands.