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Rail Traffic Declines as Growth Slows!

North American rail traffic down 1% for the week ending September 17

The Association of American Railroads, AAR, reported U.S. rail traffic for the week ending September 17. For this week, total U.S. weekly rail traffic was 490,654 carloads and intermodal units, down 2.9% compared with the same week last year.

Total carloads for the week ending September 17 were 239,528 carloads, up 2% compared with the same week in 2021, while U.S. weekly intermodal volume was 251,126 containers and trailers, down 7.3% compared to 2021.

Five of the 10 carload commodity groups posted an increase compared with the same week in 2021.

They included coal, up 3,948 carloads, to 72,774; nonmetallic minerals, up 2,491 carloads, to 35,163; and motor vehicles and parts, up 2,185 carloads, to 13,879.

Commodity groups that posted decreases compared with the same week in 2021 included metallic ores and metals, down 3,192 carloads, to 21,581; miscellaneous carloads, down 1,623 carloads, to 8,250; and forest products, down 1,362 carloads, to 9,076. North American rail volume for the week ending September 17, on 12 reporting U.S., Canadian and Mexican railroads totaled 342,034 carloads, up 3.5% compared with the same week last year, and 341,595 intermodal units, down 4.7% compared with last year.

Total combined weekly rail traffic in North America was 683,629 carloads and intermodal units, down 0.8%.

North American rail volume for the first 37 weeks of 2022 was 25,025,034 carloads and intermodal units, down 2.4% compared with 2021.

Publicly traded companies in the space include CSX (CSX), Canadian National (CNI), Canadian Pacific (CP), Kansas City Southern (KSU), Norfolk Southern (NSC), Union Pacific (UNP) and Trinity Industries (TRN), Greenbrier (GBX), FreightCar America (RAIL) and Wabtec (WAB).

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KnowBe4 receives buyout offer!

KnowBe4 confirms receipt of $24 per share proposal from Vista

KnowBe4 (KNBE) confirmed the receipt of a non-binding proposal from Vista Equity Partners to acquire all outstanding shares of the Company for $24 per share in cash.

KnowBe4, Inc. engages in the development, marketing, and sale of its Software-as-a-Service-based security awareness platform. The company provides a platform incorporating security awareness training and simulated phishing with analytics and reporting that helps organizations manage the ongoing problem of social engineering.

The company also offers Security Coach, a solution to address human behavior risks through human detection and response; and PasswordIQ that would be used to mitigate risk related to password hygiene issues, such as weak or breached passwords. It serves its customers directly through inside sales teams for enterprise and small and medium businesses, as well as indirectly through channel partners and managed service providers.

The proposal represents a 39% premium to KnowBe4’s closing price on September 16, 2022.

The Company’s Board of Directors regularly considers opportunities to enhance value for its stockholders.

In response to an inquiry from Vista, the Board formed a special committee of the Board, comprised solely of independent directors, to engage with Vista and take other actions that it deems appropriate, with the assistance of independent financial and legal advisors.

Consistent with its mandate, and in consultation with its legal and financial advisors, the Special Committee will carefully review the Vista proposal and other potential value creation opportunities to determine the course of action that it believes is in the best interests of KnowBe4 and its stockholders.

KNBE is up 29% to $22.30.

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Rig Counts Rise as Oil Stablizes!

Baker Hughes reports U.S. rig count up 4 to 763 rigs

Baker Hughes (BKR) reports that the U.S. rig count is up 4 from last week to 763.

U.S. Rig Count is up 251 rigs from last year’s count of 511 with oil rigs up 239, gas rigs up 58 and miscellaneous rigs up 4.

The U.S. Offshore Rig Count is unchanged at 16, up one year-over-year.

The Canada Rig Count is up 6 from last week to 211, with oil rigs up 3 to 140, gas rigs down 4 to 63.

The Canada Rig Count is up 47 rigs from last year’s count of 156, with oil rigs up 45, gas rigs up 3 and miscellaneous rigs down 1.

The International Rig Count is up 27 rigs to 860 and up 81 from last year’s count.

The Baker Hughes rig counts are counts of the number of drilling rigs actively exploring for or developing oil or natural gas in the U.S., Canada and international markets.

The Company has issued the rig counts as a service to the petroleum industry since 1944, when Hughes Tool Company began weekly counts of the U.S. and Canadian drilling activity. The monthly international rig count was initiated in 1975.

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West Texas Intermediate (WTI) is up 28 cents to $85.34 per barrel (down from a high of $123.70). Brent crude is up $0.72 to $91.54 per barre (down from a high of $127.98). Gasoline last traded at $2.418 per gallon (down from a high of $4.31 per gallon).

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Spectrum Brands shares tumble on DOJ action

DOJ sues to block Assa Abloy deal to buy Spectrum Brands unit

On September 8th, 2021, Spectrum Brands Holdings (SPB) announced it has entered into a definitive agreement to sell its HHI segment to ASSA ABLOY (ASAZY) for $4.3B in cash, which it said represents over 14 times HHI’s expected FY21 Adjusted EBITDA. Click here to read our blog.

The U.S. Department of Justice filed a civil antitrust lawsuit today to block Assa Abloy’s (ASAZY) proposed $4.3B acquisition of the Hardware and Home Improvement division of its rival, Spectrum Brands Holdings (SPB).

Assa and Spectrum are two of the three largest producers of residential door hardware in the concentrated, $2.4 billion U.S. industry, the DOJ said.

The complaint, filed in the U.S. District Court for the District of Columbia, alleges that the merger would eliminate important head-to-head competition between ASSA ABLOY and Spectrum, risking higher prices, lower quality, reduced innovation and poorer service in the sale of at least two types of residential door hardware: premium mechanical door hardware and smart locks.

The complaint, which seeks to enjoin the transaction under Section 7 of the Clayton Act, alleges that ASSA ABLOY and Spectrum have competed for years to be leaders in the U.S. markets for premium mechanical door hardware and for smart locks.

The proposed transaction would transform these markets, giving Assa “a near-monopoly in premium mechanical door hardware and more than a 50% share in smart locks, leaving only one significant competitor,” the DOJ said.

SPB is down 10% to $52.85.

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Altimmune announces positive results, shares tumble!

 Altimmune announces results from Phase 1b study of pemvidutide

Altimmune (ALT) announced “positive” topline results from its 12-week Phase 1b study of pemvidutide in subjects with non-alcoholic fatty liver disease.

NAFLD. The trial was a randomized, double-blind, placebo-controlled study, with Dr. Stephen A. Harrison, Medical Director, Pinnacle Research, serving as the Principal Investigator.

The primary efficacy endpoint was the percent reduction in liver fat content from baseline, and the key secondary efficacy endpoint was the % weight loss from baseline, both at 12 weeks of treatment.

The trial was conducted without adjunctive diet and exercise interventions that are the standard for obesity trials.

Ninety-four subjects were randomized and treated at 13 sites across the U.S.

Mean BMI at baseline was approximately 36 kg/m2 and mean liver fat content, as measured by MRI-PDFF, was approximately 22%.

Twenty-seven subjects had type 2 diabetes at baseline, and approximately 75% of study subjects were of Hispanic ethnicity.

The trial met its primary endpoint in all pemvidutide treatment groups.

At the 1.8 mg dose, pemvidutide achieved a mean reduction of liver fat content of 68.5%, with 94.4% of subjects achieving a 30% reduction in liver fat, 72.2% achieving a 50% reduction in liver fat, and 55.6% of subjects achieving normalization of liver fat, defined as liver fat fraction of 5% or less.

In addition, mean serum alanine aminotransferase levels declined in all subjects, and in subjects with baseline serum ALT above 30 IU/L, levels declined more than 17 IU/L at all dose levels and 27.0 IU/L in the 2.4 mg dose cohort.

The trial also met its key secondary endpoint in all pemvidutide treatment groups. Employing an efficacy estimand, mean weight losses of 4.9% in subjects without diabetes and 4.4% in subjects with diabetes were achieved at the 1.8 and 2.4 mg doses, respectively.

Pemvidutide was reported to be generally well tolerated. Gastrointestinal events comprised the majority of the adverse events.

Even without dose titration, the symptoms experienced by subjects were predominantly mild and transient in nature, consistent with known GLP-1 class effects.

“We are pleased with the results of this trial, including the extent of liver fat and serum ALT reductions. Weight loss was within our target range, and good tolerability was observed without the need for dose titration. In addition, no clinically significant ALT elevations were observed,” said Vipin Garg,, President and Chief Executive Officer of Altimmune.

“With these positive results in hand, we look forward to reporting data from the 24-week NAFLD trial, as well as 24-week interim data from our MOMENTUM obesity trial.”

ALT shares opened down 58%, now down 25.5% to $15.21.

Piper Sandler

Piper Sandler analyst Yasmeen Rahimi said she is surprised to see the negative pre-market stock reaction in shares of Altimmune (ALT) after the company announced topline results from its 12-week Phase 1b study. She thinks it may be attributed to the 4.7% weight-loss which came in below Street’s expectations. However, the analyst points out that this measure is in alignment with the 6% placebo adjusted seen with Eli Lilly’s (LLY) tirzepatide and 4% placebo adjusted weight loss with Novo Nordisk’s (NVO) semaglutide at 12 weeks. Rahimi, who calls the study a “big win with a clean safety profile,” believes that the stock reaction due to weight loss percentage is “overdone” and argues that the totality of data “suggests that pemvidutide could be a serious player in the obesity/NASH space.” Rahimi has an Overweight rating and $25 price target on Altimmune shares.

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FOMC to raise rates by 75 bp on September 21

Fed’s Waller supports ‘significant increase’ in policy rate at next meeting

The Federal Reserve release a transcript for a speech to be delivered by Governor Christopher Waller at the 17th Annual Vienna Macroeconomics Workshop, in which he plans to state:

Christopher Waller

Christopher J. Waller took office as a member of the Board of Governors of the Federal Reserve System on December 18, 2020, to fill an unexpired term ending January 31, 2030.

Prior to his appointment at the Board, Dr. Waller served as executive vice president and director of research at the Federal Reserve Bank of St. Louis since 2009.

There are three takeaways from my speech today.

First, inflation is far too high, and it is too soon to say whether inflation is moving meaningfully and persistently downward. The Federal Open Market Committee is committed to undertake actions to bring inflation back down to our 2% target.

This is a fight we cannot, and will not, walk away from.

The second takeaway is that the fears of a recession starting in the first half of this year have faded away and the robust U.S. labor market is giving us the flexibility to be aggressive in our fight against inflation.

For that reason, I support continued increases in the FOMC’s policy rate and, based on what I know today, I support a significant increase at our next meeting on September 20 and 21 to get the policy rate to a setting that is clearly restricting demand.

The final takeaway is that I believe forward guidance is becoming less useful at this stage of the tightening cycle.

Future decisions on the size of additional rate increases and the destination for the policy rate in this cycle should be solely determined by the incoming data and their implications for economic activity, employment, and inflation.” 

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Investor takes position in Disney, seeks changes

Third Point lays out case for Disney to spin off ESPN

Third Point’s Dan Loeb has sent a letter to Disney CEO Bob Chapek to outline recommendations.

ESPN

Third Point said, “ESPN is a great business that currently generates significant free cash flow, enabling the Company to pay down debt and increase strategic options down the line.

In addition, we realize ESPN content is part of the bundle being offered to subscribers of other products, both in Disney’s Linear and DTC businesses.

Despite these advantages, we believe that a strong case can be made that the ESPN business should be spun off to shareholders with an appropriate debt load that will alleviate leverage at the parent Company.

The important questions to ask before commencing a spinoff are: Will both companies be better off? Will the needs of customers be better served? Can any synergies that exist between the two companies be replicated by contractual arrangements? Will the transaction contribute to creating long-term value for Disney shareholders?

While acknowledging that broader capital structure considerations may be at issue, we believe that the answer to all four of these questions is affirmative.

Employees of ESPN could be compensated in a security directly tied to their performance.

ESPN would have greater flexibility to pursue business initiatives that may be more difficult as part of Disney, such as sports betting.

Customers of ESPN and sports leagues would be better served by a focused management team driving a leadership position in sports distribution. We believe that most arrangements between the two companies can be replicated contractually, in the way eBay spun PayPal while continuing to utilize the product to process payments.

Disney CEO Bob Chapek

Lastly, as a result of this transaction, both companies will attract shareholders seeking the respective qualities of each company, allowing the Disney parent multiple to expand as its earnings growth rate increases and the remaining business is no longer haunted by the specter of cord cutting. While I understand you have considered this idea in the past, we urge the Company to retain advisors to reassess the desirability of the transaction in the current environment, recognizing that a key determination would be the proforma capitalizations, cashflow and credit profile of both companies.”

HULU

Third Point said, “We believe that integrating Hulu directly into the Disney+ DTC platform will provide significant cost and revenue synergies, ultimately reigniting growth in the domestic market.

Daniel Loeb, Third Point

We urge the Company to make every attempt to acquire Comcast’s remaining minority stake prior to the contractual deadline in early 2024.

We believe that it would even be prudent for Disney to pay a modest premium to accelerate the integration but are cognizant that the seller may have an unreasonable price expectation at this time while noting the seller has already made the decision to prematurely remove their own content from the platform. We know this is a priority for you and hope there is a deal to be had before Comcast is contractually obligated to do so in about 18 months.”

COST CUTTING

Third Point said, “Disney’s costs are among the highest in the industry, and we believe Disney significantly underearns relative to its potential. We urge the Company to embark on a cost cutting program that addresses both margins and the disposal of excess underperforming assets.”

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AppLovin offers to buy Unity!

 ironSource drops as AppLovin’s Unity bid contingent on ironSource deal exit

Shares of ironSource (IS) are down 12%, to $4.16 in Tuesday morning trading after AppLovin (APP) announced it has submitted a non-binding proposal to the board of directors of Unity Software (U) to combine AppLovin with Unity in a stock-based transaction.

Under the terms offered, current Unity shareholders would receive approximately 55% of the outstanding shares of the combined company, with the Class A shares representing approximately 49% of the outstanding voting rights of the combined company.

AppLovin, which markets software platforms for app developers to help them find customers and bring in revenue, is offering gaming platform Unity an alternative to its recently announced a deal to buy IronSource.

The all-stock merger consideration payable in a mix of AppLovin Class A and Class C common stock would value Unity at $58.85 per share and $20B enterprise value, representing a 48% premium to the Unity share price as of July 12 and 18% to yesterday’s closing price based on the closing price of AppLovin’s Class A common stock on August 8, AppLovin stated.

The execution of a definitive merger agreement between AppLovin and Unity would be subject to approval by each company’s board of directors, the termination of the proposed acquisition of ironSource LTD, and other customary signing conditions, the company noted.

Previously, on July 13, Unity and ironSource had announced that they entered into a definitive agreement under which ironSource will merge into a wholly-owned subsidiary of Unity via an all-stock deal, where each ordinary share of ironSource will be exchanged for 0.1089 shares of Unity common stock.

Under the terms of that deal, current Unity stockholders will own approximately 73.5% and current ironSource shareholders will own approximately 26.5% of the combined company.

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Global Blood Therapeutics sold for $5.4 billion

Pfizer to acquire Global Blood Therapeutics for $68.50 per share in cash

Pfizer (PFE) and Global Blood Therapeutics (GBT) announced the companies have entered into a definitive agreement under which Pfizer will acquire GBT, a biopharmaceutical company dedicated to the discovery, development and delivery of life-changing treatments that provide hope to underserved patient communities, starting with sickle cell disease.

Under the terms of the transaction, Pfizer will acquire all the outstanding shares of GBT for $68.50 per share in cash, for a total enterprise value of approximately $5.4B, including debt and net of cash acquired.

The Boards of Directors of both companies have unanimously approved the transaction. Pfizer expects to finance the transaction with existing cash on hand.

The proposed transaction is subject to customary closing conditions, including receipt of regulatory approvals and approval by GBT’s stockholders.

Due to the proposed transaction, GBT will not hold its previously scheduled conference call to discuss its second quarter 2022 financial results. The company will file its quarterly report on Form 10-Q for the quarter ending June 30, 2022 with the U.S. SEC announcing those results on August 8.

Global Blood Therapeutics, Inc., a biopharmaceutical company, engages in the discovery, development, and delivery of treatments for underserved patient communities with sickle cell disease (SCD). The company offers Oxbryta tablets, an oral, once-daily therapy for SCD.

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Emerson Electric to sell InSinkErator to Whirlpool for $3B

Whirlpool confirms pact with Emerson Electric to acquire InSinkErator for $3B

Whirlpool (WHR) announced that it has entered into a definitive agreement with Emerson Electric (EMR) to acquire InSinkErator, the world’s largest manufacturer of food waste disposers and instant hot water dispensers for home and commercial use, in an all-cash transaction for $3B.

The acquisition is expected to be immediately accretive to Whirlpool Corporation’s margins, adding approximately $1.25 EPS accretion in fiscal 2023.

Whirlpool also expects to generate revenue upside by capitalizing on InSinkErator’s leading consumer brand preference, an installed base that is five times larger than the rest of the industry driving a recurring sales profile, the strong underlying secular tailwinds of the U.S. housing market, and the expansion of the InSinkErator brand into new markets and product offerings.

Whirlpool plans to initially fund the acquisition through available liquidity, with new debt put in place at a later date.

The acquisition, which has been approved by the Board of Directors of both companies, is subject to customary closing conditions, including regulatory approvals, and is expected to close in the fourth quarter. Whirlpool’s 2022 guidance remains unchanged.

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Hey Alexa vacuum my room!

 iRobot to be acquired by Amazon for $61/share in deal valued at $1.7B

Amazon (AMZN) and iRobot (IRBT) announced that they have entered into a definitive merger agreement under which Amazon will acquire iRobot. Amazon will acquire iRobot for $61 per share in an all-cash transaction valued at approximately $1.7B, including iRobot’s net debt. 

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We know that saving time matters, and chores take precious time that can be better spent doing something that customers love,” said Dave Limp, SVP of Amazon Devices.

“Over many years, the iRobot team has proven its ability to reinvent how people clean with products that are incredibly practical and inventive-from cleaning when and where customers want while avoiding common obstacles in the home, to automatically emptying the collection bin.

Customers love iRobot products-and I’m excited to work with the iRobot team to invent in ways that make customers’ lives easier and more enjoyable.”

iRobot makes the popular Roomba

Amazon will acquire iRobot for $61 per share in an all-cash transaction valued at approximately $1.7B, including iRobot’s net debt.

Completion of the transaction is subject to customary closing conditions, including approval by iRobot’s shareholders and regulatory approvals.

On completion, Colin Angle will remain as CEO of iRobot.

 In light of the transaction with Amazon.com, iRobot will not hold its Q2 financial results conference call, which was originally scheduled for August 10.

In addition, iRobot has withdrawn its prior 2022 financial expectations issued in early May, as well as its long-term financial targets provided in December 2021. Given the ongoing disruptions and uncertainty that could impact the company’s outlook, iRobot is suspending its practice of providing financial guidance.

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Rig Counts decline as oil retreats!

Baker Hughes reports U.S. rig count down 3 to 764 rigs

Baker Hughes (BKR) reports that the U.S. rig count is down 3 from last week to 764 with oil rigs down 7 to 598, gas rigs up 4 to 161 and miscellaneous rigs unchanged at 5.

U.S. Rig Count is up 273 rigs from last year’s count of 491 with oil rigs up 211, gas rigs up 58 and miscellaneous rigs up 4.

The U.S. Offshore Rig Count is down 1 to 16, up 2 year-over-year.

The Canada Rig Count is down 1 from last week to 203, with oil rigs up 3 to 140, gas rigs down 4 to 63.

The Canada Rig Count is up 47 rigs from last year’s count of 156, with oil rigs up 45, gas rigs up 3 and miscellaneous rigs down 1.

Rig Counts Rise to a 2-year high

The Canada Rig Count is up 28 rigs from last year’s count of 126, with oil rigs up 22, gas rigs up 6.

The Baker Hughes rig counts are counts of the number of drilling rigs actively exploring for or developing oil or natural gas in the U.S., Canada and international markets.

The Company has issued the rig counts as a service to the petroleum industry since 1944, when Hughes Tool Company began weekly counts of the U.S. and Canadian drilling activity. The monthly international rig count was initiated in 1975.

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West Texas Intermediate (WTI) is up 72 cents to $89.24 per barrel (down from a high of $123.70). Brent crude is up $0.90 to $95.04 per barre (down from a high of $127.98). Gasoline last traded at $2.869 per gallon (down from a high of $4.31 per gallon).

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What is FOMC’s next move?

The Fed says go, go, go, the markets’ say whoa, whoa, whoa

There is a lot of uncertainty on the Fed outlook and just how fast and how far will the FOMC go in hiking rates in orders to bring inflation down to the 2% average target.

Though Chair Powell gave no clear indication in last Wednesday’s press conference that the Fed was near done with its mission, the markets nevertheless heard what they wanted to hear, putting on a dovish spin and pricing in a pivot to rate cuts in the spring of 2023.

Fed Chair: Jerome Powell

But over the last week policymakers have been out in force, including several doves, strongly contradicting that outlook.

They have stressed the necessity of getting to restrictive territory while playing down the fear that the economy is already in recession.

Meanwhile, the U.S. ISM-NMI services index rose to 56.7 from a 2-year low of 55.3 in June that was last seen in February of 2021, translated to an ISM-adjusted ISM-NMI rise to 54.3 from a 2-year low of 53.7 in June.

Today’s rise joins big declines for the ISM, Chicago PMI, Dallas Fed and Philly Fed, but gains for the Richmond Fed and Empire State, to leave an 8-month producer sentiment pull-back from robust November peaks.

Surging interest rates and a flattening in real household spending as prices rise are aggravating the downtrend, though sentiment also faces support as businesses continue to restock.

The ISM-adjusted average of the major sentiment surveys in July fell to a 2-year low of 52 from prior lows of 53 in June and 54 in May. Analysts saw a 62 all-time high in both November and May of 2021. Analysts expect a 52 average in Q3, after averages of 55 in Q2, 57 in Q1, and 60 in Q4.

The futures are now repricing for about a 50-50 risk for a third straight 75 bp hike in September.

James Bullard
Federal Reserve Bank of St. Louis

Meanwhile, the hawk Bullard continues to look for a policy rate around 3.75% to 4% by year-end, though implied Fed funds still reflect a terminal rate in the 3.5% area.

Analysts continue to project a 50 bp boost in September followed by 25 bps in November and December to bring the median funds rate to 3.375%.

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JetBlue buys Spirit Airlines

JetBlue to acquire Spirit at $33.50 per share in cash or $7.6B enterprise value

JetBlue Airways (JBLU) and Spirit Airlines (SAVE) announced that their boards of directors have approved a definitive merger agreement under which JetBlue will acquire Spirit for $33.50 per share in cash, including a prepayment of $2.50 per share in cash payable upon Spirit stockholders’ approval of the transaction and a ticking fee of $0.10 per month starting in January 2023 through closing, for an aggregate fully diluted equity value of $3.8B and an adjusted enterprise value of $7.6B.

The transaction consideration of $33.50 per share implies an aggregate fully diluted equity value of approximately $3.8 billion and an adjusted enterprise value of $7.6 billion.

JetBlue expects to achieve $600M-700M in net annual synergies once integration is complete, driven in large part by expanded customer offerings resulting from the greater breadth and depth of the combined network.

The combined company is projected to have annual revenues of approximately $11.9 billion based on 2019 revenues. JetBlue expects the transaction to be significantly accretive to earnings per share in the first full year following closing.

JetBlue expects to maintain balance sheet flexibility with post-transaction leverage of 3.0-3.5x, well inside historical levels, and to continue its deleveraging trajectory as it captures synergies.”

“The completion of the acquisition is subject to customary closing conditions, including receipt of required regulatory approvals and approval of Spirit’s stockholders.

The companies expect to conclude the regulatory process and close the transaction no later than the first half of 2024.

The four largest carriers control more than 80% of the market. Creating a low-fare, customer-centric challenger with size and scale is the best opportunity to disrupt legacy carrier pricing in the current landscape.

Even as the fifth-largest carrier, JetBlue, with Spirit, would have only 9% market share, compared to 13% for the fourth-largest airline and 23% for the largest carrier.

After the combination and with its committed upfront divestitures, the largest seat share a combined JetBlue-Spirit will have in any of its largest metro areas is 40%, compared to the 57-91% share legacy carriers have in their largest metro areas.

The airlines will continue to operate independently until after the transaction closes and their respective loyalty programs remain unchanged and customer accounts will not be affected in any way.

Following completion of the acquisition, the combined airline will be based in New York and be led by Robin Hayes. As previously announced, Spirit has terminated its prior merger agreement with Frontier. JetBlue has terminated its previously announced all-cash tender offer to acquire Spirit common stock.”

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Unity Buys IronSource, Shares Tumble

Unity Software, IronSource to merge in a$4.4B all-stock deal

Unity (U) and ironSource (IS) announced that they have entered into a definitive agreement under which ironSource will merge into a wholly-owned subsidiary of Unity via an all-stock deal, where each ordinary share of ironSource will be exchanged for 0.1089 shares of Unity common stock.

Once closed, current Unity stockholders will own approximately 73.5% and current ironSource shareholders will own approximately 26.5% of the combined company.

The companies’ complementary offerings create a unique end-to-end platform that allows creators to create, publish, run, monetize, and grow live games and RT3D content seamlessly.

The proposed all-stock transaction has been approved by the boards of directors of both companies, is expected to close during Unity’s fourth quarter of 2022 and is subject to customary closing conditions, and regulatory and shareholder approval.

The combined company is expected to generate a run rate of $1B in Adjusted EBITDA by the end of 2024.

Six Months Chart of Unity

Unity Cuts Guidance

Unity Software cut FY22 revenue view to $1.3B-$1.35B from $1.35B-$1.425B – FY22 consensus was for $1.47B. Cites current assessment of macro trends, product launch and competitive dynamic with the monetization business.

Unity expects second quarter financial results to be slightly higher than the top end of the guidance range provided during its first quarter earnings call.

Needham

Needham analyst Bernie McTernan downgraded ironSource (IS) to Hold from Buy after the company announced its intent to merge with Unity (U) in an all-stock transaction. The analyst notes that ironSource shares trade at a 8% discount to the implied takeout price.

McTernan adds that the companies’ complementary platform fit, plus profitability that ironSource provides, were reasons for the large premium paid and will likely prevent smaller players from making an over-the-top offer as consolidation continues to be a theme in the mobile ad-tech space.

Piper Sandler

Piper downgrades Unity to Neutral, says ironSource deal creates overhang – Piper Sandler analyst Brent Bracelin downgraded Unity (U) to Neutral from Overweight with a price target of $34, down from $55, after the company announced a deal to merge with ironSource (IS).

While stating that the pending merger “appears to be a highly strategic acquisition that not only adds material scale and product breadth to the gaming segment but could also help improve profitability,” Bracelin cut his rating based on the near-term overhang that he sees the merger creating as well as increased execution risk over the next six to nine months.

DA Davidson

DA Davidson analyst Franco Granda lowered the firm’s price target on Unity (U) to $60 from $85 and keeps a Buy rating on the shares. The company’s deal to acquire ironSource (IS) is “very attractive” due to the confluence of revenue and cost synergies, attractive valuation, and highly complementary tech stack amidst a backdrop of privacy-driven platform changes and macro pressures, though his reduced price target reflects lower broader market multiples, the analyst tells investors in a research note.

Ark Investments

Cathie Wood’s ARK Investment bought 1.02M shares of Unity on Wednesday.

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